Seven steps to begin investing in real estate
Historically, real estate investing has been a dependable means of accumulating wealth. Over time, real estate values typically rise, and there are frequently tax benefits associated with real estate investment. Furthermore, real estate contributes to your diversification outside stock and bond markets.
Being an investor in real estate doesn’t always require you to own actual properties or own your house. There are many different avenues to pursue this career. Whatever your budget, we’ll go over some of the best real estate investment strategies in this post.
The best methods for real estate investing
The kind of real estate investment that is suitable for you will depend on your financial situation. A solid credit score and funds for a down payment may be required if you wish to purchase a house or investment property.
Certain investments are restricted to high net worth persons. For example, only accredited investors, who are defined as those having a net worth of at least $1 million or an annual income of $200,000 (or $300,000 with a spouse or partner) are eligible for many real estate syndications, where a group of investors pool their money to finance real estate projects. With a little cash in a brokerage account, you can purchase real estate through other assets, such as REITs.
You should also think about how involved you wish to be in your investment. For example, owning an Airbnb or being a landlord might not be for you if you don’t want to deal with renters or property management.
Thankfully, regardless of your preferred level of engagement or budget, there are several options to invest in real estate. Here are seven suggestions to get you going.
Purchase a home of your own
Many novice real estate investors begin by purchasing their primary home. Each time you make a monthly mortgage payment, you increase the value of your property. When you stay around for the long haul, owning a home is frequently a wise investment because real estate tends to increase over time. For many households in the United States, an owned home represents the best return on investment.
According to the National Association of Realtors, first-time homebuyers often put down 8% of the purchase price, although 20% used to be the standard.
If you are purchasing a property, be ready for lenders to examine your financial records. A lot of lenders want to see that your monthly income will not be exceeded by your entire housing expenses, which includes your mortgage, property taxes, and insurance.
Become a landowner
Investing in real estate and becoming a landlord could make sense if you want to make money off of it. You may purchase an investment property or rent out the house you now own.
However, before taking this risk, thoroughly consider your financial objectives. A lot of individuals believe that renting out property is a fantastic way to generate passive income. But as a lot of seasoned landlords will tell you, renting out a property is not at all passive. To determine rent, you’ll need to do market research in your area. You’ll also need to handle upkeep and repairs, advertise your property, screen possible renters, and handle any legal ramifications if your tenants fail to pay their rent or cause damage to your property.
You could hire a property manager if you want to be a landlord but don’t want to handle day-to-day management. However, be aware that the typical property management business will deduct 8% to 12% of your monthly rent; therefore, you need budget for these expenses to reduce your earnings.
Pro tip: If you’re purchasing an investment property, many lenders want a down payment of at least 15%.
Turn over properties
A real estate investment technique known as “house flipping” involves purchasing a home with the intention of selling it for a profit as soon as possible—typically within a year. Some real estate investors purchase a fixer-upper, make repairs and upgrades, and then resell the property for a larger sum. Some seek properties in neighborhoods where property values are appreciating quickly in an effort to capitalize on favorable local market circumstances.
The 70% rule, which states that the purchase price plus repair costs must exceed 70% of the home’s after-repair value (ARV), or the amount you think the property could be worth following improvements, is something that many house flippers who acquire fixer-uppers abide by.
Let’s say you calculate a home’s ARV to be $200,000 but it needs repairs totaling $50,000.
Using the 70% rule as a guide, determine the highest amount you are willing to pay by doing the following:
$140,000 (estimated ARV) x $200,000 x 0.7
$140,000 less $50,000 (expected repairs) equals a maximum buying price of $90,000.
hacking of homes
You can make money from the property you live in by doing house hacking.
Usually, multifamily properties like duplexes or triplexes are purchased by house hackers. They use the rental revenue from the unit(s) they rent out to pay their mortgage and other housing expenses while they reside in one of the units.
As an alternative, some individuals own a single-family house and lease a room.
Put money into REITs
Investing in real estate without actually purchasing properties is possible via a real estate investment trust, or REIT.
An income-producing property, such as an apartment building, office complex, warehouse, or data center, is owned (and usually operated) by a REIT. You can easily use your brokerage account or individual retirement account (IRA) to invest in publicly traded REITs because they are purchased and sold on stock exchanges in the same manner as shares of equities.
Trusts for real estate investments are often well-liked by investors who are looking for dividend income. They are legally obligated to distribute 90% of their taxable profits to shareholders as dividends due to their tax structure.
With exchange-traded funds, it is also feasible to invest in several REITs with a single transaction (ETFs). A lot of exchange-traded funds (ETFs) for real estate are passively managed index funds that follow the performance of the U.S. commercial real estate market as a whole or a sizable portion of it.
Employ a platform for real estate crowdfunding.
You can combine your funds with those of other investors to fund real estate development projects by using online platforms for real estate crowdfunding. Crowdfunded REITs are widely available on platforms and are often privately held. This indicates that the stock exchange does not trade their shares.
