Looking to diversify your investment portfolio? Real estate makes a compelling option. There are many ways to invest in real estate, whether you are interested in buying an individual property or shares of a real estate investment trust (REIT).
First, however, it’s crucial to review the basics. Understanding the ins and outs of each investment option can help you choose asset types that align with your investment approach and budget. Ready to get started? Here’s how to invest in real estate as a beginner.
Key Takeaways:
- There are many ways to invest in real estate, including buying and managing rental properties, purchasing REIT shares, and pooling your money with other investors through real estate crowdfunding.
- Real estate investing for beginners starts with carefully researching asset types, understanding potential risks and assessing your own financial limitations so you can make a smart investment choice.
- Diversifying your real estate investment portfolio can help you mitigate risks and improve profitability.
What Is Real Estate Investing?
Real estate investing involves purchasing land and property for profit – but there are many ways to do that, and different investment strategies among investors.
Active real estate investing involves purchasing, managing, renting and selling real estate for profit, while passive real estate investing involves buying a partial ownership of properties. As with any investment strategy, you can mitigate your potential risk by diversifying your portfolio.
Compare Refinance Offers From Verified Lenders:
Ways To Invest In Real Estate
Ready to explore your options? Here are some of the main ways to invest:
Flipping Homes
The investment strategy of flipping houses involves buying a property that needs extensive repairs, renovating it and then selling it for a higher price. Successful flippers can renovate houses quickly and resell them to generate a profit.
Granted, it takes time, energy and hard work to flip a house. Plus, the longer you take to go through the process, the more it will chip away at your profits. It’s essential to limit your initial investment to a modest price and then keep renovation costs low. Keep in mind that large problems require additional time and money to fix, and unexpected issues (and expenses) can arise during the renovation process.
Rental Properties
A rental property is a building you own and lease out to tenants, who pay monthly rent to live in or use the property. This can include purchasing a commercial building and leasing it to a business owner or buying a residential property and renting it to an individual or a family.
If you have a mortgage on this property, your goal is to charge enough rent to cover your monthly payment plus utility costs and other expenses and have some money left over for a small profit. Make sure you research the rental market where you intend to buy beforehand, to get a sense of realistic rental rates.
Once you pay off the loan, much of your rental revenue may become profit. However, you’ll still need to pay taxes, insurance, and other possible expenses such as maintenance and property management costs.
Indeed, unpredictable expenses can affect your overall cash flow, so be sure to factor in some wiggle room for expenses. If you’re handy, you can save some money by doing some repairs yourself rather than hiring professionals.
The silver lining? Over time, in addition to generating rental income, your property could also appreciate in value, meaning you could generate more profit if you sell the property down the road. In addition, the increased value could allow you to do a cash-out refinance or take out a home equity loan to either make improvements or purchase another property in the future.
Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) lets you invest in real estate without owning or managing a physical property. Instead, you invest money in a set of real estate assets, similar to how you would purchase shares of stock.
REITs are companies that own, operate or finance real estate properties. REITs pool funds from individual investors and use those funds to build their portfolios.
REITs are legally required to share at least 90% of their taxable income with shareholders. These payouts are called dividends and are usually paid in cash, so your long-term returns may grow over time; stock dividends are possible in some cases too.
REITs can include numerous asset types, such as malls, office buildings, apartment buildings and mortgages. These can generate substantial gains over time.
Just be aware that you won’t have a say in specific property decisions: The REIT management company makes all investment choices.
Real Estate Investment Groups (REIGs)
Real estate investment groups (REIGs) buy or build properties and then sell units to investors.
For example, a REIG will buy an apartment building and let investors buy units within it. REIGs find the tenants and handle property maintenance as well as other responsibilities of property ownership. This arrangement provides a hands-off approach to investors.
One downside of that limited control, however, is that if an investment fails, you may have limited legal recourse, depending on the partnership agreement and applicable laws. REIGs also charge administration fees, which can cut into your profits.
Real Estate Crowdfunding
Real estate crowdfunding enables you to pool your money with others to invest in real estate. Crowdfunding platforms attract a variety of investors, making it easier for more people to invest in real estate.
Participating in crowdfunding can be an affordable real estate investing option for beginners. It also allows you to choose investments that interest you.
For example, you might want access to a real-estate deal that would be too expensive to purchase alone. But with crowdfunding, you can team up with other investors to access fractional investments in properties or real estate projects.
Real Estate Limited Partnerships (RELPs)
A real estate limited partnership (RELP) is a type of REIG where investors pool their money together to purchase property and then develop or manage it.
You’d contribute a specific amount and receive equity in the properties the RELP purchases. For example, if five investors each put in $200,000 to purchase $1 million in real estate, each person would have a 20% share of the assets.
RELPs implement a partnership agreement naming general and limited partners. General partners are responsible for the property management of the investment, while limited partners hold equity shares but don’t participate in day-to-day decisions.
What’s Your Goal?
Buy A Home
Discover mortgage options that fit your unique financial needs.
