There are lots of modern investments that are relatively hands-off. You can buy a stock or an index fund and then sit back and watch it grow for years or even decades. Sounds good, right?
While this is an excellent and straightforward method of investing, it’s definitely not the only one.
Yep — not all potential investors want to just sit and wait for their money to grow.
There goes real estate– Real estate is a popular option for would-be investors who prefer a more TANGIBLE and hands-on approach to invest. We’ll have to admit – It’s not the most straightforward method, and there may be a steep learning curve at first. But that doesn’t mean that it’s not worth giving a shot!
In this article, we’ll help you start your real estate journey this 2022. That includes talking about the different types of real estate investment and ways to do it THE RIGHT WAY. Is it better than stocks? Or is it the other way around?
If you have the same questions in mind, make sure to grab your notes, and let’s get started!
What Is Real Estate Investing?
Real estate investing is the purchase of property as an investment to generate income rather than for personal use. It is defined as any land, building, infrastructure, or other tangible property, usually immovable but transferable. A house, office building, agricultural land, commercial plot, and so on are real estate investment examples. Experts commonly regard real estate as a safe form of investment. Why?
Let’s get straight to talking about why people invest in real estate. I’m sure you’re here because you’re already thinking about what a good idea it is to invest in real estate, you just need to justify your choices further, and that’s what we talk about here at InvestingBosses.
PROs And CONs Of Real Estate Investment
Investing in real estate is a long-term technique that yields high profits in the future at low risk. These investment choices are final, and you cannot just turn your back when things go wrong. As with any type of investment, weighing the pros and cons plays a massive role before deciding.
Let’s Start With The PROs:
Investor’s Risk-Return Profile
Real estate can improve an investor’s risk-return profile by providing competitive risk-adjusted returns. In general, the real estate market is less volatile than the stock and bond markets.
Compared to traditional sources of income return, real estate is also an appealing option. This asset class usually trades at a yield premium to US Treasuries and is especially attractive in a low-interest-rate environment.
Diversification and Safeguarding
Another good thing about investing in real estate is the potential for diversification. Real estate has a relatively low and, in some cases, negative correlation with other major asset classes, which means that when stocks fall, real estate often rises. Meaning, adding real estate to a portfolio can reduce volatility while increasing return per unit of risk.
Direct real estate also has a less principal-agent conflict or the extent to which the investor’s interest is dependent on the integrity and competence of managers and debtors because it is backed by brick and mortar. REITs, for example, require a minimal percentage of profits (90 percent) to be distributed as dividends.
Hedging Against Inflation
The ability of real estate to hedge inflation stems from the positive relationship between Gross Domestic Product (GDP) growth and demand for real estate. As economies grow, the need for real estate rises, resulting in higher rents and higher capital values.
As a result, real estate tends to maintain capital purchasing power by passing some inflationary pressure on tenants.
The Influence Of Leverage
Except for REITs, investing in real estate provides an investor with one tool that stock market investors do not have: leverage. Leverage refers to the use of debt to fund a more significant purchase than you have available cash for.
If you want to buy a stock, you must pay the total purchase price at the time you place the order—unless you are buying on margin. Thanks to that magical financing method, the mortgage, and the percentage you can borrow are much lower than real estate.
The majority of conventional mortgages require a 20% down payment. However, depending on where you live, you may be able to find a mortgage with as little as 5% down. This means you can control the entire property and its equity by paying a fraction of the total value.
Of course, the size of your mortgage affects how much ownership you have in the property, but you have control over it the moment the papers are signed.
This is what motivates both real estate flippers and landlords. They can get a second mortgage on their homes while also making down payments on two or three other properties. Whether they rent these out to pay the mortgage or wait for an excellent opportunity to sell for a profit, they have control over these assets despite having only spent a small portion of the total value.
CONs Of Investing In Real Estate
Real estate investing has some drawbacks that should be carefully considered before getting started.
Real Estate Is Expensive
To make money, you must first have money. Forget about the gurus who say, “You can get rich buying real estate with OPM (Other People’s Money).” While you can buy stock with little money, real estate investing requires money.
You’ll need a down payment, closing costs, and money to repair and update the property to maximize rental income to get started. There will also be ongoing expenses such as property taxes, insurance, mortgage payments, and property maintenance once you own the property.
It Takes A Long Time To Sell Real Estate.
