Unlocking the Power of Real Estate Investing
Investing in real estate has long been a reliable way to build wealth. With property values tend to increase over time, real estate investing often comes with tax advantages and helps diversify your portfolio beyond stocks and bonds. Fortunately, there are numerous ways to invest in real estate, regardless of your budget or level of involvement.
Getting Started with Real Estate Investing
Buying a primary residence is a common entry point for many beginners. As you make your monthly mortgage payments, you build home equity, and given that real property tends to appreciate over time, owning a home can be a good investment if you plan to stay put for the long haul. Although a 20% down payment was once the norm, first-time home buyers can now put down as little as 3% (or 0% if you’re a veteran who qualifies for a VA loan).
Becoming a Landlord: Weighing the Pros and Cons
If you want to generate income through your real estate investments, becoming a landlord could be a logical move. You could rent out a home you already own or buy an investment property. However, it’s essential to carefully consider your financial goals before making this leap. While many people think becoming a landlord is a good way to earn passive income, experienced landlords will tell you that renting out properties is anything but passive. You’ll need to research your local market, advertise your property, screen potential tenants, handle maintenance and repairs, and deal with legal issues if your tenants stop paying rent or damage your property.
House Flipping: A High-Risk, High-Reward Strategy
House flipping is a real estate investment strategy where you buy a property with the goal of reselling it at a profit in a short timeframe, often less than a year. Some house flippers buy a fixer-upper, undertake renovations and repairs, and then sell the home at a higher price. Others look for homes in areas where home values are rapidly rising, aiming to profit from strong local market conditions. To minimize risk, many house flippers follow the 70% rule, which states that the purchase price and the cost of repairs shouldn’t add up to more than 70% of the home’s after-repair value (ARV).
House Hacking: A Creative Way to Invest in Real Estate
House hacking is a real estate strategy where you buy a home and live there while also using it to generate rental income. House hackers typically buy a multifamily property, like a duplex or triplex, and live in one unit while renting out the other(s), using the rental income to cover their mortgage and other housing costs. There are several common house hacking strategies, including buying a multifamily property, building an accessory dwelling unit (ADU), renting out extra space on Airbnb or VRBO, and getting roommates.
Real Estate Investment Trusts (REITs): A Low-Risk Option
A real estate investment trust (REIT) allows you to invest in real estate without actually buying properties. A REIT is a security that owns (and typically operates) income-producing properties like apartment buildings, office complexes, warehouses, or data centers. They’re bought and sold on stock exchanges in the same way you buy and sell shares of stocks, making it easy to invest in publicly traded REITs using your brokerage account or individual retirement account (IRA).
Online Real Estate Crowdfunding Platforms: A New Way to Invest
Online real estate crowdfunding platforms allow you to pool your money with other investors to fund real estate development projects. Many platforms offer crowdfunded REITs, which are often privately held. Like publicly traded REITs, crowdfunded real estate can be a good source of passive income. However, many platforms charge high fees and require significant minimum investments.
Fractional Shares of Real Estate: A Growing Trend
A growing number of startups now allow you to buy fractional shares of real estate. These investing platforms are similar to crowdfunding sites in that they allow multiple people to combine their money for a real estate investment. The big difference is that when you buy fractional shares of real estate, you choose the individual property you want to invest in.
Real Estate Investment Groups (REIGs): Pooling Resources
A real estate investment group (REIG) is a group of private individuals who pool their money and expertise to invest in properties. Because you’re combining your resources with other investors, you can often invest in larger projects that may not be feasible for individual investors.
Weighing the Risks and Rewards of Real Estate Investing
Like any investment, real estate comes with risks and rewards. Some of the pros include property appreciation, potential stream of income, diversification, and tax advantages. However, there are also cons to consider, such as high up-front costs, ongoing expenses, illiquidity, interest rate sensitivity, lower returns than the stock market, and tax liabilities.
Investing in Real Estate: A Smart Move for Your Portfolio
Real estate can be a good investment because properties tend to appreciate over time. Investing in real estate also provides diversification and tax advantages. However, investing in physical property comes with high upfront costs and low liquidity. In the long term, investing in U.S. stocks tends to produce better returns than real estate.
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