Real estate investing is one of the best ways to accumulate wealth, but buying and selling property can be a complex process. Is investing in real estate the right choice for you? Let’s explore the real estate investing basics and outline key considerations to help you discover if this venture is a good fit.
Introduction to Real Estate Investing
Investment real estate is property purchased to generate income or accrue value without being used as your primary residence. There are different ways to invest in real estate, including:
- House flipping
- Real Estate Investment Trusts (REITs)
- Purchasing rental or commercial property
- Property development
Is real estate a wise investment? Real estate investing (REI) can be a lucrative investment opportunity, and it’s only growing in popularity as a way to build wealth. Individual investors own about 70% of the 19.3 million rental properties in the nation. Consider how much an investor stands to profit after buying and flipping a house: an average of $190,400 over the initial purchase price! The potential ROI over a short period of time makes pre-retirement investing popular.
Understanding Real Estate
Let’s start with the real estate investing basics: the five types of properties you can invest in. Real estate investing for beginners typically focuses on residential real estate, but you have other options:
- Residential real estate: Single- and multi-family homes used as a primary tenant residence.
- Commercial real estate: Property used for business, including retail stores, restaurants, hospitals, shopping centers, and apartment complexes.
- Industrial real estate: Property for production, manufacturing, fulfillment, storage, or research and development.
- Raw land: Undeveloped, vacant property or agricultural properties like orchards and farms.
- Special use: Public-use property, including schools, government buildings, churches, and cemeteries.
Asset Appreciation in Real Estate
Asset appreciation is the value increase of a property over time. Development, inflation, market shifts, and home improvements all contribute to real estate appreciation.
With the average home value appreciation at 5.5%, the potential for profit in REI is strong, but depreciation can chip into your returns. Depreciation can result from normal wear and tear, neglected repairs, outdated appliances or home features, and outside factors like increased foreclosures nearby, but it can also result in helpful tax breaks.
Beginning Your Real Estate Investment Journey
How can I start investing in real estate? Consider how you want to invest and what level of involvement you’re comfortable with. You might purchase property, make needed repairs or renovations, and flip it for profit. You could purchase rental property and earn income from tenants renting the space out.
What is the best entry-level investment for real estate? A Real Estate Investment Trust (REIT) offers a fast-track way to start investing. These trusts require less money upfront and offer an immediate way to invest by purchasing shares of stocks or bonds from public companies that buy and sell real estate assets, and then receive dividends from the profits. However, REITs may have limited liquidity, high expense ratios, and may require a long term holding period to potentially realize an expected return. And, like any investment, a REIT may lose money.
With a better idea of how you want to invest, start setting goals and objectives to keep your efforts focused:
- Set net worth and retirement funding goals: How much do you want to earn?
- Learn how to assess property ROI: Which properties will net the biggest returns?
- Set portfolio and diversification goals: What types of properties will you invest in?
- Start growing your network: Who can you connect with to further your REI goals?
- Create time investment goals: How much time do you want to spend on REI?
Exploring Rental Options
Rental properties are considered a good entry-level investment. You may invest in short-term (like vacation rentals or month-to-month leases) or long-term rentals (usually a year or more), but each has pros and cons.
- Short-term rentals: Higher cash flow potential, fewer tenant disputes, and increased flexibility are benefits, but more property upkeep and time investment, fewer tenant screening options, and increased vacancy risk are disadvantages.
- Long-term rentals: Steady cash flow, tax advantages, and enhanced tenant screening potential are pros, but tenant legal disputes, property damages and depreciation, and potential for vacancies are cons.
Whether you’re considering short- or long-term rentals, pay careful attention to the properties in which you’re considering investing.
- Price: Investment rental property should be projected to be able to generate positive cash flow based on carefully considered income sources and updated costs.
- Location: Look for good neighborhood home sale prices, few foreclosures nearby, and access to community essentials (like schools and medical care).
- Condition: Is it a turnkey property, or are repairs or updates needed before renting it out—and will you be able to front the cost?
- Tenants: Based on nearby amenities, lot size, and monthly rent, who will the property appeal to? How will those potential tenants treat and care for the property?
Is Real Estate Investing Right for You?
Can you set aside money for a down payment and a mortgage payment safety net? Are you carrying high-interest credit card or consumer debt? Will you invest as a hands-on landlord, take the hands-off REIT approach, or hire a property manager (did you include the cost of this manager in your updated costs?)?
Real estate investing is not a venture for everyone. With built-in risks and ever-increasing costs of property maintenance and management, it’s not a scheme to get rich fast. If you consider the pros and cons carefully and analyze its merits as any other project should be analyzed, it could be a viable financial investment option for you.
Key Factors to Consider
Clarify your practical and financial goals to help determine which real estate investment path may be a fit for you.
Explore real estate as an investment and consult a MyStages® consultant for personalized advice today.
