Purchasing and owning real estate is an investment strategy that can be both satisfying and lucrative. Unlike bond and stock investors, prospective real estate owners can use leverage to purchase a property by paying a section of the total cost upfront, paying off the balance, plus the interest, over time.
Whereas a traditional mortgage generally needs a 20-percent to the 25-percent down payment, in some situations, a 5-percent down payment is all it takes to buy an entire property. This ability to manage the asset the moment papers are signed emboldens both landlords and real estate flippers, who can, in turn, take out second mortgages on their homes to make down payments on extra properties. Here are ways in which investors can make money on real estate.
Why investing in real estate is the best investment today?
The thing is, for real estate, when it goes well, it goes well. Smart real estate investment is one of the simplest ways to become a self-made millionaire. But note that easy is relative. Even though you are not hoping to become rich someday, investing in real estate is a great way to earn a passive or semi-passive income.
Based on your approach, your investments could reap the rewards with almost zero work on your end. Real estate provides a continuum of effort that the investor can put in. When properly managed, investments such as rental properties can help you earn a hefty paycheck for comparatively little work; however, it is also pretty simple to scale the business if you put that money into your real estate projects.
If purchasing a whole house of your own is totally off the table, there is also passive real estate investment to consider: caves to put money into real estate without purchasing your own property.
In most cases, you can start this type of real estate investing for less than $1,000, and the profits can be substantial. However, let us go over some definitions before we dive into some specific methods to invest in real estate.
Common terms in real estate and their meaning
Here are some of the most popular terms you will hear thrown around in real estate investing circles.
- Residential real estate: Ths refers to properties created to be used as places to live. Single-family homes, condominiums, and townhouses all count- even though homes with more than four units, such as apartment buildings and big multiplexes, are regarded as commercial property.
- Industrial real estate: This is a property where industrial businesses perform their functions, whether it is a factory space, storage warehouses, or shipping yards.
- Landlord: You possibly know this one, a landlord is someone who owns the property and leases it out to third parties, often for commercial or residential use. A landlord is also called a lessor.
- Commercial real estate: This is property used for business reasons, like retail space and restaurant or office buildings.
- Lessee: This is the person renting the property, who is also known as a tenant.
- Rent: This is the cash a landlord collects from the tenant as compensation for the use of the property, often taken monthly.
- Appreciation: This is an asset’s increase in value throughout. Real estate investment is one of the only tangible investments whose value has a tendency to appreciate.
- Interest: This is the price charged by a lender for the service of offering a loan, exhibited as a percentage of the loan amount.
4 Simple ways to invest in real estate
The most obvious way to venture into real estate investing is buying property. But there are various ways to venture into real estate that require nothing but your money. And you do not necessarily have to have very much of it to begin.
Become a landlord
This method is ideal for people with DIY and renovation skills, who have the patience to manage tenants. To get started, you only require substantial needs to finance up-front maintenance costs and cover vacant months.
When it comes to the pros of becoming a landlord, rental properties can offer income while maximizing available capital via leverage. Besides, most associated expenses are tax-deductible, and any losses can offset gains in other investments. In ideal cases, properties appreciate throughout their mortgages, leaving landlords with more valuable assets than they began with.
However, becoming a landlord is not without its cons, not unless you hire a property management company, rental properties have a tendency to be plagued with constant headaches. In worst-situations, rowdy tenants can destroy property. Besides, in various rental market climates, a landlord must either endure vacancies or pay less to cover expenses until things turn around. On the right side, after the mortgage has been paid off completely, the majority of the rent becomes all profit.
Following the United States Census Bureau data, sales prices of new homes steadily increased in value from 1940 to 2006 and then dipped during the financial crisis levels. It remains to be seen what the longterm effects of the Covid-19 pandemic will be on real estate values.
Real Estate Investment Trusts (REITs)
REITs are an organization whose role is buying commercial real estate, with the intent of funding properties that accumulate income.
REITs then trade shares of those real estate investments to outside investors, who earn money in the form of dividends. Simply put, it is similar to investing in the stock market. You put your funds on the table to back the company and reap profits when the company does well.
Although in this situation, the organization’s sole role is to own, operate, and fund real estate. So you are purchasing tiny portions of various properties you may never even see or set foot on. Based on the type of REIT you are talking about, you might be able to purchase into the game for very little cash.
