How to Invest in Real Estate: A Clear & Simple Guide for 2023
March 21, 2022
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Real estate investing is a great way to diversify your income and reach your financial goals. Real estate is often less volatile than other investments, and it gives you a chance to earn dividends and capital appreciation.
Here's how to invest in real estate and reach your financial goals.
What Is Real Estate Investing
Real estate investing means investing in residential or commercial real estate either directly or through a fund. Traditional real estate investing means you buy a piece of property and either fix and flip it or keep it and rent it out, collecting rent as monthly cash flow.
Today there are many indirect ways to invest in real estate too. For example, if you want the real estate exposure but don't want the stress of property management, finding tenants, and maintaining the property, real estate investment trusts, or exchange-traded funds may be a good option.
No matter which way you invest in real estate, you have the chance to earn cash flow from interest earned, rental property income received, and capital appreciation when you or the developer sells the property.
Why Invest in Real Estate
You might wonder, especially after the housing crisis of 2008, why you would be a real estate investor. If property values can fall in the blink of an eye, why take a chance?
Real estate crashes aren't as common as stock market crashes. Also, unlike the stock market, real estate hedges against inflation. If inflation increases, so do rental property prices, interest rates, and overall profits for real estate investors. This means more profits for real estate investors instead of less.
Real estate investments have many faces too. You can invest directly in real estate, having the tangible properties in front of you to manage. Some investors prefer this, knowing they have regular income from renters and control how much they charge and/or make.
If you prefer an indirect way to invest in real estate, you can invest in real estate investment trusts. These are shares of a company that manages real estate investments, typically commercial real estate.
Whether you invest in real estate, you can build wealth by earning monthly cash flow and/or capital appreciation when you sell the property for more than you bought it. If you invest indirectly in real estate, you get the same benefits, just in a prorated amount based on your invested amount compared to the investment's total value.
Related Article: Equity vs. Debt Investments for Real Estate
Pros and Cons of Real Estate Investing
Like any investment, there are pros and cons of real estate investing. Understanding both sides can help you determine if it's right for you.
Real estate appreciates, and you, the investor, gain from it. If you invest yourself, you earn 100% of the appreciation. However, if you invest in a fund through a real estate company, you still get to participate in the appreciation at a prorated level of your investment.
- Tax benefits
If you invest directly in real estate, you can write off certain expenses, like you would if you owned a business. For example, interest expenses, real estate taxes, expenses to maintain or repair the home, and other business expenses are often deductible.
- Diversifies your portfolio
Putting all your eggs in one basket can be detrimental to your net worth. If you invest all of your money in stocks, for example, and the market crashes, you could lose everything. Instead, a common strategy is to diversify your funds across stocks, bonds, and real estate to offset the losses of any particular stocks or other investments.
- You can invest long term or short term
There are many ways to invest in real estate that can work within your timeline. New investors often buy real estate and hold it, enjoying the monthly cash flow. But if holding onto real estate or managing a single-family home or multi-family unit feels like too much, you can fix and flip property instead, making money in 6 months versus many years.
- Cash flow
Whether direct or indirect, most real estate investments pay monthly or quarterly dividends. Rental property income and interest payments are the most common. At the end of the investment, whether you sell the property or the fund manager does, there's also the capital appreciation.
- Can seem overwhelming
Investing in real estate can feel like a lot, especially for new investors. In addition, knowing you must maintain and manage a property can be a lot physically and financially.
- Requires a lot of capital (direct investments)
If you invest directly in real estate, you need a lot of capital and/or the ability to get approved for financing. While you can leverage your investment by taking advantage of mortgage financing, you're still responsible for the payments.
- No guarantee of profits
While investing in real estate is less risky than the stock market in most cases, there's never a guarantee of profits. There are costs involved, the potential for tenants to stop paying, or the risk that the market could crash.
How to Invest in Real Estate
Like we said above, there are many ways to take advantage of real estate investing. Here are the top ways.
Real estate crowdfunding is one of the indirect ways to invest in real estate. We say this because you don't own the property yourself. Instead, you invest with hundreds and sometimes thousands of other investors.
The crowdfunding platform pools the funds from all investors to reach the end result, whether buying a single-family home, commercial property or apartment building.
You can also invest in the debt portion of real estate with crowdfunding. You'll know the loan 'grade' or risk level and decide which loans you want to invest in based on the information provided.
- You can invest in one or more real estate investments, spreading your funds out
- You can invest anywhere you want since you aren't managing the property yourself
- There could be long investment requirements with no opportunity for early liquidation
- Management fees can be high
REITs / REIGs
Another great way to invest indirectly in real estate are REITs or REIGs. Real estate investment trusts and real estate investment groups invest in companies that buy, manage, and sell real estate properties.
Investing in REITs and REIGs allows you to invest in real estate without the hassle of running it yourself. Depending on what the asset invests in, you own a portion of the debt or equity and earn a prorated amount of the earnings, whether interest payments, rental property income, or capital appreciation.
- You don't have the stress of owning the property directly
- Often pays dividends
- Has management fees
- You aren't in control of which properties are bought
Related Article: Real Estate Investing Amid COVID-19
Owning a home to live in is another great way to invest in real estate. While it's not an investment property, so to speak, you still earn the capital appreciation on the property.
Let's say, for example, you bought the property for $200,000 and financed $100,000 of it. You kept the property for five years and sold it for $400,000, and owed $50,000 on the mortgage still.
