More people are beginning to realize that real estate investing is one of the most profitable investment options available
out there. In a recent report by GALLUP, a global analytics and advisory company, in 2021 41% of Americans believe that real estate investing is the best investment compared to bonds, stocks, savings accounts, and gold. This is an impressive increase from 35% in 2020.
Take stocks for instance, where if the market crashes, a $1,000 investment could immediately be worth nothing. With real estate, there is always a value for your investment, whatever the condition of the housing market.
Misconceptions About Getting Started with Real Estate Investing
There are a lot of myths surrounding real estate investing for beginners, especially around getting started. Many people believe that you need to be an expert at investing to begin your journey into real estate investing. There is also a belief that you need a load of cash to start investing in real estate. That is, only rich people can become real estate investors.
But as you will find out in the rest of the article, this is not the case. There are many ways to become a real estate investor, some of which do not require you to invest a fortune. So, if you’ve been looking for how to invest in real estate, the following list is for you.
1. Real Estate Investment Trusts (REITs)
These are investment companies that handle and finance real estate assets. Think of REITs as mutual funds but for real estate investment. Investors are able to generate income from real estate by pooling money together to fund the purchase of assets. These assets can range from residential apartments to office buildings, hotels, and warehouses. REITs are essentially a form of passive real estate investing.
Pros of Investing in REITs
Investing in REITs comes with peculiar advantages, such as:
- No corporate tax: For companies to be considered REITs by authorities, they have to meet certain conditions. This includes investing at least three-quarters of their assets in real estate and paying 90% of the taxable income to shareholders. Doing this excludes the REIT from paying corporate taxes, regardless of how much it makes.
- Liquidity: Normally, buying and selling real estate properties takes time, in terms of full payments. One major advantage of REITs in this regard is that it trades like a stock. You can buy or sell at any time you want, whenever you need some cash.
- Easy to access and diversify: REITs are generally great because they allow investing in real estate assets that would normally be inaccessible to the everyday real estate investor. By investing in REITs, you can own a piece of multiple properties since they operate several investments in different locations. Moreover, it’s an easy and affordable entry to commercial real estate investing.
Cons of Investing in REITs
As with other real estate investment strategies, REITs also have their drawbacks, which include:
- The one-property type risk: Because REITs focus on one type of property, the risk can be more complicated since each commercial property has its own associated risks. To limit your exposure to such risks, it’s advisable to choose a trust based on the economic sensitivity levels or deal with a REIT that invests in different types of properties.
- Limited control over returns: Unlike direct real estate investors, REIT investors don’t have autonomy over returns. They can’t choose the specific properties for investment, market rental properties, or manage them. Your return on investment is in the hands of the board of directors and the team of property managers.
- Sizeable initial investment: Most private REITs require a minimum investment of $25,000, so investing in a REIT is usually reserved for accredited investors. This means that you need to have saved a lot of money to go for this real estate strategy.
Investing in REITs is a great idea, especially for investors who already have an existing portfolio and those looking for high yields vis-à-vis dividends. Also, if you would want to keep a liquid investment, go for publicly traded REITs.
2. Rental Properties
Another way to enjoy the benefits of real estate investing is by becoming a landlord. With this strategy, you buy an investment property for sale and lease it. This can happen in different ways. You could invest in a single-family home and rent it to tenants who will make monthly rental payments to you. That’s effectively how you generate income. Another way for investing in rental properties is through “house hacking”.
House hacking is a real estate investing strategy where you buy multifamily for sale (usually a duplex or triplex) and live in a unit while leasing out the rest. This way, you can lower your expenses and overhead costs and also generate income to cover your taxes, insurance, and mortgage payments. A subversion of this is putting these units on vacation home rental sites like Airbnb and HomeAway where you can generate daily income, especially if you don’t want long-term tenants.
Pros of Real Estate Investing in Rental Properties
- Source of monthly income: Investing in rental properties is a sure way to generate monthly returns from tenants. You can also decide which kind of property is most profitable for you, whether it is a single-family home or multifamily apartment or more luxurious properties like condos which can even generate higher income.
