Real Estate Investment Tips For Beginners
The goal of every investment is to put down money today, make it work for you to get more money in future. With modern investment options, a lot of them are intangible investments. For example, you buy stocks and hold them for some years whilst watching them grow. Even though it is very simple, it is not the only way to invest. There are more investment options for would-be investors who would want to have a tangible investment they can control in a way and real estate investment is on top of that list. Even though it is tangible, you can have it as a hands-off investment and let a property management company manage it for you whilst you reap the profit. There are also intangible forms of real estate investment options available for would-be investors who prefer a more hands-off investment.
What Is Real Estate Investment?
Real estate investing is all about purchasing, owning, managing, sale/rental of real estate properties for profit. Real estate is one of the ways to increase wealth. If done right, the payoffs can be lucrative and will be a great way to diversify your investment portfolio because real estate investing is one of the safest investments you can get. If you are new to real estate investment, it can be confusing if you don’t know how to start investing in real estate. Here are some of the ways you can start making money by investing in real estate.
1. Owning A Rental Property
Buying a property and renting it out is the most common and traditional form of real estate investment. There are a ton of different types of rental properties out there. There are single-family homes, small and large multi-family properties, commercial properties, vacation properties and so on which you can buy and rent out to tenants. You have the option of doing short term rentals or long term rentals where tenants sign extended leases. If you want hands-on management, you can rent out the property and manage it yourself. On the other hand, if you want to save time and stress, don’t mind sharing some of your profits and want to generate passive income with your rentals, then you can employ the services of a property management company to take care of the day to day operations of your rental. Not only will you receive monthly income when you rent out your property but the property also appreciates over time
Another form of rental comes in the form of house hacking. House hacking is when you own a property, live in one of the rooms or units, and rent out the other living space. This form of rental is now new and people use it as a means to take care of their expenses and associated costs in owning a home and even pay for their mortgages whilst earning some profit from it. When one right, it affords people the luxury of living in their dream homes for free and making a profit out of it. Sounds good right?
Pros Of Owning A Rental Properties
- Owner-occupants get to leverage their living expenses and pay out their mortgage.
- A huge way to get passive income coming in every single month
- You get more appreciation value on your property as time goes by
- You save money when it comes to taxes
Cons Of Owning A Rental Properties
- Dealing with people is not always easy to do.
- When you own a property that someone lives in, you have to take liability
- You are subject to the market
2. Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) allow investors to gain exposure to real estate without taking huge risks or requiring large sums of money. It has become a very popular instrument held alongside stocks and many portfolios as one of the easiest forms of real estate investing, very attractive for beginners in real estate investment.
Real Estate Investment Trusts are funds that invest mainly in income-producing real estate assets. When you invest in REITs, your money is pooled together with other investors and collectively invested in a portfolio of income-generating assets such as warehouses, shopping centres, residential buildings, hospitals, offices, hotels and more. it gives you access to a liquid diversified portfolio of real estate assets and you don’t need to manage them directly on your own. REITs investment takes care of some of the biggest issues with real estate investing like intensive management and liquidity.
By buying REITs, investors can gain a stable flow of income without needing to operate the properties themselves because REITs are primarily an income instrument.
Pros Of REITs
- They are managed professionally and don’t require operational expertise and effort from the investor
- It gives you a diversified portfolio of real estate assets spanning different sectors and even countries.
- Given the liquid nature of REITs, you can invest any amount into it and sell the holding anytime.
- It is relatively simple to deal in compared to owning a rental property
Cons of REITs
- It offers less control as compared to owning a rental property
- It lacks the leverage advantage offered by rental properties
- Since REITs can be traded like stocks, share prices can drop within the market.
3. Real Estate Crowdfunding Investing
Crowdfunding real estate means instead of saving up to purchase one particular property, you are able to pull up money with other investors so that you can go in on multiple properties or fund a real estate together. For example, when you have a property that is worth $500,000 and the investor is trying to raise this amount of money, the investor could go to a bank and the bank is going to make him go through all these paperwork and appraisal and put make some down payment or they might not even be able to get the finance. The investor may decide not to go to the bank but use crowdfunding platforms to raise the money internally. One person may decide to put in $5000 and another $10,000 and all these people will earn a piece of the pie. This will give you more diversification for less capital as an investor.
There are two types of real estate crowdfunding. Debt and Equity Investing. Debt investing is like investing in a mortgage on a property and as the loan is paid back you will receive a set share of the interest. With equity investing, you are investing directly into the property and own a share of it. In this case, whatever the profit or income the property generates, you will receive a part of it.
There are many different crowdfunding sites out there and if you are really considering investing in real estate crowdfunding, then really do your research. Look at how your chosen crowdfunding site operates, what you are actually getting, make sure you understand all these before you start crowdfunding investing.
Pros of Real Estate Crowdfunding
- Real estate crowdfunding deals let you invest in specific properties.
- It has high return potential offering a combination of steady passive income and equity appreciation.
- It helps you to diversify your portfolio.
- Offers you the opportunity to invest in properties without the headaches of management and maintenance that comes with it.
Cons of Real Estate Crowdfunding
- It can be very risky
- Crowdfunding investment cannot be easily sold for cash
- You don’t have control over your investment with crowdfunding. Once you contribute to purchase the property, the development and management of the property is done by someone else
4. House Flipping
The premise for this type of real estate investment is simple. You look for a house that needs renovation, buy it at a low price, renovate it and make it look great, and put it back in the market for a higher price and at a profit. This investment strategy doesn’t follow the long term investment idea because it focuses on upgrading the property and quickly selling it out in the shortest possible time. You can earn your profit in a matter of weeks and months instead of years.
There is a huge element of risk in fixing and flipping houses because you need to be very accurate in your estimates and maths on how many repairs you will do. You will need to have the capital or creditworthiness to secure finance to buy the house and you will also need money to make the repairs and upgrade. The longer you hold the property, the less profit you will make if you took a mortgage to finance the property. Aside from getting enough funds for the project, you will also need to have a trusted team and contractors to help with the project estimates and construction.
As an investor, you will love it if you enjoy getting your hands dirty and bringing life to houses that need upgrades.
Pros Of Home Flipping
- Faster return on investment. Usually flipping homes is a short term investment strategy so you can quickly get your return on your money.
- It can be a rewarding experience when you bring an unappreciated property to life.
Cons Of Home Flipping
- There is a great potential to lose money if you don’t get your maths right from the beginning
- While the idea of flipping houses can be fun, it can be stressful and time consuming going through all these processes to bring properties back to life.
Buying land can be a profitable real estate investment. Investors typically buy land for residential or commercial purposes which often requires a large amount of capital for developing the land. Other investors also buy large portions of land and divide them into sellable portions. Whichever way you look at it, investing in land is a good investment option because the value of land always appreciates
Which Real Estate Investment Is Best For You?
Investing in real estate can be an additional source of income for you and can help you diversify your investment portfolio. Whether your investment goal is long term or short term focused, there are numerous options for you in real estate investing. If you prefer a more hands-off approach to real estate investment, then Real Estate Investment Trusts (REITs) and Real Estate Crowdfunding may be your go to option. If you require a hands-on investment, then you might be interested in rental properties, flipping houses and land investment. Whichever way you decide to go, do your research and due diligence very well and be informed before jumping into any form of investment.
Real estate investment can be very profitable if done very well.