Real estate investing is one of the oldest forms of investment. And a lucrative one at that. The average annual return for real estate investments in 2019 was an impressive 10.6 percent. This is great because it’s higher than the average for all investments at 8.6 percent. But how does it work? Read on to learn the five main ways of real estate investing.
If you’re interested in real estate investing and hope to get involved, you need to understand that there are different investment strategies and methods you can use. Let’s take a look.
1. Buy a Property and Rent It Out
The simplest way to invest in real estate is to buy an income property that you plan to rent out. Rental properties can be an excellent investment when bought at the right price and in the right location.
First, it gives you a steady monthly income, which can be helpful in planning your budget. Second, you’ll likely be able to claim tax breaks by deducting certain expenses related to your rental property. These are things like property taxes, mortgage interest, and repairs, from your taxable income.
Third, a well-maintained rental property may appreciate in value, providing you with additional wealth.
However, owners need to pay attention to possible drawbacks. You have to manage your tenants and deal with any problems that may arise. The property’s value may also actually go down depending on factors such as the area’s economic situation. You also need to decide whether to rent out the property as a long-term lease or through a short-term rental arrangement such as Airbnb.
2. Invest in a Real Estate Investment Trust (REIT)
A REIT is a company that buys and manages income-producing diverse property portfolios. These can include shopping centers, apartments, hotels, condominiums, and office buildings.
REITs pool the capital of many investors to purchase large amounts of property. As shareholders, investors earn a portion of the income produced by the REIT properties.
REITs issue a specific number of shares to the public and trade on major stock exchanges, like other public companies. One share usually represents equal proportionate ownership in the underlying group of properties owned by the REIT. The value of the REIT’s share price is primarily based upon how successfully the company invests its funds and earns income.
To participate, you need to contribute to the money or investment pool and pay management fees. The biggest advantage is that AREIT allows you to invest in the real estate market without taking on all of the responsibility that comes with actually buying a property. You can also earn a share of the property’s capital appreciation and income.
3. Buy, Fix, and Flip Houses
This is a strategy that’s been around for decades. House flipping entails buying a house at one price, fixing it up to increase its value, then reselling it for more money.
In most cases, flippers buy cheap houses or properties that require little renovation and sell them quickly. A successful flip requires strong market knowledge and the ability to make smart deals. When done correctly, however, house flipping can be profitable and is often more lucrative than long-term rental investments.
House flippers make money by taking the renovation and closing costs from the home sale profits. Flipping requires less time commitment than some other real estate investment strategies. But it may require more financial resources to get started.
Keep in mind, though, the real estate market’s volatility and the limited span of time when properties are in demand can make this a difficult strategy to pull off. It also requires a substantial amount of money since buying, fixing up, and reselling involve multiple transactions that often require cash payments.
4. Invest in Real Estate Crowdfunding
Crowdfunding is a way of raising money by getting thousands of people to contribute small amounts. With crowdfunding, investors pool their resources online to fund projects, new business ventures, or capital acquisitions.
Real estate crowdfunding typically involves partnerships between real estate developers and accredited investors who are looking for high-risk/high-reward investments they can’t find elsewhere.
Crowdfunding allows small and medium investors to speculate and invest collectively in real estate projects that would otherwise be inaccessible or cost-prohibitive due to high land prices, development costs, and other expenses.
This method of investing is becoming more common as free online platforms such as Fundrise become popular. These platforms make it easier for investors to find and fund the next lucrative project.
5. Buy Investment Property with a Partner
Buying investment property with a partner can help you share the work and the financial burden.
Even if you haven’t set up any sort of formal partnership, you can still gain some benefits from having someone by your side. For example, two people are more likely to have the time, energy, and motivation to flip properties than one person alone.
However, if you haven’t decided to work with someone beforehand, things might get dicey if something goes wrong. If you don’t feel that your interests are aligned or that your partner is bringing more than their fair share of the labor and financial commitment, then there’s a good chance it will be harder to succeed at this type of real estate investment.
Before you sign any paperwork, do a test run. This way you and your partner can decide if it’s a good fit. You might look into joining forces with a friend or family member, particularly one who shares the same values and goals.
No matter which real estate investment strategy you go with, it’s important to remember that real estate is a long-term business. You should plan to hold onto your investments for at least three years so you can reap financial benefits without being taxed heavily.