When most people think about real estate investments, they likely think of a few things: slum lords in huge cities and wealthy billionaires. However, the average investor should also think seriously about investing in real estate.
If you have no idea where to start, you are not alone. There are many ways to get started as a real estate investor – some of them are as low as $ 500!
Below, I’ll break down the different types of real estate investments and find out who they’re best for. But first, let’s talk about what the hell real estate investing actually is.
What does real estate invest?
Simply put, real estate investing is the buying or selling of land and buildings in order to make money. There are different categories of real estate:
- Residential real estate This includes houses, apartment buildings, vacation properties and other places where people live. This is usually the easiest real estate area to enter for a beginner.
- Commercial real estate (CRE) includes office space, retail stores, or buildings used for business purposes. It’s more expensive than residential property and you manage more properties. The best way for individual investors to get into CRE is to buy shares in a real estate investment trust – more on this below.
- Industrial real estate This includes warehouses, storage units, and other large “special purpose” structures like car washes that generate revenue.
How do you invest in real estate?
Before choosing your first investment, decide how much you want to spend on a down payment. Real estate can be a risky businessSo don’t invest money that you can’t afford to lose. Commercial real estate investors, for example, should have around $ 50,000 ready. When you don’t have nearly that much, there are less expensive ways to invest.
Real estate can also be a significant investment of time. Repairing a property isn’t easy, and even basic maintenance is a regular task that you need to keep up with. Some real estate investors outsource maintenance to management companies at an additional cost.
It is a good idea to speak to a qualified lawyer before making your first purchase. Holding investments through a Limited Liability Company (LLC) is far less risky than investing on your own behalf. When the investment fails, you want your assets to be protected and you don’t want legal liability if you can avoid it.
With the disclaimers out of the way, let’s look at your options.
Buy a rental property
The residential real estate investor can commit over time buy a property and become a landlord. This is a guaranteed monthly income as long as you can find tenants, and it’s one of the most common ways to consistently make money on real estate. (You can also buy and rent a commercial or industrial property, but the upfront costs are higher and management is more complex).
From a technical perspective, however, residential real estate can be passive investments you need pretty active engagement. So make sure you have both time and money. Many landlords outsource the maintenance of buildings to management companies. others take care of repairs themselves.
How to buy a rental property
First, get to know your local real estate market. The better you know the neighborhood, the more likely you are to make a smart purchase and offer tenants a price that is fair to them and competitive to you. Find out what types of renters live in the area, who is moving there, and how prices have changed over time.
Start with Roofstock – the premier marketplace for single family homes. They make searching a house ridiculously easy. You can go through the catalog of houses and click on the ones you like. You will get important details like the current rent, the neighborhood rating and much more.
The best part of Attic is that they sell houses that already have tenants. That means that once you buy a rental home, you have a source of income.
Real Estate Investment Trusts (REITs)
Investing in a REIT is not much different from investing in a stock. As an investor, you give money to a trust or company that is buying a property. You will receive a portion of the dividends when the property increases in value. REITs are bought and sold on most of the major exchanges.
This is the easiest way for a beginner to get into the commercial real estate world. It comes with a potentially high yield. Companies pay out at least 90% of their income on the property as dividends to investors. In addition, your investment is liquid. You can sell and cash out your stocks without having to worry about selling the building. And the company does all the management work for you.
Most likely, they are publicly traded REITs. Accredited investors with high net worth may have access to private REITs. These trusts are not registered with the SEC and the upfront investment required is much higher.
How do you invest in REITs?
REITs can be part of a novice investment portfolio. A public REIT only requires a few hundred dollars and can be sold anytime. You want a stock REIT (the most common type) as opposed to a mortgage REIT, which is a more complex trust that deals with mortgages. If you want to get into the real estate market without committing to real estate management, this is a good place to start.
To buy stocks, go through a brokerage firm just like you would buy other stocks.
Crowdfunding platforms are an increasingly popular option for small real estate investors and are passive investments that are similar to REITs. But instead of going through a trust or a company, investors pool their assets and match up with interested property developers or sponsors. There are platforms for commercial and residential real estate.
Because these investments are illiquid – you can’t just sell them – and depend on real estate market variables, they can be riskier than REITs. But they can also bring you dividends on real estate that you as an individual cannot access. You may have to wait longer for returns, but the returns tend to be pretty high.
How do you invest in crowdfunding platforms?
Many established platforms such as Equity Multiple are only available to accredited investors – with income over $ 200,000 or net worth over $ 1 million. However, real estate investments are no longer limited to those who meet these criteria.
Crowdfunding opens up opportunities for every interested investor. When it comes to getting into the real estate investment market, there are many options.
One of those options is DiversyFund, an alternative investment platform with no management fees and an obligation to help its users gain financial freedom.
DiversyFund creates investment funds for private market goods, such as real estate, intended for the everyday investor. There are no asset restrictions and the minimum investment starts from just $ 500. This makes this option accessible to investors of all income levels.
Another option is DisputeWith that, you can get started with as little as $ 1,000. Dispute Removes the middleman – brokers who charge expensive fees – and lets you invest directly in the selection of expertly audited properties. The company’s founders have been in the industry for more than four decades. So you know your investments are in good hands.
If you want to keep your initial investment down, Fundrise is a good option. You can create a starter portfolio for just $ 500 and then upgrade to a core plan once you’ve spent $ 1,000. FundriseThe investment strategy is based on Real Estate Investment Trusts (REITs), which are bundled investments in commercial real estate.
