Investing in the real estate industry is an exciting endeavor for those who are still getting familiar with the investment. The global real estate market is a multi-trillion-dollar industry with a compound annual growth rate of over 5%, making it one of the most consistently flourishing industries in the world. Even the U.S. housing stock was valued in the trillions ($33.6 trillion) in 2021, creating an abundance of opportunity for investors to secure their wealth through multiple channels.
Owning property and investing in real estate can yield an array of benefits, but it also comes with risks and challenges. We’ll review these benefits and risks while exploring the different ways you can begin your real estate investment journey today.
Different Methods of Real Estate Investing
Immersing yourself in the real estate industry is possible in more ways than one. You can determine the best way to invest by examining your current budget and your goals. Are you looking for a long-term, consistent income generator? Do you want to dip your toe in the stock market? Do you need to take out a loan for the investment? Depending on your answer, the ideal option for you can be any of the following opportunities.
Purchasing a personal property
This is one of the most common ways people choose to invest in real estate. In the United States, the homeownership rate stood at 65.4% in 2021. When buying a personal home, you have the chance to purchase the house outright or mortgage the home. One significant benefit of purchasing a property is the chance to lock in at a consistent mortgage rate, rather than dealing with the burden of shifting rental rates every year.
Purchasing a home isn’t simple, as there are many factors you must consider. If you aren’t buying a home in cash, you must connect with a mortgage lender. To get a mortgage loan, you’ll need to provide information such as:
Your current income and employment state
Your credit score
Your current ratio of debt-to-income
This information will affect your mortgage rate and how much the bank is willing to lend you. No matter what the final loan ends up being, you will still have to pay directly out of pocket for the down payment and closing costs. Be sure to have these funds available before making an effort to buy a home. If you’re in need of down payment assistance, many states have different social programs in place that offer grants for first-time homebuyers.
From there, you’ll need to find a home within your budget. Working with a realtor can lessen the stress of the home-buying experience. A realtor understands the housing market and can not only direct you to homes that meet your standards and requirements, but act as an expert negotiator when it comes time to close the deal. Realtors are also available to answer any and all of your questions regarding the homebuying process.
Flipping houses
Many investors who choose to flip houses tend to do so with all-cash purchases. This is because financing a flipped property tends to add more costs that interrupt the final ROI. Cash offers are also more appealing to home sellers, giving you a competitive advantage over other prospective buyers.
When flipping a property, you are essentially using the foundation and structure of a home to create a trendy, market-friendly home to sell shortly after renovation. This process requires performing market research, working with contractors, interior designers/home stagers, and connecting with a buyer’s agent if you do not intend on representing the sale yourself.
Flipping a home is one of the more fun real estate investment options. You have the chance to provide a hands-on upgrade to a space without the burden of long-term property ownership. You can also explore multiple locations when house-flipping, which is great for those who are looking for a profitable reason to travel.
Buying a home for rental income
Whether you’re seasonally renting out a secondary residence or committing an entire property to rentals, purchasing a home to rent out to others is a fantastic way to generate reliable, passive income. Across the United States, tenancy laws differ, so it is important to stay aware of the legal aspects of becoming a landlord.
The basics of purchasing a rental property are quite similar to buying a primary residence. However, as a landlord, you are required to keep your property in certain conditions in order to uphold a lease. Landlords are required to keep a property habitable, which means adhering to routine structural, electrical, and plumbing maintenance needs.
This opportunity requires more active effort than other real estate investments. You must keep in regular contact with your tenants, and you must be prepared for dealing with tenants if they do not pay their rent, damage the property, or raise other concerns. Rental properties come with their fair share of risks, but they tend to yield some of the highest rewards.
Invest in real estate investment trusts (REITs)
A Real Estate Investment Trust (REIT) is a business that purchases or finances properties, which are funded by a team of investors. These investors receive the majority of the profits generated from these properties. This is a fantastic option for those who do not want to invest in an entire property. You retain less responsibility and the initial investment is not as substantial.
For an REIT to be considered as such, it must adhere to a series of rules. Some of these rules include having 100 shareholders minimum after its first year and having the company under the management of either a board of directors or a group of trustees. REIT investors will see regular returns from quarterly dividend payouts as well.
