It is possible to build wealth through investing in real estate. With a real estate investment, you can enjoy predictable cash flow, tax advantages, and excellent returns.
But you don’t just jump into real estate investment even when you know many have been successful at it without any formal education in investing or financial management.
You should be able to understand real estate facts to know the movements in local markets and create a strategy. When you are able to predict the right properties to invest in and the best method of investing, you are most likely to gain profit.
There are certainly a few things you will need to know before getting started in real estate investing.
Investing in Real Estate
Investing in real estate involves purchasing a property as an investment to generate income rather than using it as a primary residence. You can invest in different types of properties such as a house, commercial building, or an agricultural lot.
Real estate investment is classified into different types of properties:
- Residential real estate — house (single duplex, triplex, township, bungalow, etc.)
- Industrial real estate — large-scale properties like factories, manufacturing units, warehouses, distribution centers, etc.
- Commercial real estate — office buildings or a complex that is subdivided into multiple smaller units rented out to different businesses.
- Retail space — showrooms, restaurants, shopping malls, retail stores, or multiple units located in a prime location.
- Land — vacant land used for ranching or farming.
- Fix and flip properties — poorly maintained properties that are bought at a very low price, then renovated and repaired, so they can be sold at a high price.
- Mixed-use — one high-end real estate project that consists of the different types of properties listed above.
How to Start Investing in Real Estate
What makes property development work out so that you can gain profit from your real estate investment? This, and many other factors, are to be considered if you want to be successful as a real estate investor.
Property investment can be done in a variety of ways throughout the country. You have the option to purchase a residential or commercial property directly or invest in another way.
The good thing about real estate investment is there are options that allow you to invest even if you have a limited amount of cash. The opportunity to invest in real estate is available to anyone regardless of their academic or economic background.
Before we get into the details of the options on how you can start investing in real estate, here are some facts about real estate investment that you should know:
- If you want to be a successful real estate investor, you should know what you want as you perform the following :
- Investment analysis to confirm the specifications you need for the property.
- Comparative market analysis on important factors like cash return, occupancy rate, return on investment, etc.
Doing these tasks will give you the data you need to help you decide what strategy you will use so that it will be a successful venture, considering all the business parameters that you analyzed.
- When you invest in real estate, you will pay tax on the net income from the real estate. Other taxes that are deducted first include property management insurance, property insurance, property tax, mortgage interest, and costs on maintenance.
You will pay tax on the profit after all of these taxes are deducted.
Another tax benefit from real estate investment is that the tax deduction reduces as the income from the real estate includes considered depreciation costs. Hence, the liability of the property is also reduced.
- The location of the property will impact your investment. Each locality has a different market price that is determined by several factors, such as:
- Socio-economic level
- Expansion opportunities
Properties in urban areas and highly industrialized cities are more expensive than in rural areas or on the outskirts. Likewise, there is high demand for the real estate industry in an urban setup, hence, the higher value of properties.
Another important consideration in location and its effect on the price of a real estate property is if the property is located in an area near a busy road and other social activities.
People who want to buy a house would less likely prefer to purchase a property in such a location.
On the other hand, if you are thinking about investing in a real estate property that you would rent out or convert into an Airbnb, you can choose a location where tourists and visitors would likely choose to stay.
- You can invest in real estate with little or no money.
Although real estate investment is considered lucrative, it doesn’t mean that you cannot do it if you have little cash. What is good about real estate is that there are a lot of options for financing that require little to no down payment.
You may have heard that it is risky and expensive to invest in real estate. However, you can still dive into this opportunity with the right financial plan and strategy. You will discover later on the different ways of getting started with real estate investing, and you might be surprised that this lucrative venture is worth doing.
Ways to Build Your Wealth Through Real Estate Investing
From little to no money to a large amount of money required to invest in real estate, consider these options on how to start a real estate investment that the industry is offering to you.
Once you have considered the factors earlier mentioned, you can choose which of these different methods of investment would be best for your location and budget:
1. Real estate investment trusts (REITs)
A corporation or trust can be formed to use investors’ money to purchase, operate, and sell income-producing properties. It is typically formed by companies who have investors who pool their money to purchase properties that they may not be able to access on their own.