Refinance
Refinance your mortgage to have more money for what matters.
Tap Into Equity
Use your home’s equity and unlock cash to achieve your goals.
Pros And Cons Of Investing In Real Estate
Consider these advantages and disadvantages before investing in real estate:
| Pros | Cons |
|---|---|
| Increased cash flow: Rental properties and REITs can potentially provide a steady stream of cash, which can become a passive or active income source during your working years or retirement. | Long-term investment: Rental properties can generate a monthly income stream, butit can take years to get there – depending on how much money you had to spend initially on a down payment as well as repairs or renovations. |
| Potential tax benefits: You can write off property management costs, repair expenses and depreciation losses. Plus, you could benefit from lower capital gains tax rates compared to ordinary income, and in some cases, even defer those taxes through strategies like 1031 exchanges. Consult with your tax attorney to maximize any benefits. | Requires time and effort: Investing methods like flipping homes require a significant amount of time and effort. You must purchase, repair and resell each property, which can take a considerable amount of time to earn a profit. |
| More equity: Owning property can potentially increase your spending power. For example, if you have $500,000 worth of rental properties and $150,000 left to pay on the mortgages for these properties, you’d have $350,000 of equity to leverage for cash or loans for further investments. | Potential need for more money up front: Some real estate investing paths – especially buying commercial or multiple properties – can require hundreds of thousands of dollars upfront, especially if the property needs major renovations. |
| Diversification: While investing in stocks and bonds is an excellent idea, real estate is a profitable asset class to add to your portfolio. However, it’s important to note that real estate values can also decline, and investments like REITs are subject to market volatility. | Low liquidity: Some real estate assets, such as REITs, are liquid, since they can be sold at any time. However, a physical property is not a liquid asset because you can’t convert it into cash quickly. Unlike a stock, a piece of real estate requires time, money and effort to sell. |
| Potential for an affordable entry point: Beginners can access real estate with relatively smaller amounts of money via REITs or some crowdfunding platforms. |
Ready To Become A Homeowner?
Get matched with a lender that can help you find the right mortgage.
Real Estate Investing For Beginners: How To Get Started
Are you a beginner who wants to start investing in real estate? Here’s how:
1. Review Your Finances
First, assess your finances. Having significant savings and minimal debt can help you invest in REIT shares or fund a hefty down payment. Having a good credit score too may help you qualify for more favorable loan rates, which can minimize costs when purchasing properties.
It’s also a good idea to build a financial cushion to address unexpected expenses or income disruptions if you opt for a rental property. For example, you could have a two-month gap without a tenant, or you may need to fund urgent roof repairs.
Strengthening your financial standing before you invest can help you obtain a mortgage preapproval. This can help you understand how much you’ll be able to borrow and the loan terms you’ll qualify for.
2. Choose Your Investment Strategy
Next, choose a real estate investing strategy and be sure to consider your strengths and weaknesses. For example, if you have excellent credit and are skilled at home renovations, consider flipping homes or purchasing rental properties. On the other hand, if you have substantial cash but limited market knowledge, an REIT with a proven track record could make more sense for you.
You should also consider how you’ll diversify your investments. For example, when you invest in REITs or certain real estate funds, you may be able to choose sectors tied to different industries, such as technology, banking or retail. If you prefer rental properties, you may be able to afford only a single building at first. As you purchase more properties, you can diversify your portfolio, whether that means adding different kinds of REITs or individual properties in other areas.
It’s imperative to understand the risks. A rushed or uninformed decision can result in the loss of your entire investment. Research your options carefully.
3. Work With Real Estate Professionals
As you navigate your real estate investing journey, look to professionals for guidance.
An experienced real estate agent or broker can add value by helping you find properties with strong return potential, alerting you of unlisted properties, negotiating better deals and providing recommendations to help you avoid making expensive mistakes. Their guidance could help you maximize your returns.
An agent isn’t the only expert you may want to consult, too. If you have a group of properties, you may also need an individual or a company to manage the properties, a real estate attorney to handle transactions, and an accountant to tend to the financial side of your business.
4. Research The Current Market
Researching real estate market trends in your local market can help you make informed decisions to secure the best deals. It’s crucial to understand your regional market dynamics before investing in real estate.
5. Close On The Deal
When buying a property, be prepared to pay closing costs when you sign the necessary legal paperwork and receive ownership of the real estate. Usually, you’ll be required to pay for an appraisal, inspection, loan origination and insurance.
Buyers typically pay an average of 3% – 6% of the purchase price in closing costs, though the exact amount varies by loan type and location. When applying for a $200,000 mortgage for a rental property, you can expect to pay $6,000 – $12,000 in closing costs. Working that number into your budget before closing day is crucial.
The Bottom Line: Savvy Beginners Can Invest In Real Estate
The first step in learning how to invest in real estate is to do some homework and assess your financial situation. Each investment – whether rentals, house flips, REITs or more – has potential risks and rewards, but thorough research can help you make informed decisions that align with both your goals and budget.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