- Private REITs are not traded on the stock market. Thus they are generally unavailable to the average investor. With minimum investments and high fees, this is the domain of accredited investors with substantial net worth.
- Publicly traded REITs: These are available on the stock market. If you have a brokerage account and sufficient capital to purchase a share, you can go ahead and include it in your investment portfolio. Nonetheless, these REITs do see substantial market volatility similar to regular stocks, so it is definitely not a threat-free investment.
- Public, non-traded REITs: These are not available on the stock market but are registered with the SEC, or United States. Securities and Exchange Commission. They sometimes come with high investment fees and minimums; however, not always, and so might occasionally be an alternative for the average investor.
Crowdfunded real estate investing
If you are familiar with services like Patreon and Kickstarter, you already know how crowdfunding works. There is a company that assists you in doing just that for real estate. You do not need much money. You can begin with a minimum investment of only $500. Via the Fundrise Starter Portfolio, your cash will be separated into two portions that support private real estate around the US.
Opportunity zone funds and private equity funds
Private equity funds operate the same way as mutual funds do- or the crowdfund services, but at a higher and fewer grassroots level. These funds still work by pooling the assets of most investors to make high-value investments; however, generally limited to accredited investors who can invest at least $100,000.
Another type of polled-asset investment is opportunity zone funds; however, they are specifically geared toward backing developments in economically distressed United States neighborhoods. Since they stimulate required growth in those regions, they are subject to some pretty appealing tax incentives- mainly if you leave your money in the fund for a substantial period.
For example, if you retain an opportunity zone fundholding for five years, your tax liability on capital revenue (such as earnings made via appreciation) is decreased ten-percent. Provided you retain it seven years, the reduction is bumped to fifteen-percent- and if you can manage to leave the money tied up for a decade, you will not pay any capital gains taxes.
This makes backing opportunity zone funds an exciting alternative indeed for a qualified investor looking for a long-term investment opportunity. However, remember that, based on the fund you select, you might still be subjected to an investment minimum of $250,000.
An old-school method to take your real estate game to the next level
If you aim to become a property owner- the kind of investor who can put the key in the door- there are various ways to make purchasing a home, which is already a smart money move, into an even more intelligent investment.
Those of you who want to sign a mortgage (or even buy a house in cash!), below are some income-generating methods to consider as you enter the real estate market.
The way house flipping works is very straightforward: You buy an investment property that can use some TLC (fixer-upper) in popular parlance- and put in the remodels and repairs necessary to make it shiny and lovely.
Then the value of the house goes up, at which you can sell the property for a profit. Nonetheless, it is essential to note that this is one of the most work-intensive methods to invest in real estate. And you have a chance to lose a whole lot of money if you do not do it right.
Renovations are costly, and if the house rests on empathy on the market, you can even lose more money in actual charges and opportunity costs, such as property taxes. In other words, this method is not for the real estate investing beginner.
If you have ever dreamt of living-rent or mortgage-free, house hacking is all about making that dream possible. Typically, you find a property that you can simultaneously live in and rent- in most cases, a duplex with two separate living regions.
You then proceed to use the money you make a landlord eradicate your mortgage payments faster, ideally eclipsing your monthly payment entirely. You can use this method as a ladder to get you to start as a landlord with multiple rental properties.
After paying off your first duplex, the rent you will be earning will be pure profit, which you can then reinvest in more properties, which can make you more rent. The greatest thing about house hacking is that it takes a necessary living expense, such as keeping a roof over your head and also gives you an earning opportunity.
So if you are already looking to purchase a home or a house, you might see if you can find one that is hackable.
Airbnb and other vacation sublets
We all know hotels last for centuries. Today it is all about the convenience, intimacy, and comparatively affordability of peer-to-peer short-term rental accommodations, such as the ones accessible on Airbnb.
If the house you purchased has a spare bedroom or an outbuilding or separate in-law quarters, you can use that space to make a profit. Just make sure you look into the regulations in your area first. Some states have enacted a short-term rental permit, or licensing plan to make sure enough housing remains accessible for permanent residents.
Generally, there are so many ways to get started in real estate investing, even though you do not have the cash to purchase a rental property outright.