You must devote time to learning about and managing your real estate investments. There is a learning curve, and if you don’t know what you’re doing, you can lose a lot of money in real estate. Furthermore, actively managing your rental properties can take time.
Real Estate Is An Investment For The Long Term.
Real estate should always be purchased with a long-term strategy in mind. You’re buying a tangible asset that you won’t be able to liquidate for cash if you require emergency funds quickly. Selling a home takes time, and the transaction costs are higher than selling stock.
Real Estate Can Be Difficult
Tenants can cause issues that cost you money and valuable time in court. If you own rental properties, your cash flow can suffer significantly if you rent to a tenant who does not pay or leaves the property in disrepair when they move out or both.
Real Estate Investing Entails Special Risks.
Risks must be understood and mitigated to the greatest extent possible. The following are some of the significant risks associated with real estate investing:
- Purchasing the wrong property at the wrong time
- Liability for accidents that occur on your property is increased.
- Having to deal with a “professional renter” who knows how to game the legal system at your expense
- Excessive leverage. This is a common stumbling block for real estate investors. You must be able to make monthly debt payments despite market fluctuations, tenant problems, property vacancies, unexpected repairs, maintenance costs, and other expenses that come with the territory when investing in real estate.
You may have gone through all of the PROs and CONs that we shared above, but you’re still uncertain if real estate is the best option for you. Don’t worry, we’ll cover more important stuff about real estate investing here.
Before we discuss the different methods of investing in real estate, I’m sure you wanna know first the types of real estate investment that you can dive into.
There are a lot of different kinds of real estate investments, but most of them fall into two groups: physical real estate investments, like land, homes, and businesses, and non-physical real estate investments, like REITs and crowdfunding platforms.
Types Of Real Estate Investment
Real Estate Investment Trusts
Real estate investment trusts, or REITs, are companies that own commercial real estate that is traded on the stock market (think hotels, offices, and malls). On a stock exchange, you can buy shares of these companies.
By investing in REITs, you are technically investing in the real estate the company owns, but without as many of the risks that come with owning real estate directly.
Crowdsourcing Platforms
Another type of non-physical real estate investment is crowdfunding platforms which give investors access to real estate investments that can have high returns but also come with a lot of risks.
Some crowdfunding platforms only let people who are “accredited investors,” which means they have a net worth of more than $1 million (not including the value of their home) or an annual income of more than $200,000 (or $300,000 with a spouse) in each of the last two years.
Residential Real Estate
Residential real estate includes almost any place where people live or stay, like single-family homes, condos, and vacation homes. Residential real estate investors make money by getting rent from tenants (or regular payments for short-term rentals) or by the value of their property going up between the time they buy it and when they sell it, or by both.
Residential real estate investing can take many forms. It can be as basic as renting out an extra room or as complex as purchasing and reselling a house for a profit.
Commercial Real Estate
A commercial real estate is one that is rented or leased by a business. Commercial real estate includes an office building rented by a single business, a gas station, a strip mall with several unique companies, and leased restaurants. Unless the business owns the property, each firm will pay the property owner rent.
Commercial real estate can include both industrial and retail property. Most of the time, industrial real estate refers to places like warehouses and factories where things are made or stored instead of sold.
A clothing store is an example of where people can buy goods or services.
Commercial properties usually have longer leases and can charge more rent than residential properties. This could mean that a property owner will have a more significant and stable long-term income. But they might also need a bigger down payment and more money for property management.
Raw land
Will they come if you build it?
Most of the time, investors buy land to turn it into a business or a home. But if you plan to develop the land yourself, you will need to do a lot of market research before buying it. This type of investment is best for people who have a lot of money to invest and know a lot about real estate, like building codes, zoning laws, and floodplains, as well as the local residential and commercial rental markets.
So those are the types of real estate that you can invest in. Now let’s get to the big question – what are the different methods to invest in real estate?
If you notice, we’re not doing the step-by-step process on real estate investment because there’s no such thing as a concrete list of steps to be successful in this journey, but we’ll be talking about tips and tricks on real estate investment in the latter part of this article.
Going back to the question: There isn’t just one way to invest in real estate, so don’t worry—you don’t have to buy an entire apartment complex right away!