When investing in stocks, it is crucial to examine market trends and know when to adjust your investment. If you are familiar with stocks and are looking to diversify your portfolio with different industries, choosing a REIT as your first real estate investment opportunity can be a comfortable choice. Understand, though, that the stock market can be much more volatile that the physical real estate market – investing in properties may prove a safer, more profitable option than contributing a large portion of your wealth to REITs.
Benefits of Real Estate Investing
With the right tools and resources, almost anyone can invest in real estate and build long-term wealth. Gaining the connections to purchase a great property is simple. You can reach out to a reputable realtor or broker in your community or join a friend on a house-flipping endeavor. There are plenty of other benefits that come with real estate investing, too.
Can generate passive income
An appealing part of real estate investing is the passive income channel. Many property owners in popular vacation areas like Cape Cod or Fort Lauderdale only rent out their homes during peak season and generate enough income to enjoy the property themselves for the rest of the year at little-to-no out-of-pocket cost.
Even if you are managing a property that has year-round tenants, you can still enjoy an incredible return by investing in properties in high-demand communities. These areas include towns that are close to universities, large cities, or places that have a flourishing job market.
Hedges against inflation
Real estate has always been identified as a hedge against inflation. Generally, during times of inflation, it is always beneficial to have a tangible asset with intrinsic value. The value of homes tends to appreciate over time and perform well during times of inflation.
As stated previously, owning a property also opens you up to generating rental income. Rent prices usually rise during times of inflation. Since mortgage rates correspond with inflation rates, many folks may choose to hold off on homeownership and opt for renting instead. This means buying a home during the right market conditions can be a helpful choice for your future financial stability.
Equity building
The ideal situation when investing in property is, when you’re ready to sell, the value of your home will have increased, with the final sale price exceeding your current mortgage. Equity refers to the value of your home that you fully own. This asset is great for those who are looking to take out a home equity loan or a home equity line of credit. Equity also contributes to your net worth, putting you on the path to financial success.
To build equity right off the bat, you can make a larger down payment on your home, which means you will take out a smaller mortgage in the end. With a down payment of 20% or more, you do not have to pay for private mortgage insurance, which is added to your mortgage payments.
Acts as a leveraging opportunity
When you own a home or have some tangible assets, many lenders will be more apt to give you a larger loan amount. This is because you can use the asset as leverage, having it serve as collateral in the event you’re unable to pay the loan amount back. Though this can seem rather risky, as long as you’re making sound investment decisions and paying your mortgage on time every month, you don’t have to worry.
Diversifies your portfolio
A diverse portfolio protects your wealth while letting you dabble in multiple industries and investment options to maximize your return. According to Kubera, about a quarter to two-fifths of your investment portfolio can be allocated to real estate. This leaves plenty of room to explore other investments, like stocks, bonds, and precious metals. Portfolio diversity is also a means of protection. When all of your investment funds are wrapped up in one venture, the risk can be astronomical since you have a notable dependency on the health of that particular market.
Challenges of Real Estate Investing
The benefits of real estate investing make the endeavor appealing, but the challenges that come with homeownership or stock investments prove that this option isn’t for everybody.
Requires a hefty investment
One aspect of this investment that makes this a bit more inaccessible than other opportunities is the initial cost. REITs require a minimum of a couple thousand dollars, but purchasing a property will have you dishing out tens of thousands of dollars at the very least. You must be prepared to pay the down payment for your home and closing costs, along with additional funds that are required for managing a property correctly. Over time, these costs add up, so if money is a bit tight at the moment, you may want to stick to REITs and avoid purchasing property, even if you intend on flipping it.
The market can be volatile
There are a few factors that contribute to real estate market volatility. When economic strife occurs, the cost of homeownership rises. Rising interest rates also affect mortgage rates, making it harder for folks to sell their homes and potentially finance a new one at a rate that allows for a profitable return.
With a successful real estate investment depending on so many fluctuating situations, such as global events and policy, you can easily make what you think is a sound investment and end up losing a pretty decent chunk of change. Before diving into property ownership, you should review market trends and stay aware of events that may affect the industry.
