Real estate is a popular investment option. It can help generate passive income, makes for a significant long-term investment, and is an excellent tool in your overall wealth-building strategy. It is also considered a safe way to invest your hard-earned money.
If you’re someone who believes in investing in tangible, usable assets, real estate is definitely the way to go. It can also help diversify your investment portfolio and is generally less vulnerable to short-term fluctuations like the stock market. Plus, real estate has excellent tax benefits.
However, real estate investing for beginners can seem daunting. If you’re wondering how to get started in real estate investing, you’ve come to the right place. We’ve listed some of the simplest ways by which you can begin your investment journey in real estate.
Real Estate Investment Trust (REIT)
REITs are probably the easiest way of investing in real estate without the hassle of owning, financing, or managing any properties.
REITs are companies that own or finance income-generating real estate across a variety of sectors such as hotels, hospitals, apartment buildings, office buildings, and retails spaces. Through REITs, you can invest in a portfolio of real estate assets either by purchasing company stock or through mutual funds and exchange-traded funds.
As per the Federal Reserve Board Survey of Consumer Finances 2020, nearly 145 million Americans invest in REITs, which is approximately 44% of total American households.
REITs lease space and then collect rent on these properties. This income gets distributed amongst shareholders as dividends. It is mandatory to pay out at least 90% of their taxable income to shareholders. As per data from 2019, REITs have distributed $69 billion in dividend income.
Historically, REITs have performed well. The last three-year average for REITs was above S&P 500 and Russell 2000. If you’ve been wondering how to create wealth investing in real estate without putting in a significant amount upfront, REITs can be the answer to your question.
However, like all investments, REITs have their advantages and drawbacks. It is crucial to consider these before deciding to invest in them. Here are some pros and cons of REITs:
Pros
- They offer steady income through dividends
- Easy to buy and sell
- Highly liquid
Cons
- Dividend income is taxable
- Sensitive to interest rate fluctuations
- Low growth potential since 90% income is distributed
Online Real Estate Investing Platforms or Crowdfunding
Online real estate funding platforms offer a unique way to invest in real estate. If you’re familiar with online platforms which connect borrowers to people willing to lend them money for various reasons, online real estate platforms are no different.
These platforms list real estate projects whose buyers are seeking investors to finance their projects. The investment can be through equity or debt. Investing in debt means you are investing in a loan on the property. When you choose the equity route, you are investing directly in the property and have a share in the ownership.
Debt investors receive payments in the form of interest on the loan, while equity investors receive a share in the income or profits generated by the property.
Initially, equity crowdfunding was only open to accredited investors such as banks, insurance companies as well as wealthy investors. For an individual to be considered an accredited investor, you have to either earn $200,000 annually or have a net worth of more than $1,000,000. However, the Securities and Exchange Commission has now allowed non-accredited investors to invest in crowdfunding.
Most platforms require a minimum investment of $1000, so this method of investing in real estate requires more cash than REITs.
Pros
- Allows investors to participate in large projects without investing too much money.
- Ability to choose the project you want to invest in
- Generate steady income
Cons
- It is relatively risky since the investment is made in a single property
- The company may not have a long financial history
- It is a fairly new concept
Rent out a Room
If you’re looking to test the real estate waters or just dip your feet a little, you could rent a portion of your existing house through websites like Airbnb or Craigslist. The best part is that you can do it right away. It does not require a significant time investment other than taking a few pictures and creating a listing on one of these websites.
It is a particularly attractive option if you live in a city that attracts tourists or visitors regularly. The location of your house is also a crucial factor to consider. You don’t have to rent out your property on a term. You can also choose the days or months when you’d like to rent it out.
Websites such as Airbnb also prescreen renters to a certain extent and your property is also insured against damages. However, once your listing is up and you start getting visitors, you will have to make time to answer queries from potential renters and maintain your room to a certain standard.
However, like all investment decisions, you need to carefully weigh the pros and cons to determine if this is the right decision for you.
Pros
- It is free to create a listing
- Generate extra income
- There is a lot of flexibility in terms of when you want to host people
Cons
- Dealing with bookings, cleaning and maintenance can be time-consuming
- Income can vary vastly depending on the location and time of the year
- You may have to deal with additional expenses on insurance, maintenance as well as pay a service fee on each booking.
Invest in Rental Properties
If you are ready to take the plunge into buying real estate, investing in rental properties can be an excellent choice. What makes investing in rentals attractive is its potential for providing two types of returns.
Firstly, it can provide appreciation in the long run, giving you the option to sell when you’re getting a great price for it. Secondly, you can also generate recurring passive income by renting the property out to tenants.
