When it comes to chasing their dream job, most people have two things in common: they want to make a lot of money and they want to be their own boss. Real estate investing has the potential to offer both of those things.
What is particularly appealing about real estate investing is that almost anyone can do it if they’re willing to put in the time and effort. However, getting started can be challenging.
With that in mind, the following guide outlines six different ways to get started on your real estate journey.
Why Invest In Real Estate Properties
Before diving into how to get started with real estate investing, it’s essential to understand why you might want to take the leap into real estate investing. Real estate investing isn’t easy – you’ll have to put in lots of time, effort, and money, and it’s not without risk. However, for most, the following key benefits are well worth the challenges:
Excellent Source Of Passive Income
One of the biggest reasons to invest in real estate is the passive income potential. With a traditional job, you are limited to earning active income only, which is money you earn from working. Once you stop working, your income stops coming in.
However, if you invest in rental properties, you can make what is known as a passive income, which is money that you earn even when you’re not actively working. As long as your tenants pay rent on time, you’ll continue to earn an income from your investment without having to actively work. In this way, real estate investing is a great way to earn passive income.
Steady Cash Flow
Another perk of having rental properties as part of your real estate portfolio is the steady cash flow. This contrasts with other investments, such as stocks, which can be very volatile.
For example, with stocks, you might make a lot of money one month but then lose it the next. Conversely, with rental properties, you’ll always know how much income you can generate each month, which means you can budget and plan for the future effectively. A steady cash flow is one of the key benefits of real estate investing.
Great Return On Investment
Real estate has the potential to offer a great return on investment (ROI). In other words, you can make a lot of money by investing in the right property. Of course, there’s no guarantee that you’ll make money on every investment.
Still, over time, if you’re smart about the properties you invest in, you should see a healthy return. This is particularly true because real estate appreciates over time, meaning the value of your property is likely to go up if you hold onto it.
The 6 Best Strategies For Real Estate Investing
Most people might have heard that real estate investing can be incredibly lucrative. However, the reason a lot of people don’t get into real estate investing is because they simply don’t know how to get started.
Real estate investing may look like a complicated process, but it doesn’t have to be. Not only are there multiple ways that you can get started, but entering the real estate market can be as easy as investing in a mutual fund. Not to mention, you don’t have to become a full-time real estate investor. Real estate can simply be a way to diversify your existing investment portfolio.
The following are six of the best ways to enter the real estate market as a new investor:
1. Invest In Real Estate Investment Trusts (REITs)
A REIT is a company that either owns, operates, or finances income-producing properties. REITs can be public or private, and are often structured as mutual funds, meaning that you can purchase shares in the company. To invest in a REIT, you’ll need a brokerage account to buy and sell shares.
The following are some of the advantages and disadvantages to consider:
Advantages Of A REIT
- Greater Liquidity: REITs are traded on major exchanges, which makes them easy to buy and sell. You can also typically sell your shares at any time, unlike some other types of investments.
- Professional Management: When investing in a REIT, you hire a professional management team to take care of the property. Doing so can save you time and effort and provide peace of mind knowing that your investment is in good hands.
- Less Risk Than Other Real Estate Investments: REITs are less risky than other real estate investments, such as flipping houses or investing in a rental property. This is because they are more diversified.
Disadvantages Of A REIT
- High Fees: Because REITs are structured as mutual funds, they often come with high fees. This can eat into your overall returns.
- Lack Of Control: When investing in a REIT, you give up some control over the property. For example, you may be unable to have a say when it comes to renovations or other changes.
- Not All REITs Are Publicly Traded: Only a limited number of REITs are publicly traded. This means that it’s not always easy finding a REIT to invest in, depending on your broker.
- The Risk Depends On The REIT: As with any investment, there’s always a risk that you could lose money. The risk of investing in a REIT depends on the specific REIT you’re investing in, and some REITs are riskier than others.
2. Try Crowdfunding For Real Estate
Crowdfunding is a relatively new way to buy real estate. With crowdfunding, you pool your money with other investors to buy a property. A professional team then manages the property, and you share the profits or losses.
Crowdfunding has become popular recently because it’s a relatively easy way to start with real estate investing. Several platforms allow you to find and invest in properties with just a few clicks. However, there are a few things to keep in mind before investing in a crowdfunded property. The following are a few advantages and disadvantages to consider:
Advantages Of Crowdfunding For Real Estate
- Ease Of Investing: Crowdfunding platforms make it easy to find and invest in properties. You can often do it with just a few clicks.
- Potential For High Returns: If the property is successful, you could see high returns on your investment.
- Diversification: Crowdfunding allows you to diversify your investment portfolio since you don’t have to invest large sums of money into one property.
- Earn Passive Income: You can invest in a rental property using crowdfunding. Doing so will allow you to earn monthly distributions of income based on the rental earnings of the property.
Disadvantages Of Crowdfunding For Real Estate
- Less Control: When investing in a crowdfunded property, you give up some control to the platform and the property manager.
- Fees May Be High: Many crowdfunding platforms charge high fees, which can affect your overall returns.