Crowdfunded real estate, like publicly traded REITs, has the potential to be a reliable source of passive income. Nevertheless, a lot of platforms have expensive fees and substantial minimum investments. While Fundrise only needs $10 to get you started with real estate investing, many other crowdfunding platforms demand $1,000 or more in upfront costs.
Purchase fractional real estate shares.
Fractional real estate shares are now available for purchase from an increasing number of businesses. These investment platforms allow several people to pool their money for a real estate investment, which is comparable to crowdfunding websites.
The primary distinction lies in the fact that fractional shares of real estate allow you to select the specific property you wish to invest in. Additionally, you’ll typically invest in vacation or single-family residential properties rather than business real estate.
Benefits and drawbacks of real estate investment
Real estate investing entails dangers as well as rewards. Before including real estate in your investing portfolio, take into account the following benefits and drawbacks.
Advantages Property valuation. With its tendency to appreciate in value over time, real estate is a good means of accumulating wealth. Because it is impractical to increase the supply of land in response to rising demand, property values often trend higher. Investing in real estate can be a smart inflation hedge due to its potential for long-term value.
Possible revenue source. Whether you’re renting out your property on a monthly basis as a landlord or investing passively through REITs and receiving dividends, real estate may generate consistent cash flow.
The process of diversification. Purchasing a variety of assets, such as bonds, equities, and real estate, will help you spread out your risk and diversify your holdings. The real estate market is typically far less volatile than the stock market, even if it is still possible for house prices or commercial real estate values to decline.
benefits in taxes. There are many tax benefits associated with real estate. For instance, mortgage interest is deductible for homeowners who itemize their taxes, while depreciation is deductible for those who own rental property. If you sell your primary residence for a profit, you may also be able to deduct up to $250,000 in capital gains from your taxes (or up to $500,000 if you’re married and filing a joint tax return).
Cons
large upfront expenses. Generally speaking, purchasing physical real estate requires a sizable down payment, especially if it’s investment property. Lenders might not want to finance distressed property purchases made with the intention of flipping them, so you might have to pay cash.
ongoing costs. If you own property, you are also in charge of property taxes and insurance, as well as upkeep and repairs.
Investment that is not liquid. Since real estate is an illiquid investment, it is difficult to profit from real estate ownership without hefty fees.
The sensitivity of interest rates. Since it costs more to borrow money, real estate is typically doomed by high interest rates. Real estate values don’t always decrease in reaction to rising mortgage rates. Since they have locked in low mortgage rates and don’t want to take out a new loan at a higher rate, many homeowners might decide not to list their homes. Prices frequently stay high because of the little inventory, which makes it difficult for first-time purchasers.
Not as profitable as the stock market. The S&P 500 index has historically generated larger average yearly returns than real estate, despite the fact that equities are often more volatile than real estate.
Who can make real estate investments?
Through fractional ownership, crowdfunding, real estate exchange-traded funds (REITs), or other means, anyone wishing to include real estate in their investing portfolio can do so. You may start investing with as little as a few dollars with some of these possibilities.
However, purchasing real estate involves some additional complexity. To invest in real estate, you’ll most likely need a down payment and a solid credit score. You might be able to put down as little as 3% (or 0% if you’re a veteran who qualifies for a VA loan) if you’re purchasing a house that you intend to live in.
However, the down payment requirements are usually substantially larger when purchasing commercial properties, such as office buildings, or rental properties. A 20% to 25% down payment is often required by lenders for commercial loans.
Whatever kind of real estate investment you make, you should always have enough cash on hand in case of need. Unexpected repairs might soon become costly. You must have savings in case your tenants don’t pay their rent if you wish to rent out your house.
Lastly, it’s critical to understand the tax implications. Real estate has significant tax advantages, but it can potentially raise your tax liability.
For instance, your profits are taxed at ordinary income rates and classified as short-term capital gains if you sell a house you’ve held for less than a year. Rental revenue is subject to ordinary income taxes, however many property owners can lower their liability by utilizing tax deductions.
You should be ready to pay taxes if you invest passively in REITs and receive dividend income. Although the laws can be complicated, REIT dividends are normally taxed like regular income. See a specialist, such as a certified public accountant (CPA), to ensure that you comprehend the implications for your taxes.
FAQ: Can I make a $100 real estate investment?
Sure, if you purchase shares of real estate investment trusts, or REITs, you may invest $100, or even less, in real estate. Purchasing shares of exchange-traded funds that make investments in a variety of REITs is an additional choice. You can even begin with $100 or less on several fractional share platforms and crowdfunding sites.
Is now a good time to make real estate investments?
The cost of investing in real estate has increased as of June 2024 due to interest rates, which are at their highest point since the mid-2000s. But there are other factors to take into account than interest rates. The local real estate market and your own financial situation will determine when is the optimum time to invest in physical real estate. Depending on your situation, a financial advisor can assist you in deciding if it’s a suitable time to invest in real estate.
How much money must be put down as a minimum for an investment property?
If you’re purchasing an investment property, you should anticipate making a minimum down payment of 15%, however specific lending requirements may apply. When determining the terms of your loan, lenders will also take into account other variables like your credit score, debt-to-income ratio, cash reserves, and whether you have any other mortgaged properties.
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