Real estate is usually one of the first investment options we consider when wondering how to multiply money. With property investments, most investors can expect a decent return potential. As one gets more seasoned, well-connected, and is lucky with property values, the returns could become quite lucrative.
What’s more, property investments can serve to diversify an investment portfolio, which becomes a buffer during recessions or any other downturns in one’s economic situation.
However, the first question that springs to mind is; how does one go about investing in real estate? There is no one best way to take the first step, but there are some simple ways that every potential investor should be aware of.
In short, there are a lot of ways in which one can invest in all sorts of real estate. Each choice will bring you different kinds of capital requirements, various risk levels, and varying investment dynamics. Every individual and their situation is different. So, only you can work out which kind of real estate investment will be best for increasing and safeguarding your wealth.
Simple Ways to Invest in Real Estate
There are a lot of guides out there that claim to give you the best advice on how to invest in real estate. Let’s have a detailed look at some of the top 5 methods now:
1. Purchase and Handle Rental Property
Among the most obvious ways of earning from real estate is buying a property and renting it out to tenants. The investment property in question could be commercial or residential, with both having their own pros and cons.
If their funds permit it, investors can also buy several investment properties and diversify their assets in this way. This step will get them several income streams as well, granting them a buffer if and when one property doesn’t have tenants.
When you own rental property, you can build up wealth and generate income for your daily needs as well. The property will usually increase in value over time, as is usually the case with the housing market in the U.S. The return potential is quite strong here as we’re combining the income, property appreciation, and equity factor as well.
Moreover, most investors will also have easy leverage when they start buying real estate. Leverage means that they can get some borrowed capital to increase the return potential of their investment.
Downsides of investing in rental properties
All benefits and potential aside, there are definite downsides to going for rental properties when investing in real estate. It might be the right way for some, but not for every single investor who wants to make it big. Here are just a few drawbacks that you should consider before taking the first step into the rental venture:
- High cost of entry: Even if you get a loan, buying even one rental property requires a large amount of money. Most banks and other lenders would require at least a 25 percent down payment before they’ll approve an investment property loan. Plus, you’d probably need to invest quite a bit before your rental gets decent tenants; the cost of advertising, getting a real estate agent, repairs, renovations, staging, and general maintenance can add up to quite a hefty amount. Most experts also say that it’s only logical to have enough cash reserves for several months’ expenses. Put it all together, and it’s evident that buying rental properties isn’t for every investor level.
- A volatile market: There’s a lot of uncertainty going on in the real estate market, and the rental properties are a prime example of it. Tenants might not be able or willing to pay rent at any given month. With squatters’ rights, you might not even be able to evict tenants for a year or several months. In the meantime, you’re getting no income and are losing money on your property. Even with decent tenants, accidents can happen; fires, natural disasters, or a family moving on when they find a better place. In short, the return potential is amazing for most properties but the short-term risks are very real.
- Requires a lot of commitment: We have already touched upon the financial demands of a new rental property. But the time factor is another story altogether. Having a rental means that you’re responsible for everything that goes on there. Some investors might be able to afford a property management company but the ultimate responsibility always comes back to them. Just a few pressing and potentially difficult tasks include intensively screening tenants, narrowing down the perfect location, and so on.
Before you decide to go for a rental property as your real estate investment, stop and think about the pros and cons. If the drawbacks don’t intimidate you, this might be the right path to choose. Whether you’re asking ‘what is a mobile home community?’ or ‘what apartment units can get me the highest rental rates?’ do make sure to get a mentor who is highly experienced in the game.
2. Investing in Real Estate Stocks
REITs stand for real estate investment trusts, but there are other kinds of real estate stocks you can go for as well.
When you choose to invest in REITs, you’re being part of a specialized company that manages, owns, or operates real estate assets. They get their income from these assets, and are required to disburse the majority of these earnings to their investors.
Most REITS have their trade on the regular stock exchanges. So, it’s quite easy to buy and sell them. Starting off with this method of investing in real estate is a good idea, as all you require is an internet connection and a little capital. It’s a great way to begin for those who have very little experience in real estate investment.
Some would place real estate ETFs (exchange-traded funds) and real estate mutual funds in the same category at REITs. An investor can also get a readymade portfolio of various REITs if they want to diversify their investments.
Real estate ETFs are those organizations who invest assets most in derivatives like equity REIT securities. They offer low expense ratios and a passive tracking of indexes for the major real estate market. With this index tracking, investors can hope to get useful exposure to larger real estate sectors but without the risk of gambling a large amount of capital on a single company.
We should also understand here that some types of real estate stocks aren’t REITs. These are the stocks that belong to homebuilders and land developers. If one wishes, they can use the stock exchange to invest in these ventures as well.
In a nutshell, REITs are what you need to start investing in real estate but without the hands-on, committed approach. You can also choose for hybrid kinds of REITs, or opt for equity. The returns on such investments are usually high, so investing here is a good choice if one is strapped for time.
As with real estate investment in the form of rental properties, getting a mentor can really take your place. When you’re investing in real estate for the first time, there are several books you can read to get in on the details. However, getting personal help from a person who has been successful in this field can give you some valuable insight that could take your investments to the next level.
3. Consider Becoming a Part of a Crowd funding Opportunity
With technical advancements in every industry, investors in real estate also have to keep their minds and eyes open for new opportunities. Crowd funding is one of these; it’s a relatively new method for investing in real estate and has a rapid growth rate.
The main idea of crowdfunding is to raise funds for a certain project or purchase from various people. Think of websites like Kickstarter; a potential entrepreneur floats their idea online and asks for help in getting started. If someone finds the prospect worthwhile, intriguing, exciting, or necessary, they donate a little towards the goal. At times, the people contributing the money also get a share in the project and its returns.
The aim of real estate crowdfunding opportunities
In real estate, the basic aim is to have a seasoned real estate developer identify a potentially lucrative investment opportunity. These opportunities usually involve a commercial real estate asset along with a modification that adds value to it. The modification might have restructured the debt on the property or be a whole renovation of the place.
The developer will plan to either…
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