Real Estate Investing 101

Look no further than real estate.  

Real estate is a popular option for investors. In fact, it’s the top choice of American investors — above investing in stocks, bonds, cryptocurrencies, gold, or anything else.

Why the popularity? Maybe because real estate is a tangible asset, unlike intangible stocks or bonds. Maybe it’s because that dream of owning a piece of land is ingrained in us all.

Whatever the reason, investing in real estate might be right for you.

What is Real Estate Investing?

Investing in real estate simply refers to putting money into a piece of property, whether it’s over the short-term, such as flipping a house, or over the long-term, as with rental properties, and taking a profit from the investment.

Benefits to Investing in Real Estate

Why choose real estate over other types of investments? Depending on the market, it can provide great returns. When interest rates are low, you can take advantage of affordable mortgages to purchase a property. And when it’s a buyer’s market, you may be able to find properties at a lower price.

If you loved playing Monopoly as a kid, you might want to expand your real estate portfolio  but you likely don’t have millions sitting in your bank account. As you acquire real estate, you can leverage the equity you have in existing properties to buy more and build your portfolio, increasing your profits even quicker.

There may be tax advantages to you as a real estate investor as well, including tax-free capital gains, interest deductions, and write-offs. If you elect to hold onto a property and rent it out, either long-term or as a vacation rental, you can earn passive income for as long as you own the property.

And while it’s not guaranteed, real estate values may appreciate over time, making your profits even bigger.

Drawbacks to Real Estate Investing

Like any type of investing, there’s no guarantee that you’ll get rich quickly (or at all) with real estate.

Your property isn’t guaranteed to appreciate, so if you buy a property expecting it to help you turn a profit in a few weeks or months, you could be stuck with a property you’ll lose money on if you sell.

You’re also at the mercy of the economy. Interest rates may rise and buyers may curb their shopping for properties. It can be difficult to sell in a down market, and you may have to decide whether to hang onto the property until conditions improve or sell at a loss to free up your capital.

Speaking of your investment capital: Investing in real estate can be a long game, so once you’ve invested in property, your capital may be tied up for the foreseeable future, preventing you from being able to make other investments.

Expenses that Come with Real Estate Investments

It’s important to calculate ahead of time the expenses you’ll be faced with when investing in real estate. Not only do you have the cost of the property you’re buying, but you may also be required to purchase private mortgage insurance and/or pay taxes.

If you’re flipping a home, know the costs of the renovations you want to do, and consider padding that estimate for unforeseen expenses. If you can’t sell the house right away, you’ll need to be able to pay the mortgage in the meantime.

If you invest in rental properties, you may need to hire a property manager to handle operations, and you may also need to invest in marketing to find new tenants.

As you can see, real estate investment costs can add up.

Types of Real Estate Investments

If the benefits outweigh the drawbacks for you, take a look at some of your options for investing in real estate.

House Flipping

If you don’t mind a little hard work with the reward of a fast turnaround on profit, house flipping might be for you. It involves buying a house for under market value, renovating it, then selling it within a few weeks or months for a profit.

The key to successful flipping is to pay no more than 70% of what the value of the home will be after it’s renovated. This is called the after-repair value (ARV).

Real Estate Investment Trusts (REITs)

If you’re not interested in actually owning physical property, you can invest in real estate through the stock market. Real estate investment trusts, or REITs, are funds for real estate projects that are traded just like any other stock.

REITs often pay good dividends, so they can be beneficial if you’re retired and would like some passive income to pad your retirement budget.

Land Speculation

Land speculation involves buying land that might have value in terms of water, oil, or minerals. Sure, you might not strike gold on the land, but if you can sell parcels of land or rights to miners or oil and gas companies, you might make more than you initially invested.

Another possibility with land speculation is to buy a large parcel of land and then break it up into smaller parcels. If you know a rural area is on the cusp of becoming developed, snatching up farmland at a low price could turn profitable once the developers come to offer you top dollar for your property.

Commercial Real Estate

This is a wide category when it comes to real estate investing, but one that can be lucrative. Commercial real estate usually involves purchasing a property that you then rent out or manage. That could be anything from a storage unit to a hotel. It can also include office space, warehouses, and more.

The key to purchasing commercial real estate is to decide how involved you want to be in managing it. Many investors hire property managers to handle the day-to-day operations, such as finding tenants and collecting rent.

Rental Properties

Similar in some ways to commercial real estate are rental properties. Rather than having businesses as tenants in an office building, you’ll have families and individuals living in the homes or multifamily units you invest in.

If you’re a hands-on kind of investor, you might start by purchasing a home or two and acting as the landlord. The benefit is that you won’t have the added expense of hiring a property manager, and you can be more connected to your tenants. The drawback is that you’ll be the one they call at 1 a.m. when the water heater breaks.

Vacation Rentals

This option also involves buying a home, apartment, or condo and renting it out, but instead of renters who sign a year-long lease, you have vacationers. The benefit is higher per-night revenues, though you’re never guaranteed to book your vacation rental every night of the year.

Invest Online

Another option if you don’t want to deal with the physicality of buying a property is to invest online through an investment platform like Fundrise. With these platforms, you can choose your risk level and invest in various real estate projects.

Things to Consider Before Investing in Real Estate

As with any type of investment, it’s important to really think about what you want to get out of it. Here are some questions to ask.

How soon are you looking for a profit?

If you want a quick turnaround and large profit, flipping houses might be a better fit, whereas if you’d prefer to have a steady stream of income over time, commercial real estate, rental properties, or vacation rentals might work better.

How involved do you want to be?

Some investors just want to plop down their money and wait for the return, while others want to roll up their sleeves and start painting the walls. How involved you’re willing to be will determine the best type of investment for you.

What does your real estate market look like?

Whether it’s a buyer’s or seller’s market can determine whether you can buy properties for below value or if you’ll have to pay a premium. In the latter case, you might want to wait until market conditions improve.

How much can you afford to invest?

Your budget will determine what you’re able to invest in. Certainly, you can take out commercial mortgages, but you’ll need a hefty down payment to do so. You might opt to start with a small property and build your portfolio as you build equity over time.

What are current interest rates?

If you do take out a loan, pay attention to interest rates. If you’ll be hanging onto the property for a while, you may cut into your profit if rates are too high. On the other hand, if rates are low, that could be a great time to invest in real estate.

Final Thought

Investing in real estate, whether it’s to flip a house for a fast profit or to own rental properties and earn a steady income over time, is a great way to diversify your investment portfolio.