I was recently asked about real estate investing. What are the investment types, the pros/cons, and if it made financial sense. So, let’s go over some of these items taken from https://www.clevergirlfinance.com/blog/real-estate-investing-for-beginners/ by Katie Braun, Feb. 2022.
Here are four of the main methods of real estate investing:
Owning Rental Property
You can buy anything from a single-family house to a multi-family dwelling to a business property or a warehouse. Then, you can rent it to tenants. If you’d like a hands-on experience, you can be the landlady yourself.
If your goal is to generate passive income instead, then you can hire a property management firm to take care of the day-to-day logistics on your behalf. It will cut into your profits, but also save you time and stress.
How you make money owning rental property
- Charging your tenants more in rent than you’re paying in expenses
- Asset appreciation (selling for more than you paid when the property has increased in value)
Pros of owning rental property
- Building equity in a long-term asset that can gain value over time
- Generating reliable cash flow since your tenants will usually pay monthly
- Having the flexibility to sell or use the property for something else if you decide
Cons of owning rental property
- Assuming risk—the property may not rent quickly, there may be damages, or the property may lose value
- Handling logistics of tenant management
- You’re responsible for expenses like repairs, insurance, property taxes
- Can be a long and costly process to sell
2. Buying REITS (Real Estate Investment Trusts)
These are companies that usually own and sometimes operate a variety of real estate properties such as hospitals, warehouses, shopping centers, residential buildings, and more.
Many REITs are publicly traded on stock exchanges, which is how they become available to individual investors like you. You can choose from several different types of REITs and buy shares of any you choose. Single shares tend to cost below $100 (I’ve even seen some below $5), making them very accessible.
How you make money with REITs
- Being paid dividends on shares you own, usually quarterly, from the income generated by the REIT’s holdings
- Selling your shares at a higher price than you paid
Pros of REITs
- Ease of access—you can buy shares of a REIT on just about any investment platform
- Historically good performance with high returns
- Diversification—REITs typically own a lot of different properties, and your investment gets you a fractional share of the income from all of them
- No work and low risk since you’re not personally responsible for a property’s success or failure
- Money is easily accessible to cash out. Just like with regular stocks, you can sell your shares as long as there are buyers
Cons of REITs
- Not hands-on, so it might not feel like truly being involved in real estate
- The experience isn’t different than investing in stocks
- You don’t have a say in a REIT’s specific holdings
- No investment is totally risk-free
3. Flipping Properties
Flippers buy houses or properties that need renovations, spend time fixing them up to improve the value, then turn around and put them on the market at a higher price. An ideal “flip” is a relatively short-term situation since the intention is to quickly sell and move on to the next.
How you make money flipping houses
- There’s just one way in this case: selling the house at a profit
Pros of flipping houses
- Extremely hands-on, a pro for those who enjoy that aspect
- High-profit potential—the average gross profit is about $65,000, although that doesn’t factor in expenses, which can vary wildly
- Good for those who already have relevant experience or connections in construction, painting, plumbing, realty, etc.
- Can be a shorter-term commitment of a year or less (but this isn’t a guarantee)
Cons of flipping houses
- Lots of financial risks—the property might be more expensive to fix than anticipated and turn into a money pit for you
- If it’s not a seller’s market, it could take more time to sell than you’d like and cost you even more in taxes and utilities
- Requires lots of work and time to renovate the house and prepare it for sale
- Money is illiquid until sold
- Not a good idea if you don’t have a lot of relevant skills or connections to guarantee that work will be done quickly, affordably, and well
4. Real Estate Crowdfunding
There are two basic types of real estate crowdfunding: debt or equity investments. It sounds strange to invest in debt, but it basically means that you’re investing in a mortgage loan on a property, and receiving a set share of the interest as the loan is paid back.
Equity investing means you’re investing directly in a property and receiving a share of ownership, in which case you’ll usually receive a part of whatever income or profits the property generates.
Investing in a crowdfunded project is a level up from REITs for several reasons. First, most existing platforms require minimum investments of $1000-$5000.
Second, you’ll be investing in single projects that you choose (rather than a diversified collection), which makes an individual property’s success or failure a little more high-stakes.
How you make money with real estate crowdfunding
- Regular interest or income dividends from your share of the property, usually paid quarterly
- Redeeming shares (essentially “cashing out”) when allowed after a certain amount of time
- A portion of the profits when the property is sold if you’ve kept your share
Pros of crowdfunding
- Gives you the ability to participate in big real estate projects with just a few thousand dollars
- You get to evaluate the details of each project and choose exactly what you invest in
- It can be very educational to familiarize yourself with loan and real estate terminology so you can understand each deal’s prospectus. This knowledge can benefit you in future ventures
Cons of crowdfunding
- It’s a new and still relatively untested space, without decades of statistics to look at
- Risky because your investment’s success or failure is attached to a single property
- Can be a 5+ year commitment; you can’t always cash out when you’d like
What You Need to Know
- Before anything else, brutally evaluate your current financial situation to decide if you’re ready. Ideally, you should have little to no debt and a lot of liquid savings to use for a down payment. You also need a good credit score to qualify for good loan rates(aka real estate leverage), and the time to dedicate to the work involved.
- Thoroughly research the areas and market trends in the locations you’re scouting. Are houses selling well or going stagnant on the market? Is it an area that people would want to live in?
- Start by looking for a smaller, safer investment to get your feet wet; don’t jump into an expensive property or a major fixer-upper right away.
- Have someone experienced examine the property with you to assess it for damage.
- If the goal is renting, decide whether you want to manage the property yourself or outsource it.
- If the goal is flipping, take inventory of your own skills that could be useful, and who you know that might be able to help for a quick turnaround.
- Evaluate all associated costs before buying, not just the purchase price. This means closing costs, property taxes, insurance, utilities, repair or renovation estimates, and more. It’s okay to ask contractors for quotes before you’ve committed to a purchase. Ultimately, the goal is to go in with your eyes wide open.
The Millionaire Real Estate Investor by Gary Keller
The Book on Rental Property Investing by Brandon Turner
What Every Real Estate Investor Needs To Know About Cash Flow by Frank Gallinelli
The Flipping Blueprint by Luke Weber
The Book on Tax Strategies for the Savvy Real Estate Investor by Amanda Han and Matt MacFarland
I’d love to help you find investment property. Contact Gina Newell, eXp Realty; Direct: 608-345-9396; email: firstname.lastname@example.org