- Tax advantages: Owning a rental property comes with tax benefits associated with expenses incurred on your homes such as depreciation, improvements, and ordinary and necessary expenses. So, you can deduct maintenance costs, insurance, and mortgage interests as well as physical wear and tear on your home.
- Buying and selling for profit: Rental properties tend to appreciate massively, depending on your strategy. For instance, you could do condominium conversions. Meaning, you can purchase a multifamily apartment and lease out individual units. Later, you can convert them into condos and sell them as individual units. In essence, you bought the building at a discount and sell off at a much higher price.
- Natural and forced real estate appreciation: Since the value of real estate properties tends to increase over time, investing in rental properties can make you money in the long term. You can also directly affect the value of your property by making improvements to force the value even higher.
- Passive income: You can own a rental property and put in little effort while still making your passive income from it. One way to do this is to hire the services of a professional property manager who will handle all operations related to managing and renting out the property.
Cons of Rental Property Investing
- Upfront cash: Compared to other forms of real estate investing, buying rental properties requires more cash upfront, including a down payment, closing costs, and property repairs. For example, a conventional mortgage loan for a rental property requires a minimum down payment of 20%. But it can be really worth it, especially if you have the right real estate software tools for finding profitable properties and neighborhoods.
- Managing tenants: Becoming a landlord can be a tedious process if this is your first time dealing with real estate investing, from screening new tenants to managing maintenance requests. But the good thing is that there are loads of property management software tools to help if you feel it will be a lot of work for you.
Now, while we’ve said buying rental properties can be the more expensive option, they are yet profitable and highly recommended based on Mashvisor’s real estate market analysis. You can always find properties for all types of budgets, depending on the location and the property type. Look for the ones that fit your budget range and offer good return on investment.
3. House Flipping
Some investors prefer to buy undervalued properties, renovate them, and then sell for a higher price. This is referred to as house flipping and is another way of how to get started in real estate. As a real estate investing strategy, flipping houses requires both time and money from the investor. But though it may be capital intensive, it has one of the highest potential returns on investment.
There are also a set of serial house flippers known as live-in flippers. What they do is buy a property and live in it while renovating it and sell it off once complete. They then invest part of the proceeds in another fix and flip project. And it goes on and on.
Pros of Flipping Houses
- Fast gains: If you ask many house flippers why they adopt this strategy, they’ll tell you that it’s because the returns come quicker. Often within a couple of months. This makes fix and flip a top short-term real estate investment strategy, similar to the wholesale real estate approach. According to The Balance, real estate flips can produce north of the annual U.S. median salary.
- A better understanding of the market: Because you are directly involved in the whole process, house flipping firms up your knowledge of the real estate industry. It opens you up to what would otherwise be a trade secret including financing options and eventually sets you up for future real estate investments.
Cons of Flipping a Property
- Unexpected circumstances: When flipping houses, it is always great to prepare for unforeseen situations like an increase in budget resulting from building permits, delays from contractors, and new material requirements. This can eat into the profit if not adequately catered for.
- Capital gains tax: Quick turnaround in sales can be a blessing but otherwise if you only owned a particular property for less than a year. In this case, you will have to pay a higher capital gains tax depending on your earned income for that period.
All this may seem cumbersome, but once you get the hang of it, flipping houses can be a profitable real estate investing strategy. You can go one step further and build a team of experts who understand the entire process, from accountants to interior designers. Most importantly, ensure your cash reserve is strong enough for house flipping.
4. Real Estate Crowdfunding
With real estate crowdfunding, companies can pool money from a group of investors via online real estate investing apps. There are platforms like RealtyMogul, which is great for property research, and Fundrise, which is ideal for beginner investors. With as little as $500 you can start investing in a real estate asset by checking recommendations or doing your own research and choosing the portfolio that is right for you.
Pros of Real Estate Crowdfunding
- Fit for every budget: With crowdfunding, getting into real estate investing is easier and allows you to start small if you don’t have a large capital. You can steadily build your portfolio as you get more returns and understand the market better.
- High-profit potential: Crowdfunded real estate investments can provide up to 15% in annualized returns. And many investors have doubled their investments in the past through crowdfunded deals.
