Real estate investing can produce lucrative results if you invest carefully. You can use real estate investments to balance a portfolio, because these investments often outperform when the stock market underperforms, which it certainly has been doing lately.
This short guide will help you understand some options available to new investors.
The Allure of Real Estate
Most of the time, homes increase in value. The Federal Reserve revealed that the average sale price of housing has risen 25 percent since the second quarter of 2020. This figure indicates that you can make a rental property investment and potentially gain a profit, with a relatively passive income. Alternatively, you may choose to flip the property later for a profit.
A powerful benefit is that the IRS offers many ways to reduce your taxes when you buy a rental property. You can deduct insurance, utilities, advertising, maintenance, and repair expenses, as well as interest, depreciation, and more.
Types of Investment Property
Investment properties come in four main types. Any one of them can turn a profit if you buy selectively and manage it well. The four types are as follows:
- Residential property: single and multi-family rentals, condos, townhomes, etc.
- Commercial real estate: shopping centers, large apartment buildings, office buildings, and properties with both residential and commercial spaces.
- Industrial property: warehouses, distribution centers, cold storage buildings, and research and development property.
- Land that will be developed or used as is: land for subdivisions, individual lots for homes, or agricultural land.
Selecting a Property
Many people start investing in real estate by looking for investment property for sale, whether it’s local or out of state.
If you’re looking at an investment property, thoroughly investigate it before you buy. Ensure that it is attractive, requires little extra investment to get it ready for tenants, passes building and fire codes, and is financially capable of producing a profit.
Buying a turnkey property is convenient—but you will be able to make more money on a property that needs some work, because it will cost less upfront.
If you can afford it, you will profit more on a multi-family property than you would on a single-family home. RentPost mentions that although you may pay more for a duplex, you could charge each tenant slightly less than the cost of the mortgage payment and still make close to twice the money that you could on a single-family rental property.
Your profit margin will be based on rental rates for similar properties in the area, maintenance costs, taxes, and the likelihood of the property appreciating.
Although mortgage rates have been high (up to 6 percent in June), Forbes reports that they inched down in early July. Nonetheless, Nadia Evangelou, senior economist and director of forecasting for the National Association of Realtors, predicts that rates will continue to climb, although not at the same rapid pace.
Evangelou says that an adjustable-rate mortgage (ARM) may be a good option for buyers who plan to sell or refinance within the next five years, because the interest rate on these mortgages is still below 4.5 percent. An adjustable-rate mortgage would make the mortgage payment for a median-priced home about $300 less per month than a 30-year fixed-rate mortgage.
The Joys of Property Management
If you are the hands-on type, you may want to manage your investment property yourself.
This could end up being difficult—especially if there are multiple tenants, and if you have never done this before. Sooner or later, someone will call you in the middle of the night to stop a leak or unclog a toilet, or you may need to settle a dispute between tenants.
Your other choice is to hire someone—or a property management company—to handle the property for you. A property manager can do everything from screening tenants to collecting rent and handling emergencies—or just the things you want them to handle.
Real Estate Investment Trusts
Another way to invest in real estate is to invest in real estate investment trusts, or REITs. REITs enable you to profit from real estate without dealing with the potential headaches that may come from physical ownership. With REITs, you do not need to finance, buy, manage, or maintain the property.
An equity REIT is a company that owns and manages income-producing properties. The properties may include malls, offices, apartments, warehouses, self-storage facilities, cell towers, hotels, healthcare centers, hospitals, and more.
Mortgage REITs (mREITS) are companies that purchase or originate mortgage debt and earn income from the interest on these investments.
Investing in REITs is one of the easiest and safest ways for you to get started in real estate. You can invest in REITs on online trading platforms, the same way that you would invest in the stock market—and you may only need $500 to get started. NerdWallet says that you can invest in more than 200 publicly-traded REITs, which are more liquid than public non-traded REITs or private REITs.
Real Estate Investment Groups
An excellent way to get started in real estate, while taking a hands-off approach, is to work with a real estate investment group. These groups commonly buy multi-unit properties and sell units to investors, while taking care of administration and maintenance. Some groups have a considerable barrier to entry, Benzinga says, which may mean you need to have an income above $200,000 or assets above $1 million. Low-cost groups such as FundRise may be more attractive to beginning investors.
Tips for Financing Your Investment
Finding the money to invest in real estate can be done in several ways. Although there are several options for coming up with the money yourself, you can also get others to help you. This may enable you to purchase investment real estate for very little money of your own. Consider the following funding sources:
- Obtain a conventional mortgage: Make sure your credit is good (above 740) and shop around for the best deal.
- Take out a bank loan: If you have good credit, you may be able to get a private loan to secure the property.
- Use the equity in your home: If you have considerable equity in your home, you can use it to buy your new rental property.
- Get a hard loan: You may not need good credit for this, because the property becomes the security for the loan. Private investors provide the money.
- Leverage real estate investors: Individuals—who are looking for places to invest their money but do not want a part in managing the property—simply want to see good returns on their money with a guaranteed interest rate.
There are many ways to get started investing in real estate. Be realistic about how much you can afford, and be careful not to go above that amount. As your profit increases, use some of it to buy more real estate, and continue to grow your wealth.
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