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Over the last few years, the United States has witnessed unprecedented trends in real estate value growth and mortgage interest rates. These have led to an influx of interest in real estate investing, which can help buyers build wealth for the future and even develop passive income streams.
If you’re considering investing in real estate, this guide can help you figure out where to start and what to keep in mind. Here’s a complete rundown of real estate investing for beginners and tips when investing in real estate.
Vault’s Viewpoint on Investing in Real Estate
- Real estate investments offer a range of opportunities to grow net worth and generate short-term earnings.
- Both passive and active income can be earned by investing in real estate.
- Investments in the real estate space include everything from single- and multi-family homes to raw land, commercial buildings and even REITs.
What is Real Estate Investing?
Real estate investing is a financial growth strategy used to generate income with the help of real property. With real estate investments, you can earn money buying and managing property, fixing and selling (flipping) property or even holding property to sell later after it appreciates. These investments can provide investors with both long- and short-term gains in the form of passive and active income.
As with all forms of investing, real estate is not a guaranteed growth strategy. To generate income, real estate investments must either appreciate in value or provide a regular return (in the form of rental income, dividends, etc.).
Why Should You Invest in Real Estate?
Real estate investments are a great option for anyone looking to diversify their investment portfolio, grow their net worth over time or generate income in the short term. Many of us inadvertently become real estate investors when we buy a home; as long as that asset appreciates in value over time, we generate growth with our investment that can be liquidated and used to fund retirement, new investments and more.
Real estate assets give owners certain tax benefits that other investments might not offer. For example, mortgage interest on a primary home is often a tax write-off. And rental property offers many opportunities for tax benefits including depreciation, deductions in the form of maintenance and operating costs, property tax deductions and even the deferral of capital gains taxes in some cases.
Another great reason to invest in real estate is that the equity in your property can be leveraged to secure funds you can use toward other investments. You can secure a loan or line of credit with the equity you hold in a property, using those borrowed funds to purchase more real estate, improve property you already own, cover emergency expenses and more.
Real estate also provides investors with a hedge against inflation. Some investments—especially tangible assets—may retain their value or even appreciate over time but don’t always keep pace with the inflation of the dollar. Historically, real estate values tend to outpace inflation by a notable margin, giving investors peace of mind that their real property will grow in value at a pace that is at least as much as inflation.
Types of Real Estate Investments to Consider
There are a few different ways to jump into real estate investing depending on how hands-on you want to be and how you plan to utilize that investment growth down the line.
Here are a few different types of real estate investments to consider.
Buy Rental Property
Rental homes can be single-family or multi-family, such as duplexes, quadplexes and even apartments, though commercial rental property like office space and retail shops are also an option.
If you already own a home with a low-interest-rate mortgage, renting that property out when the time comes to move can be a great way to jump into landlordship. Otherwise, look for a property that offers the right balance of purchase price, taxes and insurance expenses with market rental rates. A general rule of thumb is that your rental should earn at least 1% of the property’s total purchase price each month in rent to be a good buy. But this won’t work in every market.
Flip and Sell Homes
If you’re up for a challenge, flipping houses can be a great way to maximize your real estate investment gains. Flipping homes means buying a property that needs some work, renovating it and then selling it for a profit.
To make flipping and selling houses profitable, you should either have a good idea of the work required to flip the home or have a trusted contractor and home inspector available. Also be sure to research the impact of short-term gains taxes, especially if you don’t plan to use those proceeds to buy more real estate investments.
Crowdfund Real Estate Ventures
Real estate crowdfunding allows you to invest in real estate alongside other investors with a more hands-off approach than rental property or house flipping. With crowdfunding, you provide capital that goes toward the purchase, improvement and even management of a residential or commercial property.
You aren’t responsible for choosing the investment property, facilitating the purchase, overseeing improvements and maintenance or even managing tenants. Instead, you act as a silent investor and can reap the benefits in the form of dividends, bond/loan note returns and appreciated share growth in some cases.
Manage Vacation Rentals
Traveling to a new place doesn’t always mean staying in a hotel, which is why the vacation rental industry has seen astronomical growth in recent years. Thanks to Airbnb, VRBO and local platforms, vacation rentals can be a great investment opportunity that gives you and your family a place to stay when you travel and offers long-term gains and monthly income.
Invest in REITs
Love the idea of real estate investment growth but have no interest in finding tenants, handling maintenance or eventually selling property? Then a real estate investment trust (REIT) might be perfect for you.
REITs are companies that select, own and manage income-generating real estate, such as industrial complexes, shopping centers or retail buildings. The REIT generates income as rental payments come in and properties are sold. Mortgage REITs (mREITs) are also available to simply fund others’ real estate purchases, earning a return as those individuals make their agreed monthly mortgage payments.
Investing in REITs is just like investing in a mutual fund: You purchase shares of a chosen REIT, then receive dividend income over time as that asset appreciates and earns income. If and when you decide to sell your shares, this can often be done on the public market just like any other stock or exchange-traded fund (ETF).
