Investing in real estate can be one of the most reliable ways to build wealth and create long-term financial security. Whether you’re looking to purchase a rental property, explore fix-and-flip opportunities, or invest passively through platforms like REITs, real estate offers a range of paths to grow your portfolio.
In the current U.S. market, where mortgage rates and property values are fluctuating, it’s more important than ever to understand the different strategies available to investors. In this guide, we’ll break down the essentials on how to invest in real estate, no matter your experience level.
Key Takeaways
- Real estate investing includes purchasing rental properties, flipping houses, investing in REITs, and using online platforms.
- Rental properties can generate steady cash flow, while REITs offer dividends without the need for direct property management.
- Real estate typically appreciates over time, but investors should be prepared for market fluctuations and potential liquidity issues.
- Real estate investors can take advantage of various tax deductions and benefits.
- Understanding personal risk tolerance and investment goals is crucial before diving into real estate.
Is Real Estate a Good Investment?
Real estate refers to property that includes land and any improvements, such as buildings and infrastructure, located on it. Owning it gives you rights to its use, including making money from developing, renting or selling it.
The reasons to consider investing in real estate — the largest asset class at more than $230 trillion — are numerous. You might want to find a place to live, earn passive income, diversify your investment portfolio, hedge against inflation, gain tax advantages or sell for a potential profit.
Many consider real estate to be a haven for investing. Over time, the price of real estate generally increases, potentially providing you with a return on your investment. You also might generate income from rental property. However, with real estate investing, you must hold a long-term view because selling can take time.
6 Ways to Start Investing in Real Estate
You have several options for getting into real estate investing. You’re limited only by your investing goals, risk tolerance, funding and the time and energy you want to expend.
1. Buy a Rental Property
If you’re looking for steady passive income and regular cash flow, a rental property can provide that. You may also be able to deduct the cost of owning and managing your property.
However, this means becoming a landlord, which will require you to make time to keep the property filled and up to par. You could hire a property manager to do this for you, though doing so adds to your expenses while freeing up your time.
2. Real Estate Investment Trusts (REITs)
Real estate investment trusts (REITs) are like the mutual funds of real estate investing and can be bought on public exchanges. Your money gets pooled with others to invest in a commercial or residential property owned and managed by someone else.
Profits from the venture are paid to you as a dividend. If the property is sold, you may also benefit from the proceeds. This is an equity REIT, which differs from a mortgage REIT (mREIT).
An mREIT uses the money you invest to fund mortgages or purchase mortgage-backed securities. As an investor, you earn money from the interest earned on the mortgage. REITs can be easily sold on market exchanges and are a simple way to diversify your investments.
3. Real Estate Investment Groups (REIGs)
Real estate investment groups (REIGs) are formed by investors who pool their money to buy and operate income-generating properties. REIGs can be informal clubs that meet online or in person. The term also refers to more formal groups that invest in real estate, like real estate limited partnerships (RELPs) or real estate syndications.
4. Flip a House
Also known as fix-and-flip real estate investing, house flipping involves buying a house below market, typically because it is in disrepair, and fixing it up to be sold. Despite how easy it looks on TV, house flipping requires you to do a lot, including:
- Research to find discounted properties
- Assess the project’s value based on its cost and potential
- Understand your local market and total expenses
- Be organized and able to manage a project
If you don’t have the skills to upgrade the home, you can help yourself by knowing good contractors. Beyond house-building skills, it’s a good idea to maintain plenty of capital in case you encounter cost overruns or the property doesn’t sell right away.
5. Buy Your Own Home
Buying a home for you and your family might not have been the first thought you had about investing in real estate. But it is a real estate investment and a good way to learn some of the ins and outs of real estate.
As a first-time homebuyer, you may qualify for several benefits, including:
- Lower mortgage down payments
- Reduced interest rates
- Mortgage income tax credits
- Mortgage interest deductions in some states
Residential real estate investing doesn’t pay the average annual returns of other real estate investments, such as commercial real estate, but the first-time buyer benefits can make buying a home more affordable.
6. Use Online Real Estate Investing Platforms
Using online real estate investing platforms, also called crowdfunding, can diversify your portfolio and let you get in on lucrative deals you might not have been able to afford on your own. The platforms allow individual investors to pool their money to provide the capital for residential or commercial development projects or buy into existing projects.
Often, you must be an accredited investor — in other words, you must have a net worth of at least $1 million or earn more than $200,000 annually. However, several platforms don’t require this.
Pros and Cons
Investing has risks and rewards; investing in real estate is no different. Here are the pros and cons to consider.
Pros
- Generate passive income
- Take real estate tax breaks
- Diversify beyond stocks and bonds
- Increase in value with inflation
- Appreciate over time
- Raise your net worth
Cons
- Unable to rent property
- Can’t sell a property quickly
- Requires time and energy to maintain
- Pay a lot upfront
- Increases liability with tenants
- Subject to market volatility
Featured Offerings
Is Real Estate Investing Right for You?
Real estate investing is not for everyone. You must understand your risk tolerance and investment goals. Factor these risks:
- Market risk
- Debt risk
- Illiquidity risks
- Risks with deal structures
- Construction risks
You must also have a good feel for how much capital you need for the type of real estate investing you want to do. Before jumping in, consider taking time to learn about real estate, including working with other investors to find good deals.
Ready to Start Investing in Real Estate?
Real estate is the largest asset class. If you have investments, real estate investing can help you diversify your portfolio, hedge against inflation and provide you with tax advantages.
There are many ways to invest in real estate. You can develop real estate, rent homes and business space or sell properties. To have a chance at making money through real estate investing, you must acquire knowledge of the business before diving into the deep end of the pool. Now that you know the basics, you can get started.
Frequently Asked Questions
A
Limited resources don’t have to leave you on the sidelines. With $5,000 and time learning, you can invest through crowdfunding, real estate investment trusts (REITs), partnerships with other investors or wholesaling.
A
The best real estate investment depends on your situation and goals. Commercial real estate investing can offer some of the highest returns but can be complex and require longer engagement.
A
There are many types of real estate. However, the five major categories are residential, commercial, land, industrial, and special-purpose.