The majority of today’s investment can be done with less direct involvement. When you acquire a piece of a company or an index fund, you then sit on it and let it continue growing in value over years or even decades. Even while this is unquestionably a clever and uncomplicated method of investing, it is not the only one that brings us to our discussion; real estate investing for beginners.
Real estate investing is a well-liked choice among aspiring capitalists who are drawn to more practical and hands-on approaches to the investment process than other forms of investing. Although it’s not the simplest way, there is potential for a high learning curve when you first start using it.
However, the payoffs have the potential to be highly profitable, and if “becoming a real estate tycoon” is one of your goals, you have to begin somewhere!
If you are just starting in the world of real estate investment, here are some of the most important things you need to be aware of in real estate investing for beginners.
Why Real Estate Investment?
High Returns — Over the last five years, the industry has consistently outperformed other asset classes, with sectors like serviced offices generating average rental rates of up to 12.3% per year. In Q1’2020, residential and commercial office rental yields increased moderately to 5.2% and 7.8%, respectively, from 5.0% and 7.8% in Q4’2019.
Security of Returns – Unlike conventional investments whose returns vary with market performance, real estate returns have limited fluctuation and, as the value rises over time, they provide a source of secure and consistent returns.
Inflation protection – Over time, inflation erodes the wealth of investors. One of the key goals of investors is to preserve their money against inflation’s negative consequences, particularly for long-term institutional investors such as pension funds. Real estate offers a buffer against inflation since the value of the assets rises at or above the rate of inflation. Over time, rents may be changed in reaction to fluctuations in inflation rates, and,
Leverage to Build Equity and Wealth – Real estate may be used as leverage to purchase different financial instruments/borrowed funds, hence enabling the acquisition of other properties and the accumulation of equity and wealth.
Despite this, there is a significant note of caution here. As the 2008 housing market meltdown exemplified, investing in real estate can be a vast and costly endeavor, and it is never a sure thing.
Particularly when it comes to real estate investing for beginners, it is prudent to exercise care. You do not want to overextend your money before you are prepared and wind up with debt that is difficult to repay.
Different ways to invest in real estate for beginners
If you’ve ever had a landlord, the chances are good that you don’t ever want to be one: It may not seem like the most glamorous job in the world to have to answer calls about giant bugs and overflowing toilets.
Nevertheless, if done correctly, investing in real estate may be beneficial, even if we are currently operating in a climate characterized by rising interest rates. Adding real estate to your current investment portfolio will not only help you diversify your holdings but also provide an extra source of revenue. And many of the most profitable real estate ventures do not need you to cater to the whims of your tenants in any way, shape, or form.
The problem is that a large number of new investors aren’t aware of the best places or strategies for investing in real estate. The following is a list of some of the most effective methods to generate money in real estate, with the level of upkeep increasing from lowest to highest. The following are the five most common approaches to real estate investing for beginners.
1. Buy REITs (real estate investment trusts)
You can invest in real estate without really owning any of the property via REITs. They are corporations that hold commercial real estates such as office buildings, retail spaces, apartment complexes, and hotels. They are sometimes likened to mutual funds because of their similarities. Because of the substantial dividends that they, on average, payout, real estate investment trusts are a popular choice for retirement savings. These investors who don’t want or desire the monthly income may set up their investments so that any dividends they get are automatically reinvested, which helps their investments grow even more.
Are real estate investment trusts (REITs) a sound financial choice? They often are, yet they may also be very variable and intricate. Some are traded on an exchange similar to stocks, while others are not available to the general public for purchase. Because non-traded REITs are difficult to sell and may be difficult to value, the kind of real estate investment trust (REIT) that you buy can be a significant influence in determining the amount of risk that you are willing to take on. When starting, new investors should focus their attention on publicly listed REITs, which may be acquired via various brokerage companies.
You will need a brokerage account to do it. It takes less than fifteen minutes to start a business if you don’t already have one, and many of them don’t need any kind of upfront investment (though the REIT itself will likely have an investment minimum).
Purchasing shares in a fund that is invested in many REITs is another way to increase your exposure to a broader range of real estate assets and diversify your portfolio. You might accomplish this goal by purchasing shares in a real estate exchange-traded fund (ETF) or a mutual fund that invests in various REITs.
2. Use an online real estate investing platform
Platforms for real estate investments bring together real estate developers and investors who are interested in financing real estate projects via either loan or equity. In return for taking on a large degree of risk and paying a fee to the platform, investors expect that they would earn payouts on a monthly or quarterly basis. As is the case with many other types of real estate investments, they are highly speculative and illiquid, meaning that you cannot exchange them as readily as you would a stock.
In real estate investing for beginners, the catch is that you may need initial capital before you can generate revenue. The Securities and Exchange Commission (SEC) defines an accredited investor as a person who has earned income of more than $200,000 ($300,000 with a spouse) in each of the last two years or who has a net worth of at least $1 million, excluding their primary residence.
Many of these platforms are only available to accredited investors. Accredited investors are the only ones who are permitted to use these platforms. Alternatives are available for people who are unable to fulfill that condition, including Fundrise and RealtyMogul.
3. Think about investing in rental properties
To begin, let’s examine the tried-and-true strategy of purchasing real estate and then leasing it out to renters. You have the option of purchasing a variety of homes, including single-family homes, multi-family homes, commercial properties, and even warehouses. After that, you will be able to rent it out to renters. You have the option of acting as your landlady if you would want to get some practical experience.
If, on the other hand, you want to build a passive income stream, you may employ a property management company to handle the day-to-day operations on your behalf so that you don’t have to worry about them. It will hurt your revenues, but it will reduce the amount of time and anxiety you experience.
Many people are drawn to the concept of “house hacking,” which