Investing in Real Estate: Here Are a Few Ways to Start as a Beginner
Real estate investing is one of the most popular forms of investing. Furthermore, despite high rates of interest, investors are still interested in real estate. This is because real estate investments are likely to give good returns than other forms of investments. However, if you are a beginner, you might be thinking about where to start investing in real estate.
In this article, you will learn about the different investment options for beginner real estate investors. Furthermore, this article also guides you on how to choose which option is the best for you. Apart from that, you will also learn about some essential factors you need to consider before you start investing in real estate. Hence, to learn more, read on through to the end of the article.
Investing in Real Estate: A General Overview
Whenever people think of investing in real estate, the first thing that comes to mind is a home or a piece of residential property. However, when it comes to choosing your type of investment, there are a lot of investment options for you. In fact, many real estate investment options are not even physical properties.
According to Investopedia, “Buying and owning real estate is an investment strategy that can be both satisfying and lucrative. Unlike stock and bond investors, prospective real estate owners can use leverage to buy a property by paying a portion of the total cost upfront, then paying off the balance, plus interest, over time.”
However, no matter what your investment is, it is important to have a strategy that can be beneficial for you in the long run. This is what makes a good investment. Basically, a good investment is one that has a high chance of success, and the return is high. Furthermore, if your investment has a high amount of risk, it is generally more rewarding.
Hence, if you choose investments that have a high probability of success, it might not be that rewarding in the long run. Furthermore, it is also not the right option to put all your money into real estate if you do not want to lose your money.
Traditionally, you will need to make a down payment of 20-25% with a traditional mortgage. However, in some cases, you will just need to make a down payment of 5% if you purchase an entire property.
What are the Best Ways of Investing in Real Estate?
According to BankRate.com, “Consumers have a variety of ways that they can invest in real estate, including many options beyond just becoming a landlord, although that’s a time-tested option for those who want to manage a property themselves. Plus, new business platforms make it easier than ever to invest in real estate without having to come up with tens of thousands or more in cash.”
The following are some of the best ways you can start investing in real estate:
1. Real Estate Investment Trusts (REITs)
If you do not want to invest in a physical real estate property, then REITs are the best options for you. They work similar to mutual funds. Basically, REITs are investment companies that own commercial real estate properties. Once you invest in a REIT, the company/corporation uses your money to purchase and operate real estate properties. You can buy and sell REITs like any other stock on major exchanges.
Here, the REITs have to pay out 90% of their taxable profits if they want to maintain their status as a real estate investment trust. Basically, by paying this amount of money to its investors, REITs avoid paying corporate income tax. On the other hand, a general company has to pay taxes on their profits. Then, they decide whether they will distribute their after-tax profits or not.
Actually, if you want a regular income, a REIT can be a solid investment option since it acts like a stock that pays dividends. Apart from that, one of the big advantages of investing in REIT is that investors can also afford to invest in non-residential properties like commercial buildings, offices, etc.
Furthermore, there is also high liquidity with REITs, as these are exchange-traded trusts. Moreover, you will also not need a real estate agent or even a title transfer if you want to cash out your investment.
If you want to invest in REITs, you can purchase them through brokerage firms. Hence, you need to open a brokerage account, where, in most cases, you will not need to make an initial investment.
2. Real Estate Investment Groups (REIGs)
If you want to own a rental real estate and do not want to have the hassle of running it, REIGs are a great option for you. However, you will need to have a capital cushion at the start and a good flow of finances. These investment options also work similarly to those of mutual funds.
Generally, a REIG purchases or constructs apartment buildings. After that, they enable their investors to invest in these buildings through the company. As a result, the investors join the REIG.
Here, one investor can own one or more apartment units. However, the company (REIG) has the responsibility to operate and manage all the units. Furthermore, they also carry out maintenance, advertise vacancies, and bring in tenants to the apartment buildings. Since the company maintains all these management operations, it takes a small percentage of the monthly rent, which the tenant pays to the investor(s).
The lease that the REIG provides is in the name of the investor. Additionally, there is also a deduction of the rent as a guard against vacancies in the apartment. Hence, as an investor, you will receive some amount of income, even if your apartment unit is vacant. As long as there is no big increase in the rate of vacancy for the pooled apartments, you will not need to cover enough costs.