The benefits of REITs include:
- Affordable across all incomes because it is low-cost
- This leads to capital appreciation and dividend growth
- Ideally held in tax-advantaged investment accounts
2. Real estate investment groups
These are considered small mutual funds for rental properties. You can use a real estate investment group if you want to own a rental property, but you don’t have the time and knowledge about managing it, or if you simply do not want to be bothered by the responsibilities of being a landlord.
REIGs have a set of purchased properties, usually apartments that they sell to investors. So, if you purchase any of these properties that they own, you become part of the group.
You can purchase multiple properties from them, and they will take care of maintenance, advertising, and finding tenants for you.
3. Real estate stocks
One method that is not very popularly used is investing in real estate stocks. This way, you don’t have to purchase the property yourself. Just like investing in other types of stocks, you invest in stocks that grow over time.
Here are examples of the different types of real estate stocks that you can invest in:
- Home builders
- Real estate agencies
- Government-supported mortgage buyers
- Home improvement suppliers
- Construction companies
You also have an option to invest in a portfolio of these stocks through mutual funds and real estate exchange-traded funds.
There are also SPDR and S & P Home builders ETF which is a type of a real-estate-adjacent option. They consist of 34 companies that are into different types of real estate stocks.
4. Mortgage notes
Investing in real estate can also be through buying the notes that are tied to a mortgage and then collecting the payments. It is like being the bank for the lender of the mortgage.
The only downside of this real estate investment method is the low mortgage rates which makes it unattractive to real estate investors. The upside is that you can almost always buy mortgage notes that are cheaper than the outstanding loan value.
There will also be instances where you can buy mortgage notes at a discounted price. This will give you returns that are higher compared to the interest rate of the mortgage.
If you want to invest in real estate without the need of unloading a huge amount of cash and buying the property outright, buying mortgage notes can be one of your best options.
5. Investing in a short-term rental property
You can choose to rent out a property that you purchase for the purpose of earning income or rent out your own place. There are many types of short-term and vacation rental properties that you can invest in.
These are becoming popular these days and preferred by tourists because the rent is usually much cheaper than staying at a hotel, especially when they plan to stay for weeks.
Although this method of real estate investing needs more effort than long-term rentals, it can give you a much higher potential for returns.
Plus, you can do it even with little money because all you need is to consider creating a space in your own home to rent out short-term for full-time.
6. House flipping
You’ve probably heard about and seen some shows on HGTV and DIY Network involved in transforming unmanaged and abandoned houses into beautiful and marketable property. This is called house flipping.
It takes a great amount of work to do house flipping, but it can be a very lucrative real estate investment venture for you.
According to real estate research, the gross returns of this method of investment have remained above 30% for the past ten years.
7. Investing in land
If you are looking into a lower cost of real estate investment, you can purchase raw land which requires less capital compared to buying a house or developed property.
Depending on your budget, you can buy land and wait for its value to appreciate before reselling it, or you can go ahead and develop the land into an income-generating property.
8. Investing in foreclosures
There are more than one ways where you can purchase properties at steep discounts and enjoy a boost of returns. One way is to purchase real estate-owned or foreclosed properties and then rent out or flip them.
Most of the time, lenders do not want to hold large inventories of foreclosed properties, so they sell them at a cheaper price.
However, you should take extra precautions, especially because this method typically requires complex legal processes and much higher risk. This is not a recommended option if you are a beginner at real estate investing.
9. Crowdfunding with real estate
The crowdfunding platform offers a lot of real estate investment options. You can choose to either invest in the debt or equity portion of a property. You will also decide on how much you are willing to invest.
The general process in real estate crowdfunding investment involves signing up with a crowdfunding platform, researching the various offerings, and then being ready to make an offer when the platform opens the deal.
The trick to the trade to be successful in this method of real estate investment is to pick a deal that fits your investment goals.
10. Purchase commercial real estate
There are different property types that belong to commercial real estate which you can invest in. They can either be residential like multifamily residential properties with five or more units, or non-residential like office buildings, retail centers, hotels, and warehouses.
This method of investing in real estate is best for the more experienced investor because ample knowledge is needed of certain components like zoning and building codes, legal documents, and unique rental contracts.
Reap the Benefits of Investing in Real Estate
You can invest in real estate at different price points. There are benefits to each investment, no matter how small you start. Choose the type of real estate investment that is best for your needs, your financial capability, and most especially, your goals.
With careful planning, you can enjoy the many benefits of real estate investment, which include passive income, stable cash flow, tax advantages, diversification, and leverage.