There are several reasons why investing in real estate is a wise financial decision. For starters, real estate tends to appreciate over time. It also can provide stable monthly income, offers incredible tax advantages, and acts as a hedge against stock market volatility.
However, investing in property can get pricey, and the capital you earn won’t be liquid. Moreover, you might be required to personally guarantee large quantities of debt and likely not see returns for a long time.
Although it can take years for property investments to compound, your portfolio will begin to generate significant cash flow once they do. Any profits you make can be reinvested, and then you will see your wealth start to snowball.
Two Ways to Invest
There are two primary ways people invest in real estate: active and passive investments.
Active investments require a hands-on approach to real estate and will require continuous work to generate returns. Either by acting as a landlord or hiring a property manager, you would be involved in the day-to-day maintenance and upkeep of the property.
On the other hand, passive investments only require you to provide capital. This is a good option if you do not want to get your hands dirty and would like the flexibility of more liquidity than active investments. But note that passive investments usually offer lower returns.
Understand Market Conditions
Whether you are actively or passively investing, make sure you understand the market’s state before diving in.
For instance, we are in a seller’s market, and buyer demand is high – meaning it’s an excellent time for homeowners to sell and reap the returns of their residential property investments. Those who sell can then reinvest the profits into their next home or perhaps into an investment property or some REITs.
If you decide to sell your home and invest, using a real estate agent will be your most incredible tool. Real estate agents charge commission rates of around 3%. In exchange for their time and services, you receive their expertise, a deep understanding of their locality, and a network of potential buyers.
Types of Real Estate Investments
Real estate investing for beginners can be overwhelming, so understanding the different investment options can help you find a path that will best suit your goals. Whether you’re starting with $500 or $5 million, there are plenty of ways to diversify your portfolio with the property.
House hacking is a term for investors who buy a duplex, triplex, or fourplex and then live in one unit while renting out the others. Property owners can apply for a Federal Housing Authority (FHA) loan and purchase an investment property for just 3.5% down.
These loans make buying an investment property much easier for first-time buyers because they require so little money. They also eliminate rent or mortgage payments because tenants in the additional units ultimately pay for your housing via rent payments.
There are many reasons why first-time and seasoned buyers alike might invest in a fixer-upper. These properties are usually outdated at best (and nearly dilapidated at worst) and offer investors access to homes in desirable areas at much lower prices. House-flippers take on the renovations for the fixer-upper and then sell the house for a profit – and in this market, they’re likely to sell the house quickly. And if you’re handy and can tackle renovations on your own, you’ll be able to save a ton of money.
But buyer beware – finding homes to flip that won’t turn into money pits requires having multiple sources such as the MLS, wholesalers, auctions, foreclosures, short sale negotiators, and real estate agents. When determining ROI, you’ll also want to consider closing costs, the price of renovations, real estate commission fees, and other expenditures.
Investors can choose to invest in long-term or short-term (vacation) rentals when it comes to rental properties.
Long-term rental investors typically own and manage several properties on their own. They are responsible for finding tenants, managing upkeep, and being on call in case of emergencies. These properties offer the potential for steady income through tenants’ monthly rent payments.
Short-term rentals, such as properties on Airbnb or Vrbo, have some of the greatest potential to generate high returns. However, they also come with a significant amount of risk, and you will be at the mercy of the market because tenants are not signed into long-term leases. Maintenance for short-term rentals is also much more intensive, and you will have to clean it after each stay, which could be every couple of days.
With both long-term and short-term rental properties, you can choose to hire a property manager if you do not want to get your hands dirty. However, you will still need to manage the property manager to ensure things are running smoothly.
You should consider real estate investment trusts or REITs if you want to add real estate to your portfolio without actually buying property. REITs are companies that own commercial real estate such as office buildings, retail spaces, hotels, and apartments.
These investments tend to pay high dividends, making them a popular option for retirement funds. By keeping REITs in a non-taxable individual retirement account, you can automatically reinvest those dividends to grow your investment further.
The type of REIT you invest in will determine your level of risk. Although some REITs are publicly traded on an exchange, others are not. Because non-traded REITs aren’t as quickly sold and can be harder to value, new investors should generally stick to publicly-traded REITs. REITs also have minimum buy-in prices.
Online Investment Platforms
Various online platforms and apps make it easy to get started in real estate investing.
If you don’t have the cash flow to buy a physical property and are wondering how to start investing in real estate with little money, there’s an app for that – actually, there are several. Real estate crowdfunding apps such as Fundrise and RealtyMogul have low buy-in requirements, with some as low as $500. They achieve these low buy-in rates by offering investors ownership of larger commercial real estate projects.
Maximize Your ROI
There are a few rules that every investor should follow when purchasing real estate:
- The 1% Rule: One month’s rent should account for at least 1% of the home’s acquisition cost.
- The 50% Rule: Approximately 50% of your gross rent on a single-family home will be expenses. Expenses include taxes, insurance, repairs, HOA fees, capital expenditures, property management, etc. but do not include mortgages or home payments.
These rules will act as the basis for deciding if you should invest in a given property. Once you are in the purchasing process, don’t be afraid to negotiate or walk away from deals that do not match your goals.