How to Invest in Real Estate in 5 Easy Steps
There are numerous possibilities available when looking for places to invest your money. Regardless of your level of experience, you should invest in stocks, bonds, exchange-traded funds, mutual funds, and real estate; but, for novice investors, forex or cryptocurrencies may be too volatile. Your decision will be influenced by your level of investment involvement, your starting capital, and the level of risk you are willing to accept. Read more about investments on the website.
Real estate investment is a method that may be both rewarding and profitable. Prospective real estate owners can utilize leverage to purchase a property, unlike stock and bond investors, by paying a percentage of the entire cost up front and then paying off the remainder, plus interest, over time.
What attributes do a good real estate investment have? A wise investment has a high likelihood of success or a profit. If your investment has a significant level of risk, the potential gain should be big enough to offset the risk. But even if you pick assets that have a good chance of succeeding, nothing is certain. If you can’t afford to lose the money, don’t invest it in real estate or any other type of investment.
Although a 20% to 25% down payment is often required for a standard mortgage, in rare circumstances, a 5% down payment is all that is needed to buy the entire home. Both real estate flippers and landlords are empowered by the ability to assume possession of the asset as soon as the paperwork is signed and can, in turn, take out second mortgages on their homes to pay down payments on more properties. Here are the top five ways real estate investors may profit.
1. Residential Rentals
For anyone with DIY remodeling abilities and the patience to supervise renters, owning rental homes might be a terrific option. This tactic does, however, need a sizable amount of funding to cover the void months as well as the initial maintenance fees.
- Provides regular income and properties can appreciate
- Maximizes capital through leverage
- Many tax-deductible associated expenses
- Managing tenants can be tedious
- Potentially damage property from tenants
- Reduced income from potential vacancies
The sales prices of new houses, a general measure of real estate values, rose steadily from the 1960s through 2007, before declining during the financial crisis, according to statistics from the U.S. Census Bureau. Sales prices then started to rise again, even reaching pre-crisis levels. We still don’t know how the coronavirus outbreak will affect home prices in the long run.
2. Real estate investment organizations (REIGs)
For those who wish to own rental property without having to deal with the difficulties of management, real estate investment groups (REIGs) are the perfect option. A capital reserve and access to finance are necessary for investing in REIGs.
REIGs are little mutual funds that make real estate investment decisions.
In a typical real estate investment group, a business purchases or constructs a collection of apartment buildings or condominiums, and then permits investors to acquire them through the business to become members of the group.
Self-contained living units may be owned by a single investor in one or more units, but the business managing the investment group oversees all of the units, taking care of upkeep, advertising vacancies, and conducting tenant interviews. In return for performing these managerial duties, the business accepts.
A typical real estate investment group lease is in the name of the investor, and the rent for each unit is combined to protect against sporadic vacancies. This means that even if your unit is vacant, you will still make some money. There should be enough to pay expenses, so long as the vacancy rate for the pooled apartments doesn’t surge too high.
- More hands-off than owning rentals
- Provides income and appreciation
- Vacancy risks
- Fees similar to those associated with mutual funds
- Susceptible to unscrupulous managers
3. Home reselling
Flipping houses requires a great deal of expertise in real estate appraisal, marketing, and remodeling. In order to flip houses, you need money and the capacity to do or supervise repairs as necessary.
This is real estate investing’s infamous “wild side.” Real estate flippers are separate from buy-and-rent landlords, much as day trading differs from buy-and-hold investors. One such example is the desire of real estate investors to quickly and successfully resell the underpriced homes they purchase.
Pure property flippers frequently don’t make improvements to their properties. As a result, the investment must already be worth enough to make a profit without any changes, or they will rule the property out of the running.
Because they often don’t maintain enough unspent cash on hand to cover a home’s mortgage over the long term, flippers who are unable to quickly sell a property may get into problems. This may result in ongoing, spiraling losses.
Another type of flipper generates money by purchasing houses at fair prices and refurbishing them to increase their value. Investors might only be able to afford to take on one or two homes at a time if this is a longer-term investment.
- Ties up capital for a shorter time period
- Can offer quick returns
- Requires a deeper market knowledge
- Hot markets cooling unexpectedly
4. Trusts that invest in real estate (REITs)
For investors who desire portfolio exposure to real estate without engaging in a conventional real estate transaction, a real estate investment trust (REIT) is the ideal option.
When a business (or trust) invests money from investors to buy and manage rental properties, a REIT is formed. Like any other stock, REITs may be purchased and traded on the main exchanges.
In order to keep its REIT designation, a company must distribute 90% of its taxable income as dividends. In contrast to a traditional corporation, which would be taxed on its profits and would then have to determine whether or not to distribute its after-tax gains as dividends, REITs avoid paying corporate income tax by doing this.
REITs are a good investment for stock market investors who want consistent income, just like regular dividend-paying stocks. Unlike the real estate investment types mentioned above, REITs give investors access to non-residential investments like malls and office buildings, which are typically too expensive for individual investors to buy directly.
More crucially, because they are exchange-traded trusts, REITs have a high level of liquidity. To assist you cash out your investment, you won’t need a title transfer and a real estate agent. In actuality, a real estate investment group is more formalized by REITs.
Finally, investors should differentiate between equity REITs that own buildings and mortgage REITs that finance real estate and dabble in mortgage-backed securities when looking for REITs (MBS). Both provide real estate exposure, but the types of exposure vary. While mortgage REITs concentrate on the revenue from real estate mortgage financing, equity REITs are more conventional in that they reflect real estate ownership.
- Essentially dividend-paying stocks
- Core holdings tend to be long-term, cash-producing leases
- Leverage associated with traditional rental real estate does not apply
5. Real Estate Online Platforms
Platforms for real estate investment are for those who wish to pool their money with others to participate in a larger commercial or residential purchase. The investment is done through real estate crowdfunding sites, which are online real estate marketplaces. While less than what is needed to buy houses outright, this still requires funds for investment.
Online marketplaces bring together project financiers and developers of real estate. You may sometimes diversify your investments without spending a lot of money.
- Can invest in single projects or portfolio of projects
- Geographic diversification
- Tend to be illiquid with lockup periods
- Management fees