Cons of Crowdfunding Real Estate
- Non-liquid investments: Unlike REITs, real estate crowdfunding investments are not as liquid. You can’t sell when you need cash. It’s not rare to find crowdfunded deals with set periods of three years. In other cases, you can find longer periods, reaching seven years.
- Accreditation requirements: A lot of crowdfunded real estate deals are still limited to accredited investors. This means you must have assets worth at least $1 million or an annual income of $200,000. But if you have a smaller net, you can still always find deals that include non-accredited investors.
If you are trying to test the waters of real estate investing and are willing to take on some level of risk for bigger profits, you can consider crowdfunding real estate. However, you may want to consider investing smaller amounts of money in the initial stage.
5. Vacation Rentals
Buying a vacation rental is quite different from investing in any other type of income property. But it isn’t as tricky as you might think. It’s a great way to start real estate investing and also offers smart returns on investment. According to SelectUSA, America’s travel and tourism industry generated more than $1.6 trillion in 2017 alone, while creating 7.8 million jobs in the country. Vacation rental sites like Airbnb and VRBO offer real estate investors the opportunity to generate income via short-term rent. So, you can choose vacation rentals as a real estate investing strategy if you don’t want long-term rental properties.
Pros of Vacation Rentals
- Extra income: Airbnb hosts earn an average of $900 every month. According to BiggerPockets, many hosts earn Airbnb rental income reaching $10,000 monthly. Mashvisor’s real estate data also confirms that short-term rental properties are consistently able to generate more income and a higher rate of return than traditional ones. You can also choose from several vacation rental websites, especially Airbnb which is the most popular choice among travelers and tourists.
- Tax advantage: Renting your home for over two weeks qualifies you as a business and is therefore useful for tax purposes. While you have to pay taxes on your rental income, you get to write off certain expenses such as cleaning costs, property maintenance fees, utility costs, mortgage interests, and so on.
- Dual purpose: Your vacation rental can also double as a second home such that you can stay there during a vacation (with or without family) and rent it out the rest of the time. Doing this also has certain IRS tax advantages that come with buying second homes.
- Flexible pricing: Vacation rentals are usually seasonal properties, and you can leverage these periods to increase your Airbnb daily rate based on weekdays or weekends, as well as during holidays and special events to optimize your Airbnb occupancy rate and maximize Airbnb income.
Cons of Vacation Home Rentals
- Marketing: This is not entirely a disadvantage as advertising your service is expected of any enterprise, including a real estate business if you want to bring in customers. You have to do the work of listing your property on rental platforms. As a new Airbnb host, you can get ahead of the queue by making your house appealing to renters, based on the tastes of your target audience. You should also make your service top-notch ensuring that your visitors not only leave good reviews but also help with word-of-mouth advertising.
- Property management: As a vacation rental owner, you are responsible for the property maintenance which is constant as guests will always come and go. Just like a hotel service to an extent. But you can cut all that by employing the services of an Airbnb property management company.
One thing to note about vacation rentals as a real estate investing strategy is that there are rules and regulations around their operations and they often differ by state and city and sometimes even neighborhood. It is therefore important to always look out for the rule guiding short-term rentals in each location.
Read More: 8 Best Cities for Airbnb Investment in 2021
Final Thoughts on Real Estate Investing
Yes, real estate investing can be a great way to grow your wealth, whether you’re just starting out or already have a growing investment portfolio. But whatever your goal for investing, it’s important to understand the basics about the general real estate market and each strategy and choose the right one for you. It’s literally investing 101 for any kind of asset, not just real estate.
However, if you’re all about appreciation when looking for how to start investing, the best strategy to consider will be to buy and hold rental properties. You purchase a property and keep it until a massive appreciation in the value of the property while renting it out and generating a return on investment in the short term.
But more importantly, you need to ensure you’re investing in a profitable rental property and in the right location. To achieve this, you need the right real estate investment tools like Mashvisor which provides all the traditional and Airbnb data you need, including rental income, rental expenses, occupancy rate, cash flow, cash on cash return, and cap rate.
To start looking for and analyzing the best properties for investment in any location, click here.