Don’t know where to invest your money? One great type of investment is real estate. It provides numerous benefits and can eventually lead you to build wealth. In fact, 90% of millionaires today owe what they have to real estate. Investing in real estate for beginners can be overwhelming. But know that you’re not alone. In any kind of investment, there’s always a risk involved and we would like to avoid mistakes as much as possible. Learn the basics of real estate investing through this article.
Real Estate Investing
When it comes to investing in real estate for beginners, you should start with the basics. First off, real estate is defined as any piece of land or property attached to that land. Anything natural or man-made that is part of the land or property is also considered real estate. This includes trees, fences, buildings, and more. Therefore, real estate investment means purchasing, owning, managing, renting it out or putting it up for sale to get a profit.
Types of Real Estate
Real estate investments can be classified according to their uses:
- Residential – bungalow, single, duplex, triplex, township, or any kind of property used for residential purposes
- Industrial – properties that are used as warehouses, manufacturing units, distribution centres, factories, etc.
- Commercial – properties used for business-related purposes such as office spaces, restaurants, shopping malls, etc.
- Land – can be agricultural or vacant land or an undeveloped property
- Special purpose – properties for public use such as government buildings, churches, schools, libraries, etc.
The Operations of the Real Estate Industry
When people hear the word ‘real estate, what usually comes to mind are brokers and salespeople. But in reality, real estate investing offers different methods for people to earn. Your way of real estate investment may be different from another but all investors rely on the same economic factors for profit. Investors typically choose what strategy to take in the real estate industry based on how they want to earn. Some would prefer to get money quickly while it’s okay for others to take some time to get profit as long as it generates income for the long-term. Check out this article as it dives deeper explaining how real estate investing works.
Getting Started in Real Estate
Real estate can be lucrative and offers an excellent return on your investment if done correctly. Plus, it can help diversify your portfolio to save you from recessions or unfavourable situations. Take a look at some of these ways to invest in real estate to know which type of investment works best for you:
Rental Properties
Purchasing a property to rent it out to tenants is one of the most common types of real estate investment. If you have renovation and management skills, this can be a good business to venture into. Research shows that 36% of U.S. households live in rental properties. Going for residential real estate investments to rent them out to households can meet this strong demand. You can also use the property for vacation rentals and earn as much as $200 per night depending on your property’s location. A commercial real estate is also an option if you prefer business owners as tenants.
Rental properties can give you a good return on your investment through regular income and equity appreciation. Expenses made on these properties can also be tax-deductible. The challenge comes when the property hits vacancies or encounters damages caused by tenants. Also, you will need a substantial amount of capital to cover maintenance costs and vacant months.
Real Estate Investment Trusts (REIT)
A real estate investment trust (REIT) is a firm that manages, finances or owns real estate properties that generate income. The revenue they earn, which is mostly rental income, is then distributed to REIT holders. This investment allows you to pursue real estate without the need to buy, finance, or operate an actual property on your own.
One of this real estate investment’s biggest benefits is the high dividends it offers making it suitable for retirees. If you don’t want to withdraw your dividends, you can just reinvest them to grow further. However, since REITs are traded on the stock market, there is a tendency for real estate prices to fluctuate. The type of REIT you purchase also plays a role in your risk factor. Non-traded REITs, for instance, can be difficult to sell.
House Flipping
This tactic in the world of real estate is when an investor purchases a property at a low price, renovates it and sells it for a profit. Investors usually buy properties with condition issues and work on remodelling them just so they can sell them at an increased value. If you choose this strategy, you should prepare enough capital to oversee necessary repairs.
House flipping is a lucrative business. You can even get faster returns on your investment as the average time of flipping homes takes about four to six months. This kind of investment is also considered safe as it keeps capital at risk only for the least amount of time. Furthermore, it takes away the hassle of you looking for tenants or maintaining a property like in the case of rental properties.
Real Estate Crowdfunding
This type of real estate investment attracts potential investors to fund a real estate deal. Essentially, you and a couple of other investors contribute to the project’s capital of real estate developers. In exchange, you get a share for any profit the deal produces. You can either earn some income distributions or through a sale payout & real estate investment fund.
The good news is that you don’t have to put up a large amount of money just to invest in crowdfunded real estate. Some real estate crowdfunding platforms allow people to invest for as low as $500. You also have the freedom to choose what type of real estate investment you want to place your money. Moreover, you’re likely to get high dividends and this opportunity strengthens your portfolio. However, be ready to pay the annual fees of your managed assets depending on your chosen platform. Also, since crowdfunded real estate is not a liquid investment, this cannot be immediately sold in the market if you need money. This type of investment usually has a holding period of five to seven years.
In Closing
Investing in real estate for beginners can be daunting as there will always be a fear of losing your money. But it all starts with taking one step at a time. Before investing, make sure to educate yourself about the industry. Read more articles like this to make sure you’ll stay on top of your game.