However, to reap these benefits, you have to ensure that you put careful thought and planning into choosing the right property. You will need to secure the downpayment for your property since rental properties require larger payment upfront. It is also vital to choose the right location. The possibility of long-term appreciation of your property, as well as the ability to attract tenants, will be largely decided by the property location.
If you choose to finance your property, you will also need to be mindful of the interest rates you may be charged for the borrowing. Lastly, you also need to consider if you are cut out to be a landlord. As a landlord, you will be responsible for much more than collecting the rent. You will need to take care of repairs, maintenance, and general upkeep.
If you’re someone who can’t find your way around a toolbox, you can hire a property management service to take care of these aspects for you. However, this comes at a cost and that will eat into the profits you will generate from the rental. You will also have to factor in costs related to insurance, operating as well as unexpected expenses. A decent knowledge of the landlord-tenant laws of your state is also required to avoid legal hassles.
Buying a rental property is a big decision and has its plusses and minuses. Make sure you give it careful consideration and thought before taking the leap.
Pros
- Numerous tax benefits
- The ability to generate passive income through rent
- Long term appreciation in value
Cons
- High barrier to entry
- Lack of liquidity
- Landlord hassles: maintenance, repairs, unexpected costs and may have to deal with bad tenants
House Hacking
House hacking is another clever way of investing in real estate. It is similar to investing in rental properties. However, the key difference is that you combine your primary residence and your real estate investment.
Simply speaking, you are renting out portions or units of your primary residence to generate rent which allows you to cover the costs associated with the mortgage and other expenses related to owning a property.
House hacking generally works better if you invest in a multi-family property such as a duplex, triplex, or quadplex and occupy one of those units yourself. However, you can also house hack in single-family homes. This strategy essentially allows you to live for free while also generating some extra income each month.
House hacking allows you to start your real estate investment journey with small upfront investment. Since you are buying a home to live in, you are eligible for owner-occupied financing that comes with low interest rates. You also don’t need to put up a huge down payment.
However, house hacking is not for everyone. You should consider if you are okay living close to your tenants. While it may sound easy, managing multiple tenants can be tricky and also requires time.
If this is your first investment, it will give you a flavor of what it is like to be a landlord, and you can pick up the skills needed to manage rental properties, tenant relations, and maintenance for your future investments.
Pros
- Tax benefits
- Relatively low barrier to entry
- Save on living expenses while generating income to cover the mortgage and other expenses
Cons
- Lack of privacy
- Requires you to put in time and work
- Risk of tenants not paying on time or leaving
Flipping Houses
Flipping is a real estate investment strategy that involves buying a property, renovating it, and selling it for a profit. The profit in this strategy stems either from the increase in prices in a dynamic real estate market, which is doing really well, or from the improvements made to the property, which bump up its price.
This is a time-sensitive operation with the intention of completing the transaction as quickly as possible to reduce the risk to your capital which is invested in the property.
Flipping requires a fairly decent knowledge of real estate as well as skills and careful planning. If you are a complete beginner, this may be a bit overwhelming. It’s generally not recommended unless you have a partner who can take care of the technical aspects for you.If you are a complete beginner, this may be a bit overwhelming. It’s generally not recommended unless you have a partner who can take care of the technical aspects for you.
It also requires a fair amount of investment not only to purchase the property, but also for renovation and other allied expenses. While financing is an option, you would still require a sum that is larger than what you would need for some of the other investment options.
If done well, flipping has great potential to generate sizable profits. The average gross profit on a flip was nearly $63,000 as per ATTOM data from 2019.
Pros
- Potential to generate quick profits
- Gain knowledge about real estate and construction
- Chance to display your creativity while renovating homes
Cons
- High-risk strategy
- Requires sizeable investment of time and money and can be stressful
- Profits can be taxed for short term capital gains if you’ve owned the property for less than one year
Final Thoughts
The ultimate goal of any investment is to serve the investor, and real estate investing for beginners is no different. We have listed some of the best ways by which you can start your real estate investment journey. However, you are the best judge when it comes to determining which of these methods is best suited to you.
Think carefully about your goals, the amount of money you can invest, the time you have at hand, the level of knowledge you have about each of these options, and how comfortable you are with each of these strategies before you pick one. Do also consider how each of these fit within your overall investment or wealth creation strategy.
Real estate is a very versatile and popular investment choice. The right real estate investments have the potential to not only create long-term wealth and help you generate passive income but also lower your overall risk by diversifying your portfolio.
