Real estate is a fast-growing industry and one of the safest options to invest in. Even though real estate involves high capital investments, it is truly rewarding as it yields a high return in the long run. Real estate also offers you additional rental benefits which can help in recovering the money spent at the time of initial investment. It is also simple to understand and helps in diversifying an investor portfolio.
The chief objective of an individual investing in real estate at present is to put the money at hand to work and allow it to gradually increase with time. Investing in real estate can be a simple process once you know the factors affecting a real estate transaction.
This article provides certain tips for beginners to avoid any set back on their investments. Some basic tips for new investors include avoiding bankruptcy, generating rent, knowing when to invest and when to sell, etc. However, the investing process should be carried out carefully to avoid any trouble in the future.
What are important real estate terms beginners should know?
The real estate sector is well-known for its usage of industry-specific jargon and acronyms. Jargon in real estate ( “HOA”, “DOM”, “pre-qual”, etc.) may add levels of complication to an already complex process. If you’re purchasing a property for the first time or just starting out as an investor, you’re likely to come across real estate lingo you’ve never heard of before. However, the most powerful instrument at an investor’s disposal is knowledge. So, we put prepared the following glossary of real estate phrases to help you get up to speed quickly. Some terminology that you should know while investing in real estate are:
- Due diligence: The due diligence process is an essential practice while purchasing a property and includes surveying the property and verifying the ownership. The due diligence process shall be carried out with the help of professionals. During the due diligence process, the professional inspect the property and its documents to find any default. Some of the areas where due diligence should be exercised include:
- The physical condition of the property and its amenities
- Encumbrances and financial burden on the property
- Legal documents such as sales deed, a title deed, possession certificate, etc.
- Compliance with legal requirements if construction activities were carried out on the property.
- Appraisal: An appraisal is a process of evaluating the property and determining the actual price of the property. Buyers carry out the process of appraisal during the due diligence process to verify if the property is overpriced or not. Even banks conduct an appraisal before granting loans to ensure that they are lending the correct amount of money.
- Capital appreciation: Capital appreciation can be defined as the increase in the market value of the property. Capital appreciation is generally calculated at the time of selling a property. Capital appreciation is calculated by finding the difference between the sale price and the purchase price.
- Capitalization rate: The term capitalization is used in the commercial real estate sector to indicate the rate of return that the property is expected to generate. The Capitalization rate is calculated by dividing the net operating income by the property asset value. It is usually expressed in percentage.
[ Cap rate = Net operating Income/Property value ]
- Title search: A title search is a process of examining public records in order to determine and confirm the legal ownership of a property. By conducting a title search, you will also be able to any claims or liens on the property. A clean and marketable title is a requisite for any real estate transaction and it is very important that you verify if the person transferring the property has a clear title to transfer the property. You may verify the public records to determine and confirm that the property is under the legal ownership of the transferor.
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- Refinancing: Refinancing can be defined as the process of availing of a new loan to finance the previous loan. the two main reasons for doing so is:
- better and lower interest rates
- getting a top-up on the previous loan.
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- Foreclosure: Foreclosure is the attempt made by the financial institutions to recover the money they lend on a property by selling the property. The sale of foreclosed homes takes place through an auction. One of the major advantages of a foreclosed home is that it is available at a rate that is usually lower than the actual market value of the property. In this way, the return on investing in such property is also higher as the purchase price was low.
- Capital Gains: When you sell a home after three years, the amount of profit you make is referred to as “Capital Gains.” After indexation, the tax will be levied on these capital gains. You can also avoid paying this tax by reinvesting a portion of your income in another property, or by investing in bonds.
- Stamp Duty: Real Estate Stamp Duty is a tax levied by the government. The amount of stamp duty due varies by state. Some states have it at 3-4 percent, while others have it at 8 percent. The Stamp Duty is based on the Agreement Value. As a result, many times, buyers and sellers enter into a property agreement for a lower price and engage black money in the transaction. Stamp duty is a crucial expense to consider when purchasing a house, as it may be fairly high. The important element to remember is that women in many states have to pay less stamp duty than males. In Delhi, for example, women must pay a stamp tax of 4%, but males must pay a charge of 6%.
- Offer: The initial price offered by the prospective buyers to the seller is called an offer. A seller can accept the offer, reject the offer or provide a counteroffer at his convenience, considering his obligations and aspirations.
- Real estate agent: A real estate agent is a professional holding a real estate license. A real estate agent works under a broker and helps both the buyer and seller in the purchase-sales process.
