How to invest in real estate is a common question for real estate beginner investors. There are many choices when looking for investment options, such as stocks, bonds, exchange-traded funds, real estate, and mutual funds. For new investors, forex or cryptocurrency may be too volatile. Your choice will depend on how much money you have to start investing, how involved you are in investing, and your risk tolerance.
Owning and buying real estate can be both satisfying and lucrative. By paying a portion of the total cost upfront, prospective real estate owners can use leverage to buy property. After that, pay off the balance and interest over time.
A good investment has a high chance of success or a high return. An investment’s high level of risk can be balanced out by a high possible reward. However, there is no assurance that your investment will succeed, even if it has a high chance of success. If you can’t afford to lose that money, you shouldn’t put money into real estate.
A traditional mortgage usually requires a 20% to 25% down payment. Sometimes a 5% down payment is enough to buy an entire property.
How to Invest in Real Estate
Here are five simple ways to invest in real estate:
1. Rental Properties
Owning rental properties can be a great opportunity for individuals who have to do it themselves. You need skills to invest in rental properties, such as renovation skills and patience to manage tenants.
Pros
• Provides consistent revenue, and properties can appreciate
• Maximizes capital through leverage
• Many tax-deductible associated expenses
Cons
• Managing tenants can be annoying
• Probably damage property from tenants
• Reduce income from potential vacancies
According to new data, from the 1960s to 2007, the sales prices of new homes consistently increased in value before the financial crisis. Sales prices then started to rise again, even surpassing pre-crisis levels. But COVID-19 affects real estate prices deeply.
2. Real Estate Investment Groups (REIGs)
For people who want to rental real estate without the struggle of running it, real estate investment groups are an idea for them. Investing in real estate requires access to financing and a capital cushion.
A company buys or builds a set of apartment blocks or condos in a typical real estate investment group. After it allows investors to buy them through the company, thereby joining the group.
An investor can own one or multiple units of self-contained living space. The company operates the investment group, manages all of the units, handles the units, and interviews tenants. The company takes a percentage of the monthly rent to conduct these management tasks.
Pros
• A less active role than owning rentals.
• Provides income and appreciation
Cons
• Vacancy risks
• Easily manipulated by dishonest managers
• Fees similar to those attached to mutual funds
3. House flipping
House flipping is good for those who have experience in real estate marketing and valuation. House flipping requires capital and experience.
The riskier side of real estate investing is house flipping. Real estate flippers are different from buy-and-send landlords. Real estate flippers focus on profitably selling the undervalued properties they buy in less than six months.
Usually, property flippers don’t focus on improving properties. As a result, the investment must already be worth enough to make a profit without any alterations, or they will eliminate the property from the market.
Flippers may find themselves in trouble if they are unable to swiftly upload a property because they often don’t keep enough money to pay a mortgage on a property over the long-term.
There is another kind of flipper who buys properties at a reasonable price and sells them at a high price after some modifications. This is a long-term investment, but investors can only afford one or two properties at a time due to high prices.
Pros
• Shorter time span for capital commitment
• Can offer quick returns
Cons
• Requires a high level of knowledge
• Market can go down unexpectedly
4. Real Estate Investment Trusts (REITs)
If you want exposure portfolio to real estate without a traditional real estate transaction, a real estate investment trust is best for you.
Real estate investment is done through a trust that uses the investor’s money to buy and manage income properties. Like any other stock, REITs are bought and sold on the big exchanges.
In order to maintain corporation status, a corporation must pay out 90% of its taxable profits in the form of dividends. By doing this, REITs avoid paying corporate income tax.
REITs are a solid investment for stock market investors who desire regular income, like regular dividend-paying stocks. REITs afford investors entry into nonresidential investments, such as malls or office buildings, in comparison to the aforementioned types of real estate investments.
Real estate investment trusts are highly liquid because they are exchange-traded trusts. You will not need a real estate agent or a title transfer to help you cash out your investment. In other words, REITs are a more organized version of a real estate investment group.
Pros
• Essentially divided-paying stocks
• Core holdings tend to be long-term
Cons
•Traditional rental real estate’s usual leverage does not apply.
5. Online Rental Estate Platforms
For those who want to join others in investing in a bigger commercial or residential deal, real estate investing platforms are perfect for them. Online real estate platforms are used for investment, also known as real estate crowdfunding.
Online platforms are very beneficial for investors who are looking to finance projects with real estate developers. In some cases, you are able to diversify your portfolio even with less money.
Pros
• Can invest in single projects
• Geographic diversification
Cons
• Lockup tends to make people less liquid.
• Management fees
Frequently Asked Questions (FAQs)
How do you actually invest in real estate?
If you search on Google how to invest in real estate, you will find many articles. But in short, real estate requires planning, research, and execution. Steps to investing in real estate investments are:
• Define your goals and strategy
• Build a team
• Determine your budget and financing options
• Identify potential properties
• Conduct due diligence
• Make an offer and negotiate
• Close the deal and take ownership
• Manage the property
Is $5,000 enough to invest in real estate?
Yes, you can start with as little as $5,000. This is a big misconception: investors need a lot of money to invest in real estate. If you diversify your investments, your chances of success can increase. But you need to be focused because some deals do not go as planned.
Is $10,000 enough to Invest in real estate?
Yes, you can invest in real estate with $10,000. With this money, you can’t buy and flip a house, but there are many other options to invest in real estate. Options to invest in real estate with $10,000 are:
• Invest as a partner
• Real estate crowdfunding
• Use it as a down payment on a rental property
• Real estate wholesaling
• Transfer your own space into an Airbnb
• Find investment properties
How do beginners start real estate?
The best ways to start investing in real estate as a beginner are:
• Buy REITs
• Use an online real estate investment program
• Think about investing in rental properties
• Consider flipping investment properties
• Rent out a room