In recent years, purchasing rental property has become a popular investment strategy. Rental real estate can be a solid investment tool, especially with the rise of fast-growing real estate markets across the country and a mobile workforce relocating at record rates.
It is also a tangible asset that appears likely (but not guaranteed) to appreciate over time as home prices in the United States continue to rise steadily. However, purchasing a rental property is not the only way to enter the real estate market. There are numerous ways to invest in real estate, ranging from EITs to real estate mutual funds.
In this article, we will guide you through on the few ways to invest in real estate, as well as the special strategies you should make before investing in real estate.
What Is Real Estate Investment?
Real estate investing is the practice of purchasing property as an investment to generate income rather than for personal use. Simply put, it is any land, building, infrastructure, or other tangible property that is usually immovable but transferable.
A house, an office building, agricultural land, a commercial plot, and so on are all examples of real estate. It is regarded as a safe mode of investment.
What Are The Ways To Invest In Real Estate?
Here are seven different ways to invest in real estate. The method you choose is ultimately determined by your financial situation and your goals.
1. Real Estate Investment Trust (REIT)
This is the method to use if you want to invest in real estate with less risk than buying an investment property.
Real estate investment trusts, or REITs, function similarly to mutual funds in the real estate industry. Consider them to be a basket. There are various properties in the basket that you can invest in. Rather than investing in individual baskets, you invest in the entire basket with other investors. REITs are usually managed by a corporation (i.e. a trust).
Your money is spent on purchasing and developing properties to profit later. REITs, like any other type of fund, pay dividends to investors. REITs are usually managed by a corporation (i.e. a trust). They are also available in a variety of shapes and sizes. You can invest in REITs that specialize in healthcare facilities such as hospitals or retail facilities such as shopping malls.
Overall, if you want to get your feet wet in real estate investing, REITs are a great place to start. Not only do you not have to worry about paying exorbitant prices for a home, but you can get started right away with a broker. They are an excellent and low-risk way to diversify your real estate portfolio. And, unlike a traditional index fund, you never have to think about it.
2. Rental Property
If you are careful about the property you buy and the person you rent it to, it can be a great way to make money while you pay off the mortgage. And, as rents rise year after year, your mortgage will remain relatively stable, increasing your earnings.
However, you must consider the phantom costs of home ownership. These are the unseen but significant costs, such as regular maintenance and repairs, that many would-be homeowners fail to consider when purchasing a home. And, as the landlord, you will be liable for any problems that arise, such as when your tenant calls you at 3 a.m. complaining about a burst pipe.
Furthermore, many people believe that landlords can charge whatever rent they want. That is not correct. They can only charge a rent that the market will bear. If the local economy begins to falter, you may be forced to rent the property at a lower rate than your mortgage. You would start losing money every month, which would be disastrous for your cash flow.
House-hacking sounds like you are attempting to access your home’s mainframe in a cheesy hacking montage. However, it is a profitable way to make money in real estate.
The following is how house-hacking works: You buy a multi-unit building. You then live in one unit while renting out the others. This allows you to earn money through rent while also saving money on your expenses by living on the property.
This is comparable to buying rental property. However, instead of being responsible for one property’s maintenance and repairs, you will be responsible for all of your units. This can be a significant disadvantage for those interested in house hacking. However, if you have the resources to hire a repairman,
4. Real Estate Investment Groups (REIGs)
Real estate investment groups (REIGs) are ideal for people who want to own a rental property but don’t want to deal with the headaches of managing it. Investing in REIGs necessitates a capital cushion as well as access to capital.
REIGs function similarly to small mutual funds in that they invest in rental properties. In a typical real estate investment group, a company buys or constructs a set of apartment buildings or condos and then allows investors to buy them through the company, thereby joining the group.
A single investor can own one or more units of self-contained living space, but the investment group’s management company manages all of the units collectively, handling maintenance, advertising vacancies, and interviewing tenants. The company charges a percentage of the monthly rent in exchange for performing these management tasks.
A typical real estate investment group lease is in the name of the investor, and all of the units pool a portion of the rent to cover vacancies. As a result, even if your unit is vacant, you will receive some income. As long as the vacancy rate for the pooled units does not exceed a certain threshold, there should be enough to cover costs.
5. House Flipping
Flipping houses appears to be simple: buy a house, renovate it, and then sell it for more than you paid for it—and more than you spent on renovations. Some of the best advice to receive is to only consider flipping if you have a network of reliable contractors on which to rely. Otherwise, it is all too easy for costs to spiral out of control.
However, would-be house flippers should be aware that this is one of the most time-consuming, costly, and energy-intensive ways to make money in real estate. You need money to buy a house, but you also need sweat equity to renovate it.
Even if you renovate a home, it is not guaranteed that it will sell for a higher price. Factors such as the real estate market, the economy, and location all play a significant role. However, if you play your cards correctly, it has the potential to provide you with massive profits.
6. Online Real Estate Platforms
Real estate investment platforms connect developers with investors interested in financing projects with debt or equity. In exchange for taking on significant risk and paying a fee to the platform, investors expect to receive monthly or quarterly distributions. These, like many real estate investments, are speculative and illiquid — you can’t easily sell them like stocks.
The catch is that you may require money to make money. Many of these platforms are only available to accredited investors, who are people who have earned more than $200,000 ($300,000 with a spouse) in the previous two years or have a net worth of $1 million or more, excluding their primary residence, according to the Securities and Exchange Commission.
Fundrise and RealtyMogul are two alternatives for those who are unable to meet that requirement.