How to Invest in Real Estate
The right real estate investment for you depends on your investing style and current portfolio. If you’re ready to start investing in real estate, here are some questions to ask yourself:
- How much do I want to spend? Buying a few shares of a REIT is a very different level of investment compared to purchasing a single-family home on your own. Calculate how much you can afford to invest when deciding which option is right for you.
- Do I want to manage an investment property? Some investors love the idea of being a residential or commercial landlord or even flipping homes. Others simply want a hands-off approach that lets them enjoy real estate gains without the headache and hassle of managing the investment directly.
- How comfortable am I with choosing, maintaining and managing property? Do you feel like you can confidently pick out a wise investment property and then manage it? Or can you choose a group investment product that someone else has already vetted, like a crowdfunding project or REIT?
- Do I have any skills for this type of investment? Jumping head-first into flipping homes may not be right for you if you’ve never swung a hammer or have no idea how to hire contractors. But if you’re well-versed in home repair and renovation, have a trusted team or know your way around real estate transactions, you may be better suited to hands-on real estate investments compared to other new investors.
- Do I want short-term income, long-term growth or a combination of the two? Some investments can provide you with regular income now, either in the form of monthly rent or dividends. Others are more of a long-term growth strategy, with income only realized when it’s time to sell or develop the property. Decide which is most important to you when choosing your investment.
Frequently Asked Questions
Is $5,000 Enough to Invest in Real Estate?
You can often begin investing in real estate with just a few hundred dollars. If you have $5,000 or less, consider crowdfunding real estate projects or buying shares of a REIT. That way you’re able to buy in with a smaller initial investment and won’t bear as much risk like you might if you purchased a property on your own.
Is Investing in Real Estate Good for Beginners?
Real estate investments can be a great choice even for beginners. If you don’t feel confident choosing and managing property on your own, you can join a group effort through crowdfunding or REITs, for instance. Or you can rent out property you already own to others, either through househacking or as a vacation rental to earn extra income.
How Do I Start Investing in Real Property?
It’s important first to decide which kind of real estate investment is right for you. Some investments are more hands-on, and some may require a significantly greater initial investment. Depending on your funds, time, experience, knowledge and even income goals, some real estate investments may better suit your portfolio than others.
As an enthusiast and expert in real estate investing, I bring a wealth of knowledge and firsthand experience to guide you through the intricate world of real property investments. Over the years, I have closely monitored and analyzed the unprecedented trends in real estate value growth and mortgage interest rates in the United States, which have significantly influenced the surge in interest towards real estate investing.
Let's dissect the key concepts presented in the article:
1. Real Estate Investing Overview:
- Real estate investing is a financial strategy involving the acquisition, management, and potential sale of real property for the purpose of generating income.
- It encompasses various approaches such as buying and managing property, flipping houses, or holding properties for future appreciation.
2. Types of Real Estate Investments:
- Buy Rental Property: Involves acquiring single or multi-family homes for rental income. The article provides a rule of thumb suggesting that monthly rent should ideally be at least 1% of the property’s total purchase price.
- Flip and Sell Homes: This strategy involves purchasing properties, renovating them, and selling for a profit. It requires knowledge of property renovation and consideration of short-term gains taxes.
- Crowdfund Real Estate Ventures: Real estate crowdfunding enables investors to pool capital for the purchase, improvement, and management of residential or commercial properties, providing a more hands-off approach compared to direct ownership.
- Manage Vacation Rentals: Explains the growth in the vacation rental industry through platforms like Airbnb, offering opportunities for investment with potential long-term gains and monthly income.
- Invest in REITs: Real Estate Investment Trusts (REITs) are companies that own and manage income-generating real estate. Investing in REITs allows individuals to participate in real estate growth without the responsibilities of property management.
3. Reasons to Invest in Real Estate:
- Diversification of Investment Portfolio: Real estate investments offer diversification, helping investors spread risk across different asset classes.
- Tax Benefits: Real estate assets provide tax advantages, such as mortgage interest deductions and depreciation, enhancing overall returns.
- Leverage: Property equity can be leveraged to secure funds for additional investments, covering expenses, or emergencies.
- Inflation Hedge: Real estate historically tends to outpace inflation, providing a hedge against the devaluation of currency.
4. How to Invest in Real Estate:
- Consideration Questions: Investors are advised to evaluate factors like budget, willingness to manage properties, comfort with property selection and maintenance, skills relevant to the chosen investment type, and the preference for short-term income or long-term growth.
5. Frequently Asked Questions:
- Is $5,000 Enough to Invest in Real Estate? Explains that real estate investment can start with a few hundred dollars, suggesting options such as crowdfunding or buying REIT shares for smaller initial investments.
- Is Investing in Real Estate Good for Beginners? Highlights that real estate investments can be suitable for beginners, providing options like joining group efforts through crowdfunding or REITs, or renting out existing properties for extra income.
- How Do I Start Investing in Real Property? Emphasizes the importance of deciding the type of real estate investment based on individual factors such as funds, time, experience, knowledge, and income goals.
In conclusion, real estate investment offers a diverse range of opportunities for both passive and active income, catering to various preferences and investment styles. Understanding the nuances of each type of investment and aligning them with personal goals is crucial for success in the dynamic world of real estate.
