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How To Invest In Real Estate: A Guide For Beginners

Transcript 00:00 Have you ever wondered how real estate investing works? 00:02 It’s an important question. 00:04 Among houses, apartments, offices, hotels, and industrial buildings, there’s over 00:10 $35 trillion invested in real estate. 00:14 But how does real estate investing really work? 00:16 Fortunately, the basics are pretty straightforward. 00:19 Let’s look at a […]

Transcript

00:00
Have you ever wondered how real estate investing works?
00:02
It’s an important question.
00:04
Among houses, apartments, offices, hotels, and industrial buildings, there’s over
00:10
$35 trillion invested in real estate.
00:14
But how does real estate investing really work?
00:16
Fortunately, the basics are pretty straightforward.
00:19
Let’s look at a simple example.
00:21
Imagine you purchase a house for $500,000, which you plan to rent to tenants.
00:27
Typically, for a $500,000 property, your investment includes a 20% down payment — $100,000 —
00:34
and an 80% mortgage — $400,000.
00:37
We call this $100,000 of equity and $400,000 of debt.
00:42
To simplify the math, ignore closing costs for now.
00:46
Congratulations, you own a rental property!
00:50
Now what?
00:51
Find your tenants!
00:52
There’s a similar, nearby house that rents for $2,500 a month.
00:58
You match that — that’s $30,000 a year, in gross rental income.
01:03
Once the cash is flowing, your total return is that amount, minus expenses and mortgage interest…
01:08
…plus the change in your property’s value over time.
01:13
Let’s walk through that in more detail: You have to pay your property taxes and insurance,
01:17
as well as some ongoing operating and maintenance costs.
01:21
Let’s say, $5,000.
01:23
Mortgage interest is your other major expense.
01:26
Your $400,000 mortgage might have a 4.5% interest rate: that’s another $18,000 in costs.
01:34
So, $7,000 a year in residual income.
01:38
$7,000 divided by your $100,000 investment equals a 7% annual return in cash flow.
01:46
For simplification, we’re ignoring things like income tax and depreciation.
01:50
But there’s more than just cash flow.
01:53
You can also benefit from potential appreciation in both the rent and property value.
01:58
The industry rule of thumb is 3% per year of appreciation.
02:03
Altogether, you might make 7% a year in rent and 3% in appreciation.
02:08
That’s a 10% annual return over the long term.
02:12
For comparison, the stock market has an average historical return of about 8% return a year.
02:17
In fact, real estate has outperformed stocks over the past 30 to 40 years.
02:22
…But not everyone has the time or money to be a landlord.
02:26
That’s why Fundrise has built the first easy to use, online platform for real estate investing.
02:32
Imagine getting all the benefits of owning real estate directly but at a fraction of
02:37
the cost and without the work.
02:39
You can learn more about getting started with real estate investing today at fundrise.com.

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