With real estate prices steadily rising, signaling a full recovery from the Great Recession, you may be interested in learning how to start investing in real estate. Read on to learn more.
What is Real Estate?
Real estate refers to a tangible property, also encompassing land and buildings along with its natural resources.
Meanwhile, real estate investing refers to financial activities centered around generating returns from a tangible property or cash flows tied to a tangible property.
It is one of the oldest form of investments that existed long before equity investment kicked in. The attractiveness of real estate as an investment option is premised on its cash flow, liquidity, profitability, tax break and the diversification it offers
Ways to Get Started with Real Estate Investing
Method 1: Buy basic rental properties
Buying an investment property is the basic approach toward real estate investing, with renting being an obvious method to bring cash in.
On buying a property and renting it out to a tenant, the landlord gets enough money to pay off the costs associated with owning a property, namely mortgage payment, taxes and maintenance costs.
Most often, the rent is fixed to accommodate a premium over the costs to the owner of the property.
However, in some cases, owners prefer to wait patiently to pay off the mortgage before they can seek a return. By that time, most of the rent becomes a profit, while there is also an opportunity in the form of capital appreciation.
Method 2: Buy, renovate and purchase properties
This strategy, also called flipping property, capitalizes on beaten down prices of a property due to many different reasons such as foreclosure or quick sales.
Buying such a property and spending money on renovating it, the buyer would resell it for a profit.
Method 3: Purchase REITs
An REIT, or Real Estate Investment Trust, can be a publicly traded company, which is added to the investment portfolio for diversifying risk.
It could also be a private company. Compared to the other asset classes forming part of the portfolio, a REIT vests the twin advantages of generating higher returns and minimization of risk.
Investing in REITS can also be made through real estate-focused ETFs and mutual funds. Returns from a REIT is in form of dividend income as well as capital appreciation.
Method 4: Use a commercial crowdfunding service
Crowdfunding allows rich investors, having a net worth of over $1 million access to the real estate through crowdfunding, which is a form of peer-to-peer lending.
This brings down the price of entry for investors. Apartments costing millions of dollars could be part-owned by investors by contributing as little as $5,000. Global real estate crowdfunding industry was estimated at $3.5 billion in 2016, according to National Real Estate Investor, quoting data from Massolution.
Some of the real estate crowdfunding platforms include RealtyShares and RealtyMogul.
Method 5: Real estate trading
This would include instruments such as options, which allow the buyer an option for purchasing a real estate asset at a predefined sale price over a fixed period.
Options contract is usually entered into by property developers or investors in commercial real estate or high-valued residential property. The buyer of the option, who purchases the option by paying an option premium, which is a relatively smaller amount compared to the transaction price, can choose to or not to exercise the options or sell it to a second buyer before the expiry of the option.
This real estate trading provides flexibility and low-cost trading opportunity for the buyer.
Method 6: Rent out a room
Companies such as Airbnb allow people to generate money to pay off mortgages or rent through renting out rooms. Additionally, they also make a decent, neat profit.
Pros and Cons of Real Estate Investing
Before you invest, it’s important to consider the perks and drawbacks of real estate investing.
- Certain cash flows: Leases from real estate is a steady stream of income for investors. Usually, this lease is higher than the dividend income associated with stocks.
- Capital or asset value appreciation: Real estate prices historically follow an increasing trajectory compared to most other asset classes. The rationale is this – The net operating income from a real estate asset gradually increases along with rent increases and the scope of better management of the asset.
- Inflation hedge: Rental income from tenants are sometimes indexed to inflation and so when the rent revision comes up, the impact of inflation on the returns is taken care of.
- Tax breaks: Real estate is favorably treated by the U.S. Tax code.
- Equity build-up & loan pay-downs: As one pays down on his mortgage and part of the principal over the months, he/she, in turn, builds equity in his/her property. Equity in real estate is the difference between what a property is worth and what is owed on it.
- High transaction costs
- Necessity to manage, both day-to-day operations as well as strategic management, taking into account the long-term position of the asset in the market
- Real estate investment is cyclical in nature, putting at risk one’s investment
Final Thoughts on Real Estate Investing
Although investing in stocks fetches you higher return, provided you are a well informed and prudent investor, it exposes you to high risks as well, given the volatility associated with the stock markets.
Very often, you have driven along, rather than you being in control. However, when you invest in real estate, you are almost entirely in control of your actions. Meanwhile, bonds are relatively safer bets, with the returns from this class of asset said to be less volatile and hence are relatively safer.
As a corollary, returns from bonds are not very attractive. In nutshell, real estate is an investment option that combines the high returns of equity along with the safety of bonds.
Real estate investment, thus, has become well and truly entrenched today, as investors warm to the idea of generating decent returns without assuming concomitant risks. Today, the reality of realty investing is sinking in and is creating a revolution in the world of investing.
If you’re interested in real estate investing and want to learn more, check our Benzinga’s picks for the best real estate investing books or the best online real estate investing courses for this year.