Investing in real estate – how to get started and how to avoid common mistakes

Real estate can be a valuable addition to an investment portfolio. Not only is each property completely unique, but it is also no longer in production. Real estate is a great way to value your investments, no matter what type of real estate investment you do.

There is a huge range of options for property investors. You can become a very practical investor or a hands-off investor.

Investing in real estate is the peak of investment success in the eyes of many new investors. Unlike stocks and bonds, real estate can be touched and stood on regardless of market conditions. When the market crashes, you still have a piece of the planet that isn’t going anywhere. For a lot of investors, that’s a kind of comfort they can’t find in other types of investments that may seem more ethereal, even though they’re backed by very real companies.

Unfortunately, many people have the misconception that property values can only go up, which is completely untrue. If a property falls into disrepair or an area becomes unpopular, it can lead to lower returns or even a collapse in property value. Unlike stocks, you have to maintain the property, whether you do it yourself or hire someone. Plus, you have to account for other expenses such as taxes and insurance, which you pay even if you don’t make a profit.

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Investment goals and which strategy to choose

Just as there are many types of real estate (commercial real estate, rental houses, apartment buildings, wholesale real estate, debt real estate, and more), there are also different types of real estate investing.

Choosing the right strategy for a particular investor depends on several factors. It is important to know how tolerant the investor is to risk, how much control they want to have over the asset, whether they are a beginner real estate investor or an expert, how much cash they have to put down and what level of cash flow they require.

Below we have described some of the most popular real estate investment strategies:

1. Investment in single-family rental properties (SFR)

The combination of fixed-rate mortgages, gradual price increases and tax incentives supporting home purchases has made residential real estate one of the strongest drivers of intergenerational prosperity in the Czech Republic and rental properties one of the most promising real estate investments.

Investors can leverage and borrow from banks, allowing them to make purchases that generate rental income (cash-on-cash) as well as capital appreciation over time. The monthly rental income helps cover the mortgage payments, if not pay them in full, and the investor builds equity.

2. House hacking

Advances on an investment mortgage may be unaffordable for some potential investors. House hacking is a way for buyers to kick-start the process of building equity in income-producing properties.

Simply put, it is the purchase of a property in which the investor lives and then rents out part of it. In this way, he can reduce his mortgage payments by the rental income and in some cases even make a profit. The house hacker can use this so-called passive income in any number of ways: to pay off the mortgage, to make a large purchase or even to save for another house to expand his portfolio.

3. Wholesale of real estate

Wholesaling real estate is brokering between a home buyer and a seller and either collecting a fee for their services or collecting the difference between what the seller collects and what the buyer pays.

4. BURL: buy useful, rent luxury

BURL (buy utility, rent luxury) is based on the concept of utility costs. The homeowner loses money if his house is rented out at a higher price than he pays for the mortgage. If he owns a relatively luxurious house, but could live happily in a more utilitarian home, it may make more sense to live there and convert the more luxurious residence into a rental property.

We’ve described some common real estate investing strategies, but what about financing? We will address this question in the next section.

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Real estate investment – how to finance

Financing a real estate deal tends to give new investors anxiety attacks, or even make them forget their dreams and go back to their nine-to-five jobs. However, if an investor commits to doing due diligence, the fear of lack of funding is irrational.

For investors interested in how to finance an investment property, we explain some of the options for financing real estate:

Cash funding: suitable for investors who have access to a significant amount of capital, either personally or through their network, and want to buy a property without fees.

Private lenders: well-connected investors can often use capital from personal friends to borrow money at a certain interest rate and repayment period.

Seller Financing: Buyers and sellers can sometimes enter into a mutually beneficial agreement that allows the investor and seller to avoid having to use a private lender.

Peer-To-Peer Loans: this is a great option for investors who are trying to raise the last bit of funding for a project. Peer-to-peer loans can offer high flexibility and low interest rates.

When exploring the wide range of different real estate financing options, loans offered by the government, traditional lenders and ways to leverage equity should also be considered.

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Management and maintenance of the property

Once you invest in real estate, you need to find a reliable PROPERTY MANAGEMENT COMPANY. This can be quite a challenge.

Qualifications, systems and accounting practices can vary considerably from company to company. Here are a few strategies for locating and evaluating a property management company.

1. HIRE A PROPERTY MANAGEMENT COMPANY THAT SPECIALIZES IN YOUR TYPE OF PROPERTY

Ask for a list of the buildings they manage to see if they are similar to yours in terms of complexity and asset class. For example, if you own a commercial rental property, don’t hire a company whose main business is managing residential layers. The training and access to services are different, as are the systems required, accounting procedures and legal knowledge.

2. ENSURE THAT SUPERVISORS ARE LICENSED AND RECEIVE ONGOING TRAINING

During the licensing course, property managers cover essential topics such as the Real Estate Services Act, lease agreements, budgeting, insurance, professional ethics and a wide range of legal issues. A professional property management company will also ensure that its employees are kept up-to-date on legislation and best practices.

3. FIND A COMPANY WITH EXPERTISE IN PROPERTY MANAGEMENT ACCOUNTING

At the very least, check if the property manager provides:

• dedicated trust accounts for your rent to keep it safe
• an efficient arrears recovery system to ensure overdue rent is collected quickly
• monthly financial reports that track your income and expenses

4. CHECK STRONG REFERENCES AND FAST RESPONSE

Request references from the property management company you are considering and within those references look for evidence of their quality of service and response time.

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Risks of investing in real estate

Every investment involves risk. To achieve a return above the risk-free rate is to take a risk. Risk analysis is a big topic. However, there are some real estate risks that we can identify as much higher than other risks.
Risk recognition is a key skill in investing. In this section, we will review several areas that present high investment risks.

Capital risk

Capital risk is the loss of capital. Considerations in assessing capital risk include determining the unfavourability of an investment.

Debt

Debt financing is often used when investing in real estate. However, the type of debt financing is important. It is also important to understand what is included in the debt agreement. Lenders may have certain debt terms written into the agreement. If the borrower is not aware of these covenants, they can trigger them and create adverse events.

Responsibility

Properties must have adequate insurance in case someone is injured on the premises. However, insurance does not cover everything. Contracts are important to cover most other things. An arbitration clause can help avoid costly lawsuits.

Market risk

Market risk is related to trends in the overall and local property market. If the economy is heading into a recession, this can impact all properties within the economy. On the other hand, the economy may be thriving but local markets may be experiencing a downturn.
Knowing the various risks that can occur when investing in real estate and being able to rank them is a fairly effective risk analysis strategy. It allows investors to evaluate the highest risks first and abandon the project if they find that these risks cannot be effectively mitigated. This is much faster than going through a large, unorganized list of risks.

Real estate investment for everyone

You don’t have to graduate from a special university and take special courses to become a real estate investor. It is a completely accessible area of investing for everyone.

On the Czech real estate market, we have special platforms where you can invest as little as CZK 500 in a property. One of them is Investown. You can find many positive responses to this platform on the Internet.

Do not overlook: Investown – the Czech platform for real estate investment

Becoming a real estate investor may seem like taking a journey into the unknown, but this field covers a wide range of investment options. There is something for everyone. So all you need to do is do some research and have a solid investment strategy. You can check your position and goals with a financial professional beforehand to see if you are about to make the right move. Since investing starts with a plan before money, consider your next step to buying an investment property.

The article is also available in other languages. Read the Czech translation on tradeinfo.cz.