How Can I Start Investing in Real Estate

How to Invest in Real Estate: Everything You Need to Know

Real estate investments remain among the most popular and preferred investments in the USA. However, the interest rate has resulted in a moderate decline in this activity, but if rates go down, investors are expected to come back strongly. 29% of Americans like to invest in real estate if they have money and don't want it for at least ten years.

Real Estate investment can bring anyone a lot of extra money each year. This is especially true in times of rising inflation. It can also protect you against inflation if the rent keeps increasing. Data from the US Department of Housing and Urban Development shows that about 70% of rental properties in the USA are owned by regular individuals and not by big companies. You have a lot to know if you are also looking at how to invest in real estate.

Key Highlights

  1. Real estate is a different asset class and is often recommended to diversify a portfolio.
  2. Real estate investment fulfils different financial objectives. By investing in a rental property, Anyone can earn regular income by becoming a landlord.
  3. In house flipping,  investors acquire undervalued real estate property, renovate and improve it and sell it for a profit.
  4. Real state investment trusts provide indirect and passive exposure to real state properties.

How To Invest In Real Estate? 

1. Buy yourself a home

If you want to invest in real estate, consider buying your home. This may be a unique investment for many people, as their view of their first home differs. They see it as an advantage, as they build home equity through monthly mortgage payments instead of paying rent.

It can be a good investment if you plan to stay in an area long. Securing a monthly payment that is as affordable as paying rent can be another added advantage. Also, banks offer better terms for owner-occupied properties, like lower mortgage rates and down payment requirements. You also get the benefit of tax deductions on interest expenses. So, buying yourself a home can be a great real estate investment for the long term.

2. Be a landlord

If you are determined to invest in real estate, consider becoming a landlord by purchasing a rental property like a single-family home or duplex. This type of investment offers an advantage as you clearly understand market standards compared to commercial properties like shopping centres. Also, you may require a lower initial investment in residential rental property, especially with a single-family home.

However, the major drawback is it requires a substantial down payment of around 30% of the purchase price. This might be challenging for beginners without a large budget. This also adds certain responsibilities when you become a landlord, such as managing the property, deciding on necessary upgrades, and handling unexpected situations.

3. Consider house flipping

House flipping has gained popularity to increase profits in real estate investment. However, it requires a good sense of value and more hands-on expertise compared to being a long-term landlord. If you do it correctly, you can generate more profits than traditional property management. In house flipping, house flippers identify undervalued property that needs improvement or even complete renovation. After making necessary changes, they sell the house at market value and profit from the difference between the total cost and the selling price. The total cost includes the purchase price plus renovation expenses, etc.

To be a successful house flipper, you need to be skilled at identifying what can be fixed at a reasonable cost and what cannot. You also need to estimate the future selling price of the house accurately. Any miscalculation can lead you to incur a loss or even a complete loss of profit. If a flipped house doesn't sell, you may also pay interest on a loan until you find a buyer.

4. Invest in REITs

Real estate investment trusts (REITs) are a passive approach to real estate investment. They provide a fit of real estate return and simplicity of owning a stock. Additionally, investors also receive from REIT investments.

  • REITs provide various advantages over traditional real estate investments, the biggest of which is making real estate investments more straightforward.

  • However, there are a few downsides, as REIT prices can fluctuate with market conditions. Investing in REITs can be a good option for beginners with limited funds. However, analysing the pitfalls that can impact your REIT investment is important.

5. Use an online real state platform.

You can use online real estate platforms like Fundrise or Crowdstreet to invest in the real estate market. These platforms give you access to millions of deals. You can directly connect to the developers through this platform and take advantage of potential returns. However, these platforms do have a drawback as some may only accept accredited investors, limiting access to individuals with less funds. Some platforms even require a minimum investment of $25,000. And many platforms even charge annual management fees of around 1% plus other additional fees. This makes it more costly than other real estate investments.

Merits and Demerits of Real Estate Investments

Like any other type of investment, real estate investment has and cons that must be considered before making any decision to invest in Real Estate

Pros of Investing in Real Estate

  1. It provides regular income: The main objective behind real estate investing is that it has the potential to provide regular and reliable income. If you invest in residential or commercial properties, renting them out can generate reliable and consistent cash flow. With this income, you can cover expenses associated with the property or invest in other investment options.

  2. Its value is appreciated: However, it is not guaranteed, but owning property can give you long-term capital appreciation. The value of your property always increases, resulting in significant profits when you decide to sell your investment.

  3. You may receive tax benefits: Real estate investors receive various benefits, such as tax incentives and deductions. Expenses like mortgage, interest, property taxes, and specific maintenance costs are often tax deductible, reducing their overall tax liability. Moreover, holding their property for an extended period may make them eligible for capital gains tax exemptions.

  4. It provides diversification: Real estate investments are a good option for diversifying your portfolio. They have a low correlation with stocks and bonds and act as a hedge against market volatility.

Cons of Investing in Real Estate

  1. It comes with a high initial cost: Real estate investment typically requires a large upfront capital investment. You must pay a down payment, closing costs, property inspection fees, and other potential renovation expenses. This adds up to your budget and makes it costly.

  2. They are not liquid investments: Real estate is not a liquid investment, which means selling a property can take time and effort time-consuming. If you urgently need money or have an emergency, real estate may provide a different level of liquidity than other investment options like stocks or bonds.

  3. It requires property Management: As a landlord, you are involved in various time-consuming processes like dealing with tenants, handling maintenance issues, and managing your property. Sometimes, property owners may also hire a property manager and invest their time in managing these other aspects, which consumes time and becomes costly.

  4. Risk of bad tenants: It is quite hard to find a reliable tenant. Bad tenants may cause property damage or even may not pay your rent on time, leading to additional expenses and potential risk to your investment.

What type of real estate is best for beginners? 

Many beginner real estate investors favour residential properties over commercial properties because they see them as having lower requirements. Commercial real estate can be more complicated and often demands significant capital. For a beginner real estate investor, exploring commercial real estate investments through real estate investment trusts or REITs is advisable.

Real estate investment trusts (REITs) develop and manage commercial properties. Similar to stocks, investors can participate by selecting and purchasing a REIT. REITs offer more accessible and diversified investments. Investors can also get exposure to the commercial real estate market without directly owning or managing the properties.

What is the cheapest way to invest in real estate? 

Some of the best ways to invest in real state investment are

1. Real state investment trust

REITS provide indirect and passive ways to invest in real estate. In such an investment, investors purchase units of a REIT, where they acquire shares in the company that owns and manages a diverse portfolio of income-generating real estate assets. These assets include offices, malls, hotels, and other commercial properties. One of the main characteristics of REITs is that they are obliged to distribute at least 90% of their income to unit holders in the form of dividends. This is why more investors are attracted to REITs.

2. Real estate mutual funds

Investors are offered indirect and passive ways to invest in real estate in such investments. Individuals buy units of real estate mutual funds, where they acquire shares in mutual funds that invest in the real estate sector.
Real state mutual funds typically invest in various securities related to the real estate industry, like companies involved in construction, financing and other respects of the real state sector.

Final words

Real estate investments are a good option for investors looking to diversify their investments and want a consistent income flow. However, real estate investment also varies by type; therefore, choosing an investment that aligns with your financial condition is good. You can choose from rental properties, real estate investment trusts, real estate mutual funds or commercial properties to invest in real estate. But before making any move, it is good to conduct thorough research and understand the specific requirements of each investment type.

Read Also:

  1. Tax Benefits of Real Estate Investing

  2. How to invest in Commodities

  3. Crypto Vs Stocks Investment

03 Feb, 2024

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