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For those looking to invest in real estate, there are multiple methods available. Which is right for you? Take a look at the following common methods to determine which best fits your goals.
Before you invest, it’s also important to understand the benefits and drawbacks of this type of investment. An overview of the pros and cons of real estate investments is also included here for your review.
REITs
Real estate investment trusts are often a good way for beginners to start to invest in real estate. They give investors partial ownership without requiring full purchase. They provide passive income from minimal investment.
REITs pool funds from multiple investors and buy properties. The trust operates the property and splits the profits among investors. REITs are mostly traded online in a similar fashion to stocks.
For beginners, publicly traded trusts that are well known are recommended. These are less risky and easy to obtain and sell.
If you decide to invest in real estate through REITs, this offers two main advantages. First, they allow you to diversify your portfolio. You can own pieces of different types of properties, so all your eggs aren’t in one basket.
Secondly, REITs lower the investment threshold. You won’t have to raise enough capital to purchase an entire property. Often, the amount required is affordable (less than $1,000), making it possible for beginner investors to invest in real estate.
Crowdfunding
Like REITs, crowdfunding is an excellent way to invest in real estate because of its simplicity and capital requirements. Crowdfunding platforms like Fundrise make it possible for investors to get started with real estate investing with as little as $10.
This investment type is great for new investors because it provides real estate exposure for large or small investors which can deliver diversification and income. Through platforms like Fundrise, investors can earn dividend income from their real estate portfolio as well as appreciation as the properties rise in value.
One downside of crowdfunding versus REITs is lower liquidity as most platforms require a 5 year holding period but liquidity with this investment type is higher than traditional real estate investing.
Flips
Flipping houses can be another great strategy to invest in real estate. These can provide quick profits for those who want a fast turnover rather than passive long-term income. To start flipping houses, you need to buy distressed properties on the cheap, make necessary repairs, and resell for a profit.
To find appropriate properties, look for foreclosures that are being auctioned, or you can buy directly from owners. Be sure to research thoroughly, to confirm the market value will exceed the costs required to rehab the property.
With recent trends in the market, the number of foreclosures has increased. This means investors often have an abundance of options for properties that can be obtained at a decent price. And, of course, the cheaper the price, the greater the profit.
Long-term rentals
For both beginner and experienced investors, rental properties are typically the most sought-after opportunities to invest in real estate. These provide a steady stream of income over the long term.
The biggest challenge with this type of investment is choosing the right property. This requires a careful review of the market to determine how much you should pay for the property and how much you can expect to charge for rent.
Long-term rentals can generate enough funds to cover the cost of owning them plus additional profit. You can even hire a property management company to handle day-to-day landlord responsibilities, so the income is more passive.
Another big plus is that you can sell the property in the future. If you decide to get out of the rental space or simply want funds for a different venture, you can sell the property to make a profit.
Short-term rentals
Short-term rentals offer a modern method to invest in real estate. With this strategy, you can rent out portions of your property or the entire property for brief periods to various renters. For example, you could list your property on Airbnb and make it available for a nightly rate, or split it up to rent various portions or suites to different renters.
This method allows you to adjust your rates to meet demands or your profit needs. It provides a flexible stream of income that you can turn on or off as needed.
Due to their popularity, short-term home rentals often have more demand than hotel rooms. This can make short-term rentals a profitable way to invest in real estate.
As mentioned, this method also provides flexibility. You can even rent out a spare room in your own residence, if you desire. Modern rental platforms have made this a fairly simple process and can allow beginners to dip their toes into real estate investing.
If you’re not yet ready to invest in your own short-term rental, you can research a crowdfunding platform like Here which allows investors to buy shares as low as $100 in attractive rentals across the United States.
Pros of real estate investing
If you invest in real estate, you can enjoy multiple benefits. Your property can provide:
- Recurring income: Rather than a one-time payoff, real estate can provide recurring profits from long-term rentals.
- Appreciation: Unlike other purchases such as cars, real estate typically appreciates. You can hold onto the investment and watch it grow in value over the years.
- Tax benefits: When you invest in real estate, you can often reduce taxable net income. Costs to maintain your property are often deductible.
- Diversification: Real estate diversifies your portfolio beyond traditional ETFs, stocks, and bonds. In many cases, it also offers less volatility than other investment methods.
Cons of real estate investing
While there are many benefits when you invest in real estate, it is important to understand the potential drawbacks as well. When you invest in real estate, keep in mind that this venture is:
- Capital intensive: Some real estate investments require significant funds. It may be difficult to generate enough capital to make or maintain certain investments.
- Management intensive: Owning rental properties can demand a lot of time and attention. This is why many investors hire property managers.
- Not liquid: Even in a seller’s market, it can take a while to sell a home. Real estate is typically a long-term investment.
- A liability: When you own a property, there is always a risk of lawsuits from guests, contractors, or tenants. You’ll need adequate insurance coverage and close adherence to applicable landlord-tenant regulations to protect yourself and your investment.
Is investing in real estate for you?
Real estate can provide a lucrative, diverse option for investors. Many enjoy significant profits without a lot of effort or capital to get started. However, there are risks involved.
As you consider whether to invest in real estate, start by reviewing your financial goals. Then review each of these options and determine which, if any, are a good match.
Lastly, complete additional research on your options. Here are some resources to help guide your decisions. Happy investing!