RealtyMogul is a great option for those who need to invest at least $ 1,000. With RealtyMogul you contribute to REITs whose properties are carefully selected according to their earnings potential. Non-accredited investors are limited to properties that have been made available to them, while accredited investors can choose from a wide variety of REITS and individual properties known as “private placements”.
Note that dividends on crowdfunded real estate aren’t always quick. Both companies strongly recommend investors to get exposure for the long term (at least five years). Short-term investments are inherently risky, while long-term investments offset your risk.
Short term and holiday apartments
What if you don’t want to go public or buy a property but still want real estate income?
Try to rent a room every night or weekly. You can even rent out an entire house for short-term periods. The amount you earn depends on the local rental market. If you live in an area with high tourist traffic, whether seasonal or year-round, you can really make a profit. You don’t need a lot of money to get started. just the extra space. And you’ll see cash flow pretty quickly compared to investing in stocks.
Think of these rentals as a “sideline” or part-time gig. You are responsible for furnishing, maintaining, updating the property and communicating with tenants.
Entry into the short-term rental market
Many tenants find it easier to access a third-party website. Airbnb is the most famous.
There are also VRBO or vacation rentals from the owner. The website does a lot of the management for you, e.g. B. Finding and reviewing tenant games, providing damage protection and handling complaints from tenants.
If you’d rather do every aspect of the process yourself, you can advertise locally through sites like Craigslist or through a network of trusted friends.
Don’t forget to check your local laws to see what regulations you need to meet. Many cities and federal states are responding to rising housing costs against the short-term rental market. For example, laws can limit the length of stay guests can stay.
Join a real estate investment group
Investment groups are one way of entering the residential real estate market without the hassle of actively letting. Like-minded investors pool their resources and buy residential property such as apartment buildings or condominiums through a larger company. In return for a reduction in rental income, the company takes over maintenance and tenant management. Think of these assets as small mutual funds.
Individual investors can own individual units within apartment buildings. (The group itself becomes a legal entity with each member as a co-owner.) Since vacancy is always a risk for rental properties, many groups “bundle” part of the rent so that investors still earn a certain income even if their unit is empty .
Trade or “flip” real estate
After you’ve been in the real estate investment game for a while, here’s what to do with it. For investors ambitious enough to tackle construction projects, trading or flipping real estate can produce high returns in just a few months.
Here’s how it works: An investor buys an undervalued residential property, renovates it, and then sells it at a higher price. It is possible to be a pure “real estate flipper” not renewing your purchase and waiting for the market to improve. The properties should already be in good condition for this to work.
The sale is not guaranteed, of course, and you’re still on the hook for the mortgage if you can’t find tenants or buyers. House flipping is best for seasoned real estate investors who know how to hedge their bets with the local market.
How to trade or flip real estate
First, familiarize yourself with the design and construction principles and local building codes. Even if you don’t do the work yourself, you manage the process as the owner. Then you can estimate a schedule for the renovation, pricing of materials, etc. This is an active investment. Professionals recommend working with a partner, ideally someone whose skills you do not have.
Note that this type of investment comes with quite a large amount of risk. You can make a lot of money in a short period of time, but you can lose money if the market doesn’t go your way.
Frequently asked questions about real estate investments
The biggest bonus of real estate investing is the cash flow, or monthly income, that investors get from rental properties after they have paid all of their expenses. Ideally, your cash flow will increase over time as rents increase with inflation but your mortgage payment stays the same.
Real estate is also a great way for a savvy investor to diversify their portfolio. The real estate market has its own whims so it may do well if the rest of the stock market doesn’t.
You make money in real estate in three ways: rent, appreciation, and credit.
Rent is where you see most of your real estate income, regardless of whether you invest in commercial or residential real estate. How much cash you collect depends on many factors (local market, type of property, whether you are paying a management company or contractor, etc.).
Loans are passive investments where you (the investor / REIT you buy shares in / the investment group you join) borrow money to a real estate developer and then make money with interest payments. This is known as “debt investing” in real estate jargon.
Appreciation is the increase in value of a property over time. If and when you sell your investment, the appreciation will ensure you’re selling for more than you originally paid for. Investors who, like real estate flippers, focus on capital appreciation should be familiar with risk – unlike cash flow, there are no guarantees.
Since the investment options are varied, there is no specific amount that could be sought. You can buy shares in some REITs for as little as a few hundred dollars. However, real estate investments are best for those in good financial health who have the basics – retirement, emergency saving, debt management, and more.
Plan to set aside more money than you think is necessary, especially if you are involved in real estate management and maintenance.
They are sure to complicate your taxes. Any money you make on real estate is taxed like any other income. In 2018, the tax rate for active investors was around 39.6 percent and for passive investors 43.4 percent. When you benefit from the appreciation of real estate, those gains are considered capital gains and you pay a capital gains tax.
Deductions are where you really save. You can deduct certain property-related costs such as repair costs or property taxes. You’ll also want to make a deduction for depreciation – the process the IRS uses to determine the cost of a rental property over time. These deductions are subject to fairly strict regulations. The property should have a “determinable useful life” (which just means that it will eventually wear out) and a useful life of more than a year.
Real estate investments can be exciting and lucrative, but it takes practice and lots of money.
When it comes to real estate, the options are endless. So, you need to consider which investment is best for you before signing on the dotted line.