3 Ways to Start Investing in Real Estate
Real estate is known to be one of the safest and smartest investments around. It generally appreciates over time and it’s great to have real property assets in your holdings. Plus, it is much less volatile compared to other investment ventures like the stock market or crypto. People always want and need land, houses and commercial buildings. Why not own a piece of that action?
If you are just learning the ropes, you have a few choices to make as you start investing in real estate. The main one is what type of investments do you want to make. There are several ways to invest in real estate. Some will require more involvement. Some are more passive property investment opportunities. Here are the three most common ways for you to be a real estate investor:
1. Rental Property Ownership
Rental properties (i.e., “income properties”) are probably the most common type of real estate investments for beginners. You buy a house, condo or a multi-family property and then rent it out. You may run it as a long-term rental with tenants who lease for years at a time. You may opt to make it a short-term vacation rental.
The advantages of rental property ownership are clear. You will be receiving rent payments from month to month that should offset your ownership and management costs, plus ideally earn you a little profit. These profits add up over time as you continue to own the property. In addition, you benefit over the long-term as the property appreciates in value. This allows you to raise rent over time or sell the unit a few years down the road for its equity gains. In the real estate investment world, this is known as “buy and hold” investing.
The primary challenge of rental property ownership is managing the property. You can assume the role of the landlord, which involves marketing the unit, finding tenants and handling maintenance needs. Or, you can pay a property management company or live-in property manager to handle the day-to-day duties. Paying someone else to do the dirty work takes some stress off your plate, but also takes revenue out of your pocket.
2. House Flipping
This is what you typically see on TV, but of course it’s not as easy as they make it look. However, the premise is easy to understand. You buy a house at a good price. You spend some time and money to renovate the property. Then, you ultimately resell it for a tidy profit.
The main advantage of flipping houses is that you won’t hold the property for very long. You buy it, renovate it and flip it as quickly as you can for a faster profit compared to the slower earning process of rental property ownership. House flipping is a great option for a real estate investor, as long as you know what you are doing. There are common mistakes to avoid if you want to be profitable. Many first-time house flippers are happy to break even and can potentially take a loss with bad decisions, construction delays and other issues.
It’s important to go into a house flip with a solid budget and plan. Make sure you get the house at a price that allows for a healthy profit. Make sure not to go over your renovation budget. Finally, make sure the house will resell at a significantly higher value—enough to make all the work worthwhile!
3. Indirect Real Estate Investment
The last form of real estate investment we will cover today is known as “indirect” investing. You will not physically be holding or managing the properties you buy. There are different forms indirect real estate can take:
- Real Estate Investment Groups (REIGs)—You invest capital in a real estate investment group, which is a company or group of investors who buy and hold rental properties. This offers a fairly hands-off way to invest in real estate and see long-term gains, but you may have limited control over the funds.
- Real Estate Investment Trusts (REITs)—These are similar to REIGs, except you are basically investing capital in a trust like you would a stock or bond. Rather than riding the stock market roller coaster, though, your money is invested in real estate holdings. It is a very hands-off way to invest in real estate without all the hassles of property management.
- Real Estate Crowdfunding—There are various online groups and platforms that allow you to invest in real estate as part of a group. The money may go to purchase rental properties, land or commercial units. You can choose what you want to invest in and have more control over your funds. However, those funds are usually tied up for some time and there may not be a lot of liquidity.
If you are a real estate investor—or looking to get started investing in real estate—consider joining the PropertyLark home buying network. We offer numerous resources and tools to help property buyers get the most out of their investments.