4 Most Common Real Estate Investing Methods For Beginners:
Having a Rental Property
We’ll start with the “tried-and-true method” of purchasing a property and renting it out to tenants. You can buy anything from a single-family home to a multi-family residence, commercial property, or warehouse. You can then rent it out to tenants, and then you can be the landlady yourself if you want to get your hands dirty.
If you prefer to generate passive income, you can hire a property management company to handle the day-to-day logistics on your behalf. It can reduce your profits but at least, it would help in saving you time and stress. This can help you pay off your mortgage faster or even cover all of your expenses, allowing you to live there for free.
How do you make money as a landlord?
- Renting to tenants for more than you’re paying in expenses
- Asset augmentation (selling for more than you paid when the property has increased in value)
Purchasing REITs
We’ve mentioned REITs previously, and REITs are unquestionably the simplest form of real estate investing, making them an appealing option for new investors.
These companies typically own and operate a wide range of real estate properties, including hospitals, warehouses, shopping centers, residential buildings, and others.
How to Profit from REITs
- Dividends are paid on your shares quarterly, based on the income generated by the REIT’s holdings.
- Selling your stock for more than you paid for it.
House Flipping
The concept of flipping houses provides an entirely different perspective on property ownership. It is not intended to be a long-term endeavor of managing renters and adding properties to your portfolio.
Flippers buy houses or properties in need of renovations, spend time fixing them up to increase their value, and then resell them at a higher price. An ideal “flip” is a short-term situation in which the goal is to quickly sell and move on to the next.
How do you make money from house flipping?
In this case, there is only one option: sell the house for a profit.
Real Estate Syndication
Another way to invest in real estate is through real estate syndication. This is where investors pool their resources to purchase or construct real estate. Real estate syndicates have greater purchasing power than individual investors.
They begin with a sponsor who initiates the transaction. The sponsor profits from rental management fees, monthly rent cash flow, and capital appreciation. Sponsors seek investors who profit from the monthly cash flow from rent and the appreciation of real estate.
Now, we promised that we’ll share some key pointers because, at this point, we’re assuming that you’re ready to get started with your real estate journey, so here they are:
- Before you do anything else, make sure to assess your current financial situation to see if you’re ready. Ideally, it would be best to have little to no debt and a large amount of liquid savings to use as a down payment. To qualify for reasonable loan rates (aka real estate leverage), you must also have a good credit score and the time to devote to the work involved.
- Investigate the areas and market trends in the areas you’re considering. Are houses selling well or stagnating on the market? Is it a desirable neighborhood to live in?
- Begin by looking for a smaller, safer investment to get your feet wet before diving into an expensive property or a major fixer-upper.
- Examine the property with an experienced eye to assess any damage.
- If renting is your goal, decide whether you want to manage the property yourself or hire someone else to do it.
- If flipping is the goal, consider your own skills and who you know who might be able to assist with a quick turnaround.
- Before purchasing, consider all associated costs, not just the purchase price. This includes closing costs, property taxes, insurance, utilities, and repair or renovation estimates, among other things. It’s fine to get quotes from contractors before committing to a purchase. The ultimate goal is to enter with your eyes wide open.
To perfectly sum up this article, we’ll also answer some of the most commonly asked questions about real estate investing:
What is the best way for you to invest in real estate?
If you want to invest in traditional real estate, like a house or a business, doing your research is more than just coming up with a down payment. It’s essential to know your local market. If there aren’t many people looking for homes or businesses in your area or if property values start going down, that investment could quickly become a burden.
If you want to be less involved with your investments, REITs and crowdfunding platforms are easier ways to add real estate to your portfolio without owning property. Some brokerages sell REITs and REIT mutual funds that are traded on public markets.
Is your personal home an excellent place to begin investing in real estate?
Yes, purchasing a home is an excellent long-term investment. If done correctly, it can rack up your credit score, provide you with equity, and increase your net worth, all of which can benefit your real estate investing endeavors.
Is it possible to invest in real estate with no money?
Yes! Every year, many investment transactions take place in the real estate market. Most of them are accomplished through traditional lenders and institutions such as banks, but some are achieved through unconventional means. Most of the time, this is because the investor was unable to raise the necessary capital or lacked the necessary credit score. What do you think? Even if you don’t have a lot of money, there are many ways to invest in real estate. This includes Hard Money Lenders, Private Money Lenders, Wholesaling, Equity Partnerships, Home Equity, and other financial institutions.