You'd walk away with $150,000 in profit just for holding onto the real estate, even though you lived in it.
- You earn capital appreciation while having a place to live
- You can exclude up to $500,000 in capital gains on your primary residence if you're married filing jointly
- You're responsible for all maintenance and repairs, which eats at your profits
- There's no cash flow
Owning rental properties is a great way to increase your monthly cash flow. As the landlord, you collect rent, maintain the property and earn its capital appreciation. Owning rental properties comes with its demands, though. As the landlord, you're on call 24/7, and you're in charge of the lease agreements, the rent charged, and all aspects of owning the home or building unless you hire a property management company to do the work for you.
- Your tenants make you money by paying rent
- You collect the capital appreciation when you sell the house even though you didn't live there
- Managing tenants can be challenging and exhausting, and a property manager costs money
- There's a high risk of vacancies
Related article: Understanding Loan-to-Value Ratio (LTV)
If holding onto real estate doesn't seem like a good fit, you can fix and flip real estate. This lucrative way to invest in real estate is more short-term than other options because your goal is to improve and flip the property within six months.
The key to successful fix and flip properties is to know how to find undervalued properties. When you purchase an undervalued property and fix it up, you increase the capital appreciation and your profits for your time and effort, and you don't have to act as a landlord.
- You can invest in more real estate options since the investments are short term
- Finding an undervalued property can net you a decent profit
- You must know how to find properties, understand their costs, and how to renovate them and still make a profit
- It can take a lot of time and data to find the right properties
Funding Your Real Estate Investment
A big part of investing in real estate is funding it. Some investments require a large amount of money and others require much smaller investments, some as low as $1. Here are the top considerations to come up with the funds needed for your investments.
- Personal savings
Don't use your emergency funds, but any other money you have available that can be earning higher interest rates than your savings account could be invested and give you a nice rate of return.
- Credit cards
Credit cards can be a way to fund your investment in real estate, but only if you can pay the balance off in full right away. Most investments don't have an ROI higher than the high APRs credit cards charge, so be careful.
- Family or friend loans
Family or friends may be willing to loan you money for real estate if they can reap some of the benefits too. Work out the fine print so you are both on the same page regarding expected returns.
- Personal loans and lines of credit
You can leverage lines of credit on your primary residence or personal loans you qualify for to invest in real estate with only a little money. Ensure you know the total cost of the interest payments and how you'll pay it off, so you don't get in over your head in debt.
- Seller/owner financing
Seller financing is a great way to invest directly in real estate. Sellers provide the funds to buy the house at the terms they require. Instead of paying a bank, you pay the seller with the intention of either selling the property before loan maturity or being able to refinance it with a standard loan.
- Conventional loans and government programs
You can use conventional loan financing to buy an investment property, but if you're using government financing, like FHA or VA loans, the property must be a primary residence.
Related Article: Private vs. Public Investments: Understanding the Differences
Real Estate Taxation
Something to consider before you put your money in real estate is taxation. You'll pay taxes on any profits like you would with any other investments, including stocks or other options.
You'll pay taxes on your capital gains on any properties that aren't your primary residence. If you have lived in a property for at least two of the last five years, though, you can take advantage of the capital gains exemption and enjoy your profits tax-free or at least some of them.
Rental Income Taxes
Rental income must be reported on your taxes. However, since it's business income, you can offset the income with your expenses which might lower your out-of-pocket costs.
Related Article: How and When to Prioritize Savings for Retirement
Tips to Get the Most Out of Your Investment
Before you invest in real estate, know the ROI. Consider the expenses, investment required, time limits, and look at past performance in the area. Not all investments in real estate are created equal. While real estate can be an excellent investment, not every property available is the right one for you.
Investors should always diversify their portfolios. It's the only way to offset losses and avoid a total loss. You never know when one industry or even type of real estate might take a hit. When you have other investments in different industries or sectors in your portfolio, they can balance one another out, giving you an overall positive return.
Be Prepared for Risk
You should always prepare yourself for risk. No investment is without the risk of a total loss. Even a piece of real estate with a high value doesn't mean that it will automatically perform well. Do your research and have a backup plan should things go sideways.
How to Invest in Real Estate: Mistakes to Avoid
Before you invest in real estate, know these mistakes to avoid:
- Not planning
You need a plan to invest in real estate and an escape plan in case things go wrong. Think of your timeline and goals and see how they work together with the available properties.
- Not looking at the numbers
When looking at the data and crunching the numbers, past, industry, and property potential are essential factors. Get a professional to help you if you aren't sure what to look at.
- Getting in over your head
Real estate can be a great way to make money, but if you don't do it right, you could lose money too. So don't jump in hastily and assume you'll make a profit because you probably won't without a plan.
- Trying to do it all yourself
Investing in real estate takes a village. Whether you're buying properties directly or you're investing in companies that do the buying, managing, and selling of properties for you, don't do it alone. Get advice, take support, and listen to the experts.
Is Real Estate a Good Investment for the Future?
Real estate is a great way to hedge against inflation, plan for the future and reach your financial goals. But, like any investment, there are risks, so diversifying your investments is the key to meeting your financial goals. Click here to check out Concreit's website!
This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security which can only be made through official documents such as a private placement memorandum or a prospectus. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Neither Concreit nor any of its affiliates provides tax advice or investment recommendations and do not represent in any manner that the outcomes described herein or on the Site will result in any particular investment or tax consequence.Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Concreit does not guarantee its accuracy.