The Investor's Guide to Buying Real Estate

If you've got some money to invest, there are several compelling reasons to look into real estate. The market has recovered since 2008 and there are multiple ways you can opt in. We'll show you those ways, and how to get started right here in this Investor's Guide to Buying Real Estate. 

Learn Your Options 

From the straightforward concept of buying a rental property to investing in REITs on the stock exchange, you have several ways to dip your toes into the sea of real estate investment. You might even want to consider commercial real estate. Here are some of the ways you can invest in real estate: 

• Residential property. This is any property you aim to rent out to private individuals: houses, apartments, vacation rentals, etc.  
• Foreclosures. This is a special area of property, with its own set of rules for purchasing. When homeowners don't pay their mortgages, they are eventually forced out, and the property is seized by the lender. Usually banks will sell off foreclosed properties at incredibly reduced prices. The catch is, the property you're interested in may still be occupied when you take over. You may also have to purchase sight unseen, as-is, and with other pitfalls you may not be ready for. Definitely do your homework on this type of investment.  
• Commercial property. In this case, your tenants would be business owners. 
• Industrial property. Warehouses, car washes, storage units etc.  
• REITs. Purchasing actual property means your cash is tied up for a very long time, and if you want to sell it's a process. In other words, you're not very liquid when you own land or a building. Then along came REITs (Real Estate Investment Trusts), which allow you to purchase real estate but to also remain pretty liquid at the same time. You actually own shares of a corporation that owns the actual property, but it's still investing in real estate.  
• Real Estate ETFs. Exchange-traded funds are mutual funds that trade daily on the stock market just like stocks (normally, mutual funds trade just once a day). ETFs have a low cost structure and allow investors to dip their toes into the real estate market while remaining liquid.  

State Your Goal(s) 

We all want more money, and you'd probably love to grow your investments to a point where you've got either a steady income or growth or both. Beyond that, there are different reasons why people choose to invest in real estate. Here are the top reasons: 

• Financial freedom 
• A way to diversify your investing 
• For the tax benefits 
• Love deals/Love fixing up property 
• A new career/you just love real estate 

Financial freedom can come from the cash flow you get from renting out your investment property. You can finance your purchase or buy it outright with cash: either way you're counting on rental income so always choose your property (and your renters!) wisely. 

For some, investing in real estate is something they simply can't help. They enjoy the thrill of the property hunt, the thought of a great deal that's going to appreciate in value, or the vision of fixing up a beautiful property (and making the world a better place). 

As for taxes, you get a tax deduction for depreciation of your property over the life of the property. You also may want to claim the interest as a tax deduction, if you are paying a mortgage. 

One goal that's not very realistic is getting rich fast. Don't be susceptible to so-called experts who say they got rich in a week by flipping real estate. Real estate is meant to be a long-term investment for everyone but the most dedicated and experienced of investors. 

It's risky, volatile, and complex so leave behind the notion that you're going to make a fortune overnight. 

Make a Plan 

A common bit of advice you'll hear is that you shouldn't buy investment property in your own name. That's mainly for legal reasons, should you get sued. You'll have insurance of course, but sometimes legal settlements turn out to be more than what you're covered for. 

You'll want to plan out what sort of legal entity to form (most use LLC). Seek advice from a lawyer, an accountant, or even your financial advisor. 

Next, define your strategy. Too many investors start with a property they love, buy it, then think of how they'll make money from the property. That's the wrong order of things! 

The plan should come first, and then you find the property that suits your plan. For example, your plan might be to buy a duplex and live in one half while you rent out the other half. You'll save yourself a lot of time if you come up with that plan before you go shopping around. 

Creating and sticking to a plan will also help prevent "emotional buying", which is when you let your feelings do the shopping. Remember: you're not going to live in the property. You have to look at it from a purely financial perspective. 
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Recap 

There are now many more choices for today's real estate investor than there used to be, including the more liquid REITs and Real Estate ETFs that are relatively new on the scene. And as we all know, real estate markets are unpredictable and risky.  
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That's why nobody should go it alone. This investor's guide to buying real estate should really be just a starting point for you. Getting advice from a financial advisor is a smart move for any investor, especially in the complex and risky world of real estate investing. Good Luck!

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Scott Frank is the founder of Stone Steps Financial, a fee-only financial planning firm located in Encinitas, California. Scott started Stone Steps to help young professionals and families understand their financial lives and position themselves to reach their fullest potential. Scott and I became friends after meeting at XY Planning Network and I asked him to write some thoughts on buying real estate as a guest topic for this site.