For those who want to diversify their portfolio, real estate investing can be an excellent opportunity. Providing a way to generate returns on both a short and long-term basis, buying a property for investment purposes holds significant potential.
For many people, jumping into a real estate investment can be a daunting prospect. There's not always a clear way to start, and buying any form of real estate can be an expensive venture. However, with a little due diligence and education into the real estate market, it's possible to create a plan that will meet - or exceed! - your financial objectives. This is what you need to know about how to get started investing in real estate.
What is Real Estate Investing?
Real estate investing is an investment option in which property is purchased with the intention of generating income rather than providing a residence. This can occur in several ways, from renting property to fixing up homes to sell at a profit, giving investors plenty of flexibility. Not all modes of real estate investing will work for everyone, but with multiple options to consider, it's easy to find a good fit. It's also possible to partake in more than one method simultaneously for those passionate about generating an income from investment properties.
These are the most common real estate investing strategies.
Many property investors choose to purchase properties for rental purposes. In this scenario, buyers will invest in single-family homes or multi-family properties with the intention of renting them out to area residents. In many areas, rent can be higher than the standard mortgage, creating a profit margin on which investors can capitalize. This generally requires some level of maintenance, either before buyers move in, in order to bring a property up to a livable standard, or while renters are living on the property. In some cases, investors purchase properties solely for rental use, while others make the choice to convert a personal home into a rental.
In renting properties, many investors also become property managers. This can add an extra layer of complexity, as managing property can require things like regular repairs to plumbing and electricity, as well as the ability to respond in an emergency, like a blown fuse or an HVAC breakdown in the middle of winter. This can contribute additional stress to the process as a passive activity becomes an active one. For those who want profits without obligation, hiring a management company is a viable alternative. While this will diminish ROI, the trade can be worth it.
- Steady stream of income
- Consistent and sustainable business model in virtually every market
- Few barriers to entry, particularly if turning a former residence into a rental property
- Passive income opportunity; for those who own one rental property, maintenance and management demands aren't usually significant
- High costs; it's not always possible to use a conventional mortgage to purchase rental property, requiring investors to have significant cash flow to invest
- Property management can be complex for those who own multiple properties, and the alternative requires spending profits on third-party management resources
- Reliance on renters; in a down market, finding tenants at the right price point can be a challenge
- Problem renters, like those who damage your property or who need to be evicted, can seriously compromise returns
Fix and Flip Properties
For those who don't feel as though the commitment to serving as a landlord is a good fit, fixing and flipping may be a better strategy. This process involves buying homes that need maintenance, making repairs and upgrading spaces in need of modernization, and selling at a profit.
This strategy isn't foolproof - finding the right combination of repairs and upgrades to see results without compromising profit margins isn't a guarantee - and succeeding in the process can take a significant amount of trial and error. However, for those who are willing to study the market, analyze what kinds of upgrades get the best results, and put time and effort into repairs, it's possible to see large profits.
Fixing and flipping may seem like an easy opportunity to make extra cash, but the process does require a large commitment. Some banks won't finance properties under these circumstances, and if they will, the cost of repairs won't be included in this amount, meaning that making a purchase and preparing it for sale will involve a sizable cash investment. For those who aren't well-versed in DIY home repair, making the necessary upgrades will require partnering with contractors to guide the process. Finding good contractors can be expensive, and it may take time to cultivate the kind of relationships necessary to see an affordable yet high quality end result.
In spite of the potential barriers to entry, investors who take the plunge and are prepared for the effort involved can make a nice profit. Even small changes, like replacing the faces of kitchen cabinets, trading carpet for composite, or grooming the front lawn, can yield big results, instantly adding thousands of dollars to the list price.
- The opportunity for big rewards is high for those who learn the game
- Income doesn't depend on finding and maintaining renters
- No property management requirements
- Immediate profits; no need to wait for months or years to see cash flow
- A large initial investment is required
- Speed is of the essence so making repairs requires a large time commitment
- Success requires relationships with contractors and renovation professionals
- Profits are directly related to costs, so spending too much on superficial upgrades can result in a loss, not a gain
Real Estate Investments Trusts
Arguably the easiest way to invest in real estate, is to invest in real estate investment trusts, also known as REITs, giving you the freedom to buy into real estate without physically purchasing property. These trusts hold various kinds of income-generating property, including apartment buildings, condos, and commercial property.
REITs work in similar ways to mutual funds or ETFs: investors purchase shares within the trust and all actual real estate dealings are handled by the managing owner. This provides exposure to the real estate market in a low-cost way that doesn't involve the risks that can come with purchasing property yourself. REITs exist in many different forms and are often traded on stock exchanges, just like thousands of other funds. Ample research is available on the success of these funds on all kinds of finance and stock market websites, providing an easy way to do due diligence.
REITs exist in a few forms, including REITs that operate income-generating property, REITs that function in the mortgage space to provide financing, public non-listed REITs that are registered with the SEC but do not trade on any market, and private REITs that are operated independently outside of the SEC's regulations or any standard marketplace.
- A hands-off way to invest in real estate; fund managers handle all property transactions
- Low-cost opportunities; shares of many REITs can be very affordable
- A variety of different classifications to allow for variety and customization of investments
- No actual real estate holdings
- All decisions are made by fund managers with no way for investors to make independent choices
- Returns are more closely tied to the market
- Returns on the whole are often much smaller than rental properties or fix and flips
A real estate investment can be a great way to diversify any portfolio, functioning as a hedge against traditional stock market movement. With options including renting property, fixing and flipping property, and buying into a REIT, there's an investment opportunity for everyone.