Whether Andrew Carnegie’s quip that 90% of millionaires’ wealth comes from real estate holds today, real estate still is a solid investment on which to build wealth. Among Americans with a net worth of $30 million and above, about 54% hold properties, including their primary or secondary home.
Most millionaires do not come from money. So if you’re looking for a way to stake your claim on an improved future financial position, real estate might be the right fit for your investing.
There’s no secret to real estate investing for beginners; instead, it requires you to assess your financial situation, understand your risk tolerance and be prepared for a long-term commitment.
Best Real Estate Investments for Beginners
There are many strategies you can use to jump into real estate investing. For those new to the landscape, seven of the best ways that you can get going in real estate investing for beginners include:
1. Rental Properties
Owning rental properties is a way you can generate cash flow by collecting rent, and you can take advantage of your property appreciation. If you plan on purchasing property to serve as a rental, watch the market for properties and scout the location. You’ll want to consider the neighborhood in which your potential property sits and whether it is an area of growth.
If you buy the property, you become a landlord, which can be a full-time job. Landlords of rental properties have to pay the mortgage, insurance and property taxes for the property as well as maintain the property, collect rent and deal with tenant complaints.
2. Commercial Properties
When you think of real estate investing, commercial properties might not immediately come to mind. Commercial real estate falls into four broad categories: office buildings, retail space, multifamily and warehouse. The properties can be used for industrial or retail purposes, such as for office space, retail stores, shopping malls, hotels, medical centers and manufacturing.
Commercial real estate can offer the opportunity for high returns, but it can also come with high risks. Like residential property, you can make money from rent and appreciation, but commercial property transactions and lease agreements can be complex.
3. Flipping Houses
When it comes to real estate investing for beginners, a lot of buzz is generated around flipping houses. Most of the talk is about how easy flipping houses can be, but there’s a lot more involved in flipping houses than owning a rental property.
Flipping houses is finding undervalued homes — usually because of the need for repairs — buying them, fixing them up and selling them for a profit. You have to have a sense of the neighborhood and where property values are heading.
Flipping houses has grown in popularity, but renovations and construction add risk and costs, and you might need to hire contractors if you don’t have the skills to do the work yourself. Rising construction costs and delays can add to your cost, and if a neighborhood doesn’t take off as you assume, you could have a hard time getting a return on your investment.
4. Land
Buying land can be lucrative for real estate investing for beginners, but you have to understand your risk tolerance and be ready to do your homework. You can purchase residential and commercial properties, farmland or specialized agricultural land.
You can subdivide land, develop it, lease it for income or buy and hold it, giving it a chance to appreciate. However, there’s a lot of legwork that needs to happen first.
For instance, you don’t want to buy a piece of farmland only to find out later that someone else owns mineral rights to what’s just beneath the surface or that your neighbors have an easement across your property. Similarly, if you want to build an apartment complex, you need to know whether you have the right to do so.
Research zoning laws, ownership, title status, tax obligations and environmental issues. Any of these matters could turn your investment into a costly one instead of a profitable one if you are not diligent in your property research.
5. REITs
A real estate investment trust (REIT) owns and operates income-generating real estate, sometimes offering financing to investors. REITs typically own apartment buildings, office buildings, hotels, hospitals and shopping centers.
REITS are mostly sold on major exchanges, or you can buy a nontraded REIT through a broker. Your money is pooled with other people’s money, and the REIT purchases and operates properties. The profits from the rental income or appreciation are paid out as a dividend.
Congress created REITs in the 1960s to give all investors access to commercial real estate. One of the easiest ways to get into real estate investing for beginners is through a REIT.
To qualify as a REIT, a trust must hold 75% of the available investments in real estate and must pay out 90% of its taxable income to shareholders as a dividend.
6. Real Estate Crowdfunding
Another good option for real estate investing for beginners is online real estate crowdfunding. It’s similar to buying into a REIT because you’re pooling your money with others to buy real estate, except that you select the real estate and development projects you want to get involved in.
You also typically have to remain invested for longer periods — sometimes as long as five years — before you can take your money out.
A potential barrier to someone just starting to invest is that some real estate crowdfunding sites require you to be an accredited investor, which means that you have a net worth of more than $1 million, minus your primary home, or you earn $200,000 annually and have done so for the previous two years.