Real Estate Investment Tips For Beginners
Some of the essential tips for real estate investments are:
- Stay Patient: Buying a real estate property can be a time-consuming activity, and it may take substantial time to complete. Some real estate firms offer complete formalities in just a day. However, it is recommended that you wait patiently to find the best deal and the right property. Sometimes hurry can lead to property falling short of your expectation, or it is overpriced. In some cases, they may also be a delay in the delivery of property, which will lead to your investment not offering any returns for that specific period.
- Research and conduct due diligence: You must conduct specific research works before you set out to look for a property. Several projects are offered to the sellers, and sometimes choosing the right property becomes a little complicated. The amenities, the history of the construction company, the materials used, the area of a property, etc., play a vital role in determining the returns you earn on your investment. Failing to conduct proper research may result in future inconveniences that are as grave as losing your property.
- Cross-check and verify the documents: Checking the document and verifying them is one of the essential steps in real estate investment as you may be scammed with properties showing fake documents. Buying a property without a clear title can also lead to further litigations and may also result in nullifying your investment. Thus you must get all the documents verified with the help of a legal attorney.
- Check Market Rates: Most local state governments have provided guidance value for properties to help the investors know the correct rate of a property. Knowing the market rate can also help track your local market trends, thereby ensuring that you are not scammed into paying a higher amount during the transaction. Researching the market rates and working out developments can help in maximizing your returns.
- Calculate Your Finances: It would help if you calculated your finance before making any investment decisions. This will help you to plan your home loans, interest, and other factors. It is also essential that you negotiate your terms as it can help you in saving money. It would help if you also considered various risk factors associated with the property, even though real estate is the safest investment option. Legal hurdles and property disputes are common in India, and you must ensure that your property is clear and does not have any hurdles.
- Consider the opinion of acquaintances or residents: Talking to neighbors is an essential step which most of us tend to ignore. By talking to the neighbors, you can get a first-hand perspective of how things operate in that locality, thus helping you create a narrow list of investing problems. Talking to neighbors can also help you know the current market rates and the list of developments in the locality, the past, and the future. Given the fact that neighbors are not salesmen, you can receive accurate feedback on the property. This helps the investors to maximize the returns as well.
How can you earn money through real estate?
Investing in real estate is an excellent investment as there are different ways to earn money. Some of these ways include:
- Capital Appreciation: Real estate appreciation is when the property’s value increases as a result of a change in the market conditions. For example, your property’s value will increase when there is development in your area, such as the development of schools, colleges, companies, etc. The value of the property is also appreciable when it is made more attractive to potential buyers. Real estate appreciation can also be tricky as it is unpredictable.
- Rental Income: This is a type of real estate investment in which the property is purchased to operate to generate income from tenants. Cash flow income can also be earned by investing in storage units, office buildings, retail establishments, and rental houses.
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- Brokerage Income: Specialists in the real estate industry generate this form of income. These specialists include real estate brokers, who earn money by aiding their clients in buying or selling their property. Real estate management companies are also real estate specialists who get to keep a percentage earned as rent in exchange for necessary assistance in running the property on a day-to-day basis.
Investing in real estate is one of the best options as it has several benefits attached to it. Real estate is a long-term financial asset if investments are made correctly. For new investors, you must carry out the investment process after conducting due diligence and proper research to avoid any hurdles in the future. Investing in real estate for beginners may not be overwhelming as investments can be made safe if you do a little research and determine your short-term and long-term goals. You may also take expert advice and learn more about investing through them. They can also help in determining property in the market you wish to buy. Assetmonk is an online investment platform offering investment opportunities in the real estate sector. Assetmonk offers a wide range of products in different real estates markets such as Hyderabad, Chennai, and Bangalore. You shall visit our website for details regarding various projects.
Important tips for Real Estate beginners FAQs:
Some of the ways by which you can start your investments include identifying your financial position, choosing a specific real estate investing strategy, picking your target market, deciding on the type of property you want to invest in, listing and determining your finance, raising cash for down payments and reserves, etc. You shall also create a plan to find the best deals, schedule your time, and prioritize your actions.
The best way to start your investments is through REITs (real estate investment trust), as it is the most comfortable form of real estate investment. It makes the investing process an attractive option for real estate beginners.
The answer to this question depends on your financial position. You can also invest in real estate without the money at hand as there are several options to finance your property. However, it is recommended that you have enough money to cover the down-payment while investing in real estate as most of your home loans do not include down-payments.
Investing in real estate is one of the safest ways to invest. Thus you can invest in real estate with no or little experience. You have to carry out certain research works and take advice from professionals to ensure that you invest safely. You may also talk to the neighbours to get a first-hand opinion of your property.