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What you need to know before becoming a real estate investor

Investing money in real estate has been an effective way to grow wealth for generations. Buying and potentially developing property can bolster your cashflow as a side business, or, if you operate intelligently, could become a major business for you.

Assuming you have accrued the startup capital, there are some things you should know before you cut your first check.

Asset separation

It’s important to understand the value and necessity of asset separation. When you purchase investment real estate, you never want to do so in your own name. Setting up a Limited Liability Company (LLC) or Limited Partnership (LP) and operating through it is a much safer and smarter option.

Consider a situation where someone is injured on a piece of property you own. Should they sue for damages, the resulting lawsuit could seriously damage your personal finances. Setting up an LLC is relatively inexpensive and separates your real estate from your personal assets.

You can easily set up separate LLCs or LPs for each investment property you purchase, if you like. If there is a situation in which one must declare bankruptcy, it won’t hurt your other investments.

Types of investment real estate

There are many different types of real estate you may consider investing in. Each type of property comes with different challenges and advantages. Broadly speaking, these are some types of investment properties someone new to the real estate investment may consider:

  • Residential real estate– A residential property investment consists of you purchasing a house, apartment building, or other domicile and renting it to tenants. You may also have the option to work with a property management company if you prefer not to deal directly with tenants.
  • Commercial real estate– Commercial real estate is a property used solely for business and is zoned as such. These investments range from small corner stores to massive shopping centers. A key benefit of investing in commercial properties is their potential of return, which can range from 6 percent to 12 percent annually.
  • Industrial real estate– This type of property encompasses manufacturing facilities, warehouses, tech space, etc. Industrial real estate is typically more stable than other forms of investment real estate. They tend to have predictable cash flows and low operational costs, making for attractive diversification opportunities.
  • Mixed-use real estate– This type of property blends several types of zoned properties into one establishment. An example may be a strip mall with commercial store fronts, walk-up apartments on a floor above and industrial self-storage tucked in the back. Mixed-use investments can be complicated and expensive, but can make for very desirable opportunities if you have the assets.

Real estate can be a very lucrative enterprise if you have the means and know-how to pull it off. Now that you have a better understanding of the basics, you can plan your next move with confidence. Good luck and happy hunting.

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