3. Rental Properties
If you have good DIY renovation skills, then investing in rental properties is a better option for you. Furthermore, by owning rental properties, you will also need the ability and patience to manage your tenants. In addition to investing in local rental properties, you can also invest in various opportunities outside the state.
However, if you use this investment strategy, you will also require a large amount of capital. This is because you have to spend a substantial amount to finance your maintenance costs and property management. Moreover, you will also need to have enough capital to cover those periods when your property is empty or when your tenants might not pay their rent.
The following are the major pros and cons of investing in rental properties:
Pros
- You can have a regular source of income, which you can
- Maximization of capital through leverage.
- There are many expenses that are eligible for tax deduction.
Cons
- A lot of patience is required to manage tenants.
- In many cases, tenants can damage your property.
- Potential vacancies can lead to a reduction in income.
4. Property Flipping
NerdWallet.com states – “You invest in an underpriced home in need of a little love, renovate it as inexpensively as possible, and then resell it for a profit. Called house flipping, the strategy is a wee bit harder than it looks on TV. It’s also more expensive than it used to be, given the higher cost of building materials and mortgage interest rates. Many house flippers aim to pay for the homes in cash.”
If you want to invest in house-flipping options, you will need to have some experience in the valuation of real estate. Furthermore, you must also have some knowledge of real estate marketing and renovation.
Apart from that, in pure property flipping, you will not need to invest in property improvement. Hence, the investment must have an intrinsic value, which can be helpful in making profits without making any alterations. If this does not happen, pure property flippers eliminate the property from contention.
Furthermore, those property flippers who are not able to unload a property fast might get into trouble. This is because they do not have enough uncommitted cash with them. As a result, they are not able to pay their mortgage on a property in the long term. Hence, it leads to continued losses, which increase with time.
On the other hand, there are other flippers who make profits from properties at reasonable prices. Then, they add value to the property through renovation.
5. Online Real Estate Investing Platforms
Online real estate investing platforms can be helpful for you if you want to join a group of investors to invest in a big residential or commercial area. This way of investing is also known as real estate crowdfunding. Here, you will have to invest capital. However, the amount is quite less than what you need to purchase if you purchase real estate properties outright.
By becoming a part of the best online real estate platforms, you will be able to get access to a variety of investors who are looking for investment opportunities with others. This is because they need financial backing for their real estate projects. Hence, you can get good opportunities to diversify your real estate investments. The best part is that you will not have to spend a lot of money on that.
The major advantage of investing in online real estate is that you have the choice to invest either in a single project or more than one portfolio.
However, on the downside, there is less liquidity in those investments, especially in the lockup periods. Furthermore, you will also have to pay management fees to the investing company.
Which Option Should You Choose to Start Investing in Real Estate?
According to the Forbes Advisor, “Real estate is beneficial as a form of investment but it is essential to understand what works for you. Based on how much you are prepared to invest, the kind of liquidity you desire, the regularity of cash flow, and your risk appetite, you can make a decision.”
Firstly, if you want to own, lease, or flip real estate properties, you might require large investments. Also, you will need some experience and a good understanding of the real estate market. Furthermore, you will have to spend time and resources hunting tenants, taking care of assets, and looking for buyers with additional responsibilities.
Hence, if you are not okay with spending a big amount at the start, spending in REITs is a good option. Here, you can also be slow and steady with your investing decisions, which is a necessary requirement at the start. However, on the downside, you might not get a regular cash flow since the liquidity of the investments is based on the share value.
Always remember that when you are investing in real estate, always invest for the long term. That is exactly when you get the benefits of real estate investing.
Factors to Consider Before You Start Investing in Real Estate
Before you start investing in real estate, make sure you get some fundamental real estate skills and knowledge. Then, you will be ready to invest in real estate. The following are a few things that you need to consider:
- Start getting familiar with terminologies and regulations on real estate.
- Have the patience and the willingness to invest for the long term.
- Start making a strong presence on social media. This will enable you to get access to good opportunities.
- Since you have to interact with others, you will need to enhance your soft skills. This will also help you understand the real estate industry better.
- Before starting out as an investor, start taking some classes on investing in real estate. This will help you understand the industry and the market forces better.
Wrapping Up
Hope this article was helpful for you in giving you a better idea of how real estate investing works and how you can start investing in real estate. You can see that if you lack finances and risk-taking ability, then the best option would be to invest in REITs. Apart from that, you must also upgrade yourself continuously about the industry and market forces.
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