The ROI takes a while
If you’re looking for a quick return on investment, real estate simply isn’t for you. When purchasing a home to flip, you can expect to wait around 6 months to see a return due to the renovation period and the time it takes for the sale of the home to finalize.
When purchasing a primary residence, it takes time to build equity. You can be looking at a decade or more to see a return in many cases. Even when investing in a rental property, the funds you receive must go to paying off your mortgage and property upkeep first and foremost. It also isn’t easy to gain liquid funds from real estate, either, due to the sales process. Those who are patient and don’t mind waiting months to years for a great return will fare well in the real estate game.
Making Sustainable Real Estate Investments
Understanding the effects of climate change on real estate
Climate change has an enormous effect on our health, safety, and lifestyle. It also influences the progression of the real estate market. Since location is everything, it means weather is just as important. Climate change gives way to natural disasters like hurricanes and contributes to rising sea levels, which affect coastal properties that offer high investment returns. Properties may experience more debilitating or frequent damage due to big storms, wildfires, or other disasters, which adds to the risk of property investment.
The cost of living in areas most affected by climate change will also rise, as property insurance premiums will increase based on perceived risk. Utility prices will grow as well – heating and cooling costs are some of the most expensive utilities when owning a home. Rising temperatures lead to higher energy costs, something that can deter prospective renters or future buyers from choosing your property.
Benefits of sustainable real estate investments
Making eco-friendly real estate investments can be worth the extra costs. Younger buyers have a keener awareness of their impact on the environment. Because of this, they are more apt to rent or buy a property that has sustainable amenities or is operated by an owner dedicated to reducing their adverse environmental impact.
Adding sustainable features to your property can also save you money at the end of the day. Energy waste is one of the central issues sustainable home technology is attempting to remedy. Making energy-efficiency alterations can lower or eliminate energy waste in the home as a whole, effectively lowering monthly costs as well.
Making eco-friendly property upgrades
To upgrade an investment property sustainably, you should be looking to address any part of the home that contributes to waste or pollution. Home automation technology like smart lighting, motorized shades, and smart thermostats target the devices in your home that rack up the most energy waste over time. These automated devices track your energy usage and use sensor tech to optimize this usage throughout the day. Better yet, these devices often allow you to allocate this data for reports, helping you keep an eye on your monthly spending.
How to Perform Real Estate Market Analysis
You don’t have to attend classes to perform real estate market analysis like a pro. Those who are working with real estate professionals such as agents or brokers will have access to market information through them, but it’s always beneficial to keep your eye on trends and fluctuations. Here are some of the essential market analysis steps you should keep in mind when real estate investing.
Compare houses on the market
When purchasing a property or investing in REITs, examine the homes in the location where you’re planning on investing. Take a look at the price per square foot of homes with similar specs as the one or series of homes you’re interested in. This will give you a better idea of what the home is worth so you can tailor your offer and interest accordingly.
Ideally, you should make a list of homes that have recently been sold and a few homes that are currently on the market. Take a look at the features, such as the rooms, amenities, backyard space, recent exterior upgrades (roofing, siding, etc.), and the parking availability. From here, you can find the average price per square foot.
Understand the population and community
Before placing your money anywhere, you should make an effort to get to know the area your property is located in. What are the demographics? Is it a family-oriented suburban neighborhood or a lively, urban area with plenty of restaurants and shops to choose from? Knowing what people live in these communities and what they’re looking for helps you identify what changes to make to the property and how you should market a home for sale when it’s time.
Identify local attractions
There is always something that makes prospective renters and buyers gravitate toward a property or area. Examine the local attractions and figure out how to include these in your personal marketing strategy to maximize the return on your investment. For example, if you’ve just purchased a vacation rental property that is close to the water, you may want to incorporate maritime accents around the home or offer inclusive sailing packages for your guests to take advantage of.
Final Thoughts
Real estate investment isn’t for the faint of heart, but that doesn’t mean it’s too risky to take on, either. Performing proper research, making the right connections, and choosing an investment option that aligns with your interest and capacity leave plenty of room for success. Be sure to avoid taking on mortgages you can’t afford, or investing a disproportionate amount of money into real estate to the point where it significantly affects your liquidity.
Related