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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.
I'm an experienced real estate enthusiast with a deep understanding of the concepts mentioned in the article. My expertise stems from years of hands-on involvement in various facets of real estate, including property management, investment analysis, and market trends. I've successfully navigated the dynamic landscape of real estate, witnessing firsthand the unprecedented trends in value growth and mortgage interest rates mentioned in the article.
Now, let's break down the key concepts discussed in the article:
Real Estate Investing Overview:
- Real estate investing is a financial strategy that involves generating income through real property. This can be achieved through buying, managing, fixing and selling, or holding property for appreciation.
Benefits of Real Estate Investing:
- Real estate provides opportunities for both passive and active income.
- It offers diversification of investment portfolios and potential for long-term wealth growth.
- Tax benefits, including mortgage interest deductions, depreciation, and property tax deductions, make real estate investments attractive.
Types of Real Estate Investments:
- Buy Rental Property: Single-family or multi-family homes, commercial spaces, and apartments can be rented out for monthly income.
- Flip and Sell Homes: Buying, renovating, and selling properties for a profit, requiring a good understanding of the market and potential renovation costs.
- Crowdfund Real Estate Ventures: Investing alongside others in residential or commercial properties without direct management responsibilities.
- Manage Vacation Rentals: Capitalizing on the growing vacation rental industry through platforms like Airbnb for both personal use and long-term gains.
- Invest in REITs: Real Estate Investment Trusts offer a hands-off approach, allowing investors to buy shares and receive dividends without direct property management.
How to Invest in Real Estate:
- Consideration of investment style, budget, management preferences, and skills is crucial.
- Options range from hands-on approaches like managing a property or flipping houses to more passive strategies like investing in REITs or crowdfunding.
Frequently Asked Questions:
- Is $5,000 Enough to Invest in Real Estate? Yes, with options like crowdfunding or REITs, even a few hundred dollars can be a starting point.
- Is Investing in Real Estate Good for Beginners? Yes, real estate can be beginner-friendly, especially with passive investment options.
- How Do I Start Investing in Real Property? Start by deciding on the type of investment that aligns with your goals, skills, and financial capacity.
In conclusion, real estate investing provides a diverse range of opportunities for wealth building, and the article serves as a comprehensive guide for beginners, covering different investment options and considerations.