7. Real Estate Limited Partnerships
Real estate limited partnerships (RELPs) are another way people can pool their money for an investment. This specialized organization looks to purchase, develop or lease a property.
The group has general partners — also known as sponsors — who make day-to-day decisions about the investment and are personally liable for the investment’s debts and obligations. The limited partners contribute capital, have little say in the venture and are liable to the extent of their investments.
Real estate limited partnerships function much like private equity firms: They pool money for investments, are fairly illiquid and offer potentially high returns with high risks. They also have a pass-through tax treatment and typically target high-net-worth investors.
Pros and Cons of Investing in Real Estate
Real estate is typically considered a solid investment to help you build wealth. However, as with any other investment, real estate investing has its positives and negatives.
Pros
- Cash flow from rent
- Property appreciation
- Tax benefits
- Diversification
- Control
Cons
- Initial costs
- Illiquidity
- Property management
- Market volatility
- Bad tenants
Historical Returns
What is considered to be a good return on your real estate investment depends on who you ask. But returns generally depend on your real estate investment strategy. The median real estate return is 8.6%.
Historically, rental properties have averaged an annual return of 4.7%, while crowdfunding has averaged 10%. REITs have averaged 11.1%, and limited partnerships have averaged 15% to 30%.
With the Great Recession in 2008, real estate annual returns plunged to negative 12%. The average return for 2020, during the height of the COVID-19 pandemic, was about 10%.
Home prices typically increased every year before 2007, and in 2022, prices soared 10% over the previous year, hitting an all-time average high of $386,000.
The key to investing in real estate after COVID-19 may be understanding the lasting impacts, according to the Kellogg School of Management at Northwestern University.
Potential Career Paths for Aspiring Real Estate Professionals
If you want to get involved in real estate, investing is just one of the ways you can participate. Consider these three careers as a real estate professional:
- Real estate investor: Real estate investors buy and sell properties to make a profit. There are many ways to go about it, and you can do it part time or full time. Real estate investing can range from buying a single home for a rental property to pooling your money with others to develop projects or invest in commercial real estate. Some of the different types of real estate investors include REIT investors, long-term investors, speculators and owner-occupants.
- Real estate agent: Real estate agents help clients buy, sell or rent properties. Agents assess your needs and financial ability and propose solutions based on their experience and knowledge of the local market. From there, real estate agents guide you through the process of buying, selling or renting a property, negotiating the price on your behalf and handling the paperwork for your offer.
- Property manager: Property managers handle all the day-to-day responsibilities necessary to maintain a rental property. Property managers are responsible for finding and screening potential tenants, and getting them to sign a lease and renew that lease. Property managers also have to collect rent, see that the property is in proper order if the owners live in another area and have repairs made.
Tax Advantages of Investing in Real Estate
Real estate purchases can potentially save you money on your tax bill. When you file, you can deduct the interest on your mortgage and your property taxes. You also may be able to claim a depreciable asset and lower your taxable income.
Another tax advantage is a 1031 exchange. This allows a real estate investor to sell an investment property and buy one that is “like-kind” to avoid a capital gains tax. This tax-saving maneuver is usually reserved for experienced real estate investors, and you should consult your accountant before pursuing it.
Helpful Skills and Strategies for Success in Real Estate
Depending on your strategy for investing in real estate, you may need to rely on several different skills, including:
- Technical real estate knowledge
- Knowledge of your local market
- Critical thinking
- Communication
- Networking and relationship-building
Using these skills and keeping your strategies simple can help you pursue success in real estate investing.
Find Out Whether Real Estate Investing Is for You
Real estate investing requires you to do your research, and it takes patience. But it can help you diversify your investments, hedge against inflation and build wealth.
Frequently Asked Questions
What is the best way to start investing in real estate?
Assess your financial situation and your investing goals. You can start investing by buying a home for yourself, purchasing a rental property, putting money into a REIT or sharing the cost with others through crowdfunding or a partnership.
Is $5,000 enough to invest in real estate?
Education is a key to investing in real estate with $5,000. Once you’ve acquired knowledge, crowdfunding, real estate investment trusts (REITs) or a partnership could get you into the game.
Is real estate a hedge against inflation?
Real estate is an asset that is expected to maintain its value or appreciate during a period of inflation. Real estate investors also can benefit from inflation by increasing rents along with rising housing prices, while your mortgage stays the same.