7. Private Equity Funds
Private equity funds, like mutual funds, pool the money of various investors to invest in real estate. However, unlike a REIT or real-estate trust, these funds are typically only available to accredited investors with a large amount of money to invest.
To begin investing, you must have at least $100,000. Depending on the fund, that figure could easily reach the seven-figure range.
As a result, it is not as accessible to the general public as many of the other options on this list. However, it’s worth noting in case that applies to you.
Real Estate Investing Strategies For Success
Certain strategies will serve you well regardless of the form your real estate investment takes.
Understand The Costs Involved.
To be honest, real estate investment is not inexpensive. Property can be expensive to buy outright, but if you have the funds or are willing to take out a loan, it can be worthwhile. However, it is not as simple as buying a property and watching it grow in value. Additional costs to consider include basic maintenance, yearly upkeep, upgrades, and expenses such as utilities and taxes.
If you decide to take out a loan, keep real estate investment trusts in mind. REITs are companies that finance or own real estate based on specific criteria. They allow investors to invest in real estate, and while REITs pay out the majority of their taxable income, investors must pay income taxes. Everything has a price, so make sure to account for everything. Make sure you know what you’re getting into before you dive in.
Choose a Property Type.
So you have set aside enough money for real estate investment. You must now decide on the type of property in which to invest. You can buy rentals, which can be commercial or residential. You can rent out your home or apartment as a landlord. Your property can be rented out on Airbnb or as a vacation rental.
If keeping a residential property isn’t your thing, you can go with the commercial option. You can also avoid renters by buying property to flip for a faster return. Decide what your plans are for the property and what goals you have in mind before purchasing it.
Examine The Surroundings.
When it comes to real estate investing, location is everything. You don’t want to buy in a neighborhood just because the price is low. Check out the market value, the neighborhood, and what the location has to offer. Where to look depends on the type of rental you’re looking for.
Investigate the competition and determine whether the property you have chosen is in a prime location for its intended use. Consider the community, proximity to popular attractions, and way-of-life factors when looking for residential or vacation rentals. Check out the population, parking, and demographics of the area before renting a business.
Determine The Terms.
After deciding on the type and location of your property, you can negotiate the terms of your investment. To keep a running budget, calculate rent, fees, yearly costs, and emergency funds. Is it planned to include utilities? Consider any fees and the amount of funding required to maintain the quality of your investment.
Consider hiring a property manager, especially if you intend to own properties in multiple locations. The key is to make this decision ahead of time so you aren’t caught off guard when the bills start to come in.
If you are thinking about investing in one or more properties, consider purchasing them through an LLC. A limited liability company, or LLC, can assist you with risk management. The LLC owns the properties; if anything happens on those properties, you are not held personally liable. Furthermore, having an LLC can protect your retirement fund if something happens on the property.
It can also provide “checkbook control,” which can be useful if accessing your retirement funds for real estate-related purchases is time-consuming. When you open an LLC with your self-directed IRA, your account becomes the business, and you are the designated business manager.
This procedure gives you access to your funds whenever you need them; however, it does not eliminate the need for a custodian or the ability to use the funds for other purposes.
All funds removed from the property must be used on the property, and any withdrawals must be reported to your custodian. However, rather than being charged for each account change, you only need to report it once. This is especially helpful when it comes to paying fewer fees.
Purchase Real Estate to grow It.
When you invest in real estate, you may want to sell it at some point. You will want to profit whether you plan to sell it right away or hold on to it for a while. The goal is to sell your home for a higher price than you paid for it. Increase the value of your home by making simple improvements or additions. When you increase the value of your property, you can sell it for a higher price, and your hard work will pay off handsomely.
Keep Vital Numbers Close At Hand.
It takes a village to invest in real estate. While you have the authority, you are limited in what you can do with the property. Make a list of people you will need to help you with your investment. Property managers, attorneys, accountants, real estate agents, and money lenders are all valuable resources.
Keep in mind who you will need to keep your property in good condition: an inspector, plumbers/electricians, a handyman, pest control experts, and contractors. While you may not need all of these people right away, it’s a good idea to have a few numbers to call.
What Are The Benefits of Real Estate Investing?
Here are some of the Benefits of real estate investing:
Create Wealth & Equity
The power of equity is the first of many advantages of investing in real estate. When you own a home or piece of property, its value naturally rises. You build equity as you pay down the mortgage and let the house appreciate. Because equity is an asset component of your net worth, it is one of the simplest ways to generate wealth.
Reliable long-term Investment
Although the real estate market fluctuates, it is a reliable investment with a consistent return. Real estate, unlike the stock market, is not subject to frequent market swings or inflation. Real estate prices do not change immediately in response to capital contributions or political volatility, making it a safe and stable long-term investment.
Real estate investors, unlike most people, are not concerned about inflation. In today’s markets, one of the most valuable advantages of real estate investing is that property values are rarely affected by inflation. Rather than being harmed, real estate investments generally increase in value in tandem with inflation.
Passive Income from Rental Properties
When you invest in real estate, you open the door to passive income generation. As previously stated, property values naturally increase even if no changes are made to the property.
Rental properties generate a consistent monthly income for owners regardless of whether the owner works on the property for hours or lives in a different state. The ability to make money without devoting a specific amount of time to your real estate investment provides investors with flexibility.
Frequently Asked Questions
Is real estate an excellent investment?
Why Should I Invest in Real Estate?
What is the most profitable real estate investment?
What are the three most important aspects of real estate?
Real estate investment can be a difficult endeavor, but when done correctly, it is possible to build a successful nest egg. Take your time and do your research before deciding whether or not real estate investment is right for you.
Ascertain that you have the time and resources to devote to this investment strategy and start building your retirement fund right away.