- Crowdfunding For Real Estate Is Speculative: Real estate crowdfunding is a relatively new industry. As a result, it’s still unclear how successful it will be in the long run.
There’s always a risk that the platform could fail or that the property could underperform because there may be less transparency about the property compared to other types of real estate investments.
- The Investment Isn’t Liquid: It can be challenging to sell your investment in a crowdfunded property. This means you may have to hold onto the property long-term, which may not be ideal if you need the money you have invested for other reasons.
3. Purchase Rental Properties
Rental properties are often a great way to earn passive income. By purchasing a property and renting it out, you can earn passive income from the rent your tenants are paying. However, there are a few things to keep in mind before purchasing a rental property.
For instance, the location of the property, the condition of the property, the potential for finding tenants, and the cap rate (which is the rate of return you can expect to earn on the property).
With that in mind, the following are a few advantages and disadvantages to know about when considering a rental property investment:
Advantages Of Rental Properties
- Earn Passive Income: Rental properties can provide a source of long-term passive income.
- Can Appreciate In Value: Over time, the value of your rental property can appreciate, providing you with even more passive income and potential profits if you sell.
- Hedge Against Inflation: Rental prices tend to go up with inflation, so your rental property can act as a hedge against rising prices.
- Increased Demand For Rental Properties: The demand for rental properties has been growing in recent years as more people choose to rent instead of buy.
- Tax Benefits: There are several tax benefits that come with owning a rental property, such as deducting expenses and depreciation.
Disadvantages Of Rental Properties
- Requires A Significant Upfront Investment: Rental properties require a large upfront investment, which may not be financially feasible for everyone.
- It Takes Time And Effort To Find The Right Property: It can take time and effort to find a rental property in a good location and in good condition (meaning it doesn’t require extensive repairs and renovations before you can rent it out).
- Passive Income Depends On Tenants: There’s no guarantee that you’ll find tenants, so you may have to wait a while before earning any income from your investment.
- Requires Ongoing Maintenance And Upkeep: Rental properties require constant maintenance and upkeep. This includes repairs, which can be costly and time-consuming – especially when your property is vacant.
4. Learn How To Fix-And-Flip Properties
The concept of fix-and-flip properties involves finding homes that need significant repairs or renovations, and then doing them up with the goal of selling them for a profit. Because most of these properties are in poor condition, they are usually available for less than their market value.
The strategy of fixing and flipping is to buy the property at a discount, make the necessary repairs and renovations, and then flip the property for a substantial profit. The following are the advantages and disadvantages of buying fix-and-flip properties:
Advantages Of Fix-And-Flip Properties
- Substantial Profit Potential: You can make a significant profit from fix-and-flip investing if you can find a good deal and know exactly what needs to be repaired. Using a fix-and-flip calculator can help you figure out if an opportunity will be profitable.
- Earn Fast Returns: The goal is to fix the property as quickly as possible so that you can sell it for a profit before expenses start piling up. As such, fix-and-flip properties can provide investors with fast returns.
- Can Be Done Part-Time: Fix-and-flip investing can be done part-time, making it a great way to earn extra income.
- It’s A Relatively Safe Investment: Fix-and-flip properties are usually available for less than their market value, so there’s less risk involved. In addition, experienced investors typically have a good idea of what repairs need to be made and how much they will cost, so there’s less guesswork involved.
Disadvantages Of Fix-And-Flip Investing
- Requires A Significant Upfront Investment: Fix-and-flip properties commonly require a large upfront investment. This usually means you’ll have to take out a sizable loan.
- It Can Take A While To Find The Right Property: It can take time and effort to find a fix-and-flip property in a good location and in good condition. You’ll need to have a good understanding of the local real estate market as well.
- There’s No Guarantee That Your Property Will Sell: There’s no guarantee that you’ll be able to sell the property for a profit. The longer your property stays on the market, the more money you’ll have to spend on holding costs, such as mortgage payments, property taxes, and insurance. These expenses can eat into your potential profit.
- Requires Experience And Knowledge: Fix-and-flip investing requires experience and expertise to succeed. You need to know how to find good deals, what repairs need to be made, how long the repairs will take, and much more.
- Capital Gains Taxes Can Be High: When you sell a property for a profit, you may have to pay capital gains taxes. Short-term capital gains taxes are much higher than long-term capital gains taxes. Most fix-and-flip properties are sold within a year of purchase, so you’ll have to pay short-term capital gains taxes.
5. Master Wholesaling Of Real Estate Properties
Wholesaling is the process of finding deeply discounted properties and assigning your purchase contract to another buyer. Basically, this means that you would find a property, get it under contract, and then sell that contract to another buyer for a higher price.
The goal of wholesaling is to make a quick profit, so you would typically try to sell the contract within a few weeks or months of finding the property.
Consider the following advantages and disadvantages when considering wholesaling as an investment strategy:
Advantages Of Wholesaling Properties
- Can Make A Quick Profit: If you can find a good deal and sell the contract quickly, you can make a quick profit from wholesaling.
- No Repairs Needed: Since you’re not buying the property, you don’t have to worry about making any repairs. As a result, you can save a lot of time and money.
- Can Be Done Part-Time: Wholesaling can be done part-time, which makes it a great way to earn extra income.
- Requires Less Capital: Wholesaling requires less capital than fix-and-flip or buy-and-hold investing. Again, because you’re not buying the property, you don’t need to come up with a large down payment.
- There Is Less Risk: There is less risk involved in wholesaling than in fix-and-flip investing or buy-and-hold investing. This is because you’re not buying the property, so you don’t have to worry about the value of the property declining.
Disadvantages Of Wholesaling Properties
- It Can Be Challenging To Find Good Deals: It can be difficult to find deeply discounted properties. Finding good properties that are listed below market value requires a lot of research and work.
- You’ll Need To Find Buyers: You’ll need to find buyers for your contracts. If you don’t have any potential buyers lined up already, you could have difficulty selling your contract. Once you find potential buyers, you’ll also need to convince them to buy your contract instead of finding their own deal.
- You’ll Need To Be Able To Close Quickly: You’ll need to be able to close on the property quickly to make a profit. Doing so can be a challenge if you’re not experienced in real estate.
- The Profit Potential Is Capped: The profit potential is capped because you’re only making a profit on the spread between the purchase and sale prices.
6. Purchase REO Properties
A real estate-owned (REO) property is a property that was foreclosed on, and that didn’t sell at the foreclosure auction. The lender that foreclosed on the property now owns it.
As such, they will generally be looking to sell it for as much as possible and as quickly as possible. In most cases, they are simply trying to cover their losses from the foreclosure, which is why many REO properties present a good investment opportunity.
The following are some of the advantages and disadvantages of investing in REO properties:
Advantages Of REO Properties
- Can Be Bought At A Discount: REO properties are usually sold at a discount, so you can potentially profit from the property.
- No Liens Or Back Taxes: One advantage of buying an REO property is that there are usually no liens or back taxes owed on the property. This means you won’t have to worry about paying off any debts attached to the property.
- You Can Inspect The Property: Unlike buying foreclosures at auction, you can inspect the property before making an offer. This allows you to assess the repairs that need to be completed and ensure you’re not overpaying for the property.
- No Homeowner To Deal With: Some homeowners can be challenging to negotiate with since they may be emotionally attached to the property. Lenders have no such attachment to REO properties.
Disadvantages Of REO Properties
- May Require Repairs: Many REO properties are sold “as-is,” which means that they may require extensive repairs. You’ll need to keep that in mind when calculating your budget.
- Potential Competition: Other investors may be interested in the same REO property. This can make it challenging to get your offer accepted. If you get caught up in a bidding war, you may not end up with as great of a deal as you thought.
- It’s A Significant Investment: Despite being available for a discount, you’ll still need a large amount of money to cover the cost of an REO property.
What To Consider Before Making An Investment In Real Estate
If you do your due diligence, there’s money to be made in the real estate investment business, and there are plenty of ways to get started. However, there are several different factors that you’ll need to consider to determine whether an investment opportunity is worth your time, effort, and money:
- Real Estate Market Status: You’ll need to research the area to determine if the real estate market is a good place to invest. Buying low and selling high should be your goal, so you don’t want to invest in a market on its way down. You’ll be much less likely to find good deals if it’s a seller’s market.
- Property Location: Location, location, location. It’s one of the most crucial factors in real estate. The better the location, the more valuable the property will be. Look for neighborhoods that are growing or have growth potential.
- Valuation Of The Property: You’ll need to know how much the property is worth before you invest. If you overpay for a property, it will be that much harder to turn a profit.
- Age Of The Property: The property’s age will play a role in its value and how much it will cost to keep up. While a historic property may hold more value, if it’s not well-maintained, it can become a money pit. This is especially true if the plumbing, electrical work, appliances, and HVAC systems are outdated and need to be replaced.
- Type Of Mortgage That Fits Your Situation: You’ll need to find a mortgage that fits your financial situation and investment strategy. Many different types of loans are available, so you’ll need to do research to determine which one is best for you.
It’s also worth noting that some lenders have strict qualification guidelines based on the type of mortgage you’re looking for.
- Credit Score: Your credit score will play a role in getting approved for a mortgage and what interest rate you’ll pay. Some types of lenders require higher credit scores than others.
- Investment Purpose And Investment Horizon: You should have a clear idea of why you’re investing in real estate and how long you plan to hold onto the property. This will help you determine what type of property to buy and what financing options will suit your investment goals.
- Profit Opportunities: There are many ways to make money with real estate. When considering a property, you’ll need to look at the profit opportunities and determine if they align with your investment goals.
- Expected Cash Flow: Identifying the expected cash flow from an investment property is critical to determine if the property is a good fit for your portfolio. The goal is to have a positive cash flow, which means that the income you earn will cover all of the expenses associated with the property.
Start Out Right On Your Real Estate Investment Journey
Real estate can be an amazing way to make money, but it’s not without risk. You must thoroughly research the real estate market so you can understand the advantages and disadvantages of each real estate investment opportunity.
Still, if you take the time to do your due diligence, you’ll be in an excellent position to find a profitable investment and become a successful real estate investor.