A Beginner’s Guide on How to Invest in Real Estate
If you’ve ever rented a property from a landlord, you’ve interacted with a real estate investment. While most people don’t dream of becoming a landlord in their spare time, there are a lot of benefits to investing in real estate. For one, real estate investments will give you the opportunity to diversify your investment portfolio so that in times of uncertainty, you’ll have a stronger grasp of your true assets. While changes in the market are normal, extreme fluctuations like we’ve seen since the beginning of the pandemic can cause anxiety. When you add real estate investments to your portfolio, you’ll be better prepared for the markets and their uncertainty. But investing in real estate isn’t exactly easy. Once you understand how to do it and get some experience, it becomes second nature, but learning how to start can be hard. Luckily, we’ve put together a beginner’s guide on how to invest in real estate to help you get off on the right foot.
A Few Pros and Cons of Real Estate Investing
Before diving into how to invest in real estate, you should make sure that you understand all of the pros and cons. A lot of real estate investments require big up-front commitments, so you need to make sure you’re ready before jumping in. Real estate investments also require a lot of maintenance and could end up costing you more than you’d think for upkeep, improvements, and even property management. A lot of people also notice that real estate investments don’t have the same potential for aggressive returns as other types of investments, but they do carry less risk and volatility and will eventually result in a strong cash flow.1
Real estate investing gives you a lot more opportunity for tax deductions and often have great long-term return, you just have to be willing to take the time to get there. In most cases, properties appreciate over time. However, if you know that you’re not interested in dealing with tenants and building issues, you might want to reconsider real estate investing.1
How to Make Money by Investing in Real Estate
Now comes the fun part—how to actually make money with real estate investments. Contrary to what many people think, there are a number of different ways you can make money through real estate. A good real estate investor will take the time to fully understand each of their options so they can capitalize on multiple different income sources.
Real Estate Appreciation
One way that you can make money from investing in real estate is through real estate appreciation. This is when a property that you own increases in value due to some sort of change in the market or over time.1 If you have a property in an up-and-coming neighborhood and it starts to flourish, your property value will increase accordingly. This also happens if you make a significant number of upgrades or renovations to a home that in turn, increases its value. Real estate appreciation is fairly unpredictable, so it’s riskier to rely on than other types of real estate investments.1
Cash Flow Income
Cash flow income is when you buy a property, such as an apartment building, so that you can go on to collect monthly payments from residents or tenants.1 Cash flow income can also come from storage units, retail stores, rental homes, office buildings, and other properties where the tenant would need to pay you on a monthly basis.1 With cash flow income, you’ll need to be ready and able to deal with all of the problems and hurdles that come with managing buildings and housing multiple people.
Real Estate Related Income
Real estate related income is fairly straightforward—it’s the money that comes from any real estate related transaction. Because of this, real estate related income is only earned by specialists in the industry who work and make commission for either selling, renting, or managing a property.1
Ancillary Real Estate Investment Income
This type of income is a little less common but is extremely profitable when done right. Ancillary real estate investment income is the income that’s generated off of things like vending machines or laundry facilities.1
How to Invest in Real Estate
Some people are involved in as many facets of real estate investment as possible, while others only manage one. If you’re new in the process, we recommend starting slow and building your way up. As we discussed, real estate investments can require a large cash investment that can take longer to generate returns, so you need to be sure that you are ready for the commitment before jumping in. To help you get started, try taking the following steps to ease your way into the practice.
- Buy Real Estate Investment Trusts
Real estate investment trusts (REITs) give you a chance to test the waters before jumping in. When you buy REITs, you’re basically investing in real estate without the physical property.2 They’re comparable to mutual funds, but pay high dividends and can help you slowly test out the real estate investment sector.2 Some REITs are more risky than others, so make sure you read up on more information about them before making any investment decisions.
- Use an Online Platform
Another way that a lot of beginners choose to get involved in real estate investment is through the use of online platforms. There are tons of real estate investing platforms that can help you get a better understanding of the process, get connected to developers and investors, and make trades with other investors. While some of these platforms are reserved for accredited investors, there are options available for those that don’t meet the financial requirements.2
- Look into Rental Properties
If you’re interested in the more traditional world of real estate investments, look into acquiring one or more rental properties. This involves purchasing an investment property with the intentions of renting it out. Investment properties do take a lot of work, so you need to make sure that you’re ready for the commitment. Many investors choose this option because it gives them flexibility, there are low interest rates involved, and it allows them to create and build equity over time. There are many things that you’ll need to consider before buying an investment property, but the biggest decision you’ll need to consider is location. If you’re interested in learning more about investment properties, click here.
If you’re not ready to commit to a full rental property, consider renting out part of your room like an Airbnb. This will give you a glimpse into the rental world without getting stuck in any long-term commitments.
- Consider Flipping Properties
If you’re a hands-on person who likes to take on projects, consider flipping investment properties. This type of real estate investment is pretty much exactly what you see on TV, but it tends to take a little more effort than what Hollywood producers show. House flipping does carry substantially more risk, as you never know what your costs are going to be, but a lot of people find it to be extremely fulfilling.
Tips for Your First Investment
When you’re ready to buy your first investment property, make sure that you’re prepared and have done your research. You’ll want to find a place that has the potential to be successful, but you’ll need to make sure that you can afford it. If you don’t have all of the cash up front, talk to a leasing agency about using debt by taking a mortgage out against a property to give yourself the opportunity to buy something you otherwise couldn’t.1 However, make sure that you know the risks of this as it can be dangerous in certain circumstances. You can also look at holding real estate investments using certain types of legal entities to increase your risk management strategy.1 If you’re interested about using a limited liability company or limited partnership, make sure you talk to an attorney about the methods and get outside help on choosing the right option for you.1
Partnering with a Real Estate Agency
If you’re ready to purchase your first investment property, or if you’re looking to add to your growing portfolio of properties, First Star Realty is here to help. Our real estate agents are dedicated to helping you find exactly what you’re looking for in an investment property, primary residency, or secondary home. Regardless of what your needs are, we’ll be able to help you find a solution. We’re committed to providing five-star realtor services to Northwest Arkansas and work with you throughout the entire buying or selling process so that you have the peace of mind you need. Our clients always come first, which is why we only measure achievements through client satisfaction. If you’re ready to buy or sell an investment property, contact us today. Our team of highly seasoned real estate professionals is dedicated to providing exceptional, personalized service to all of our clients. Call us today at 479-267-1600 or fill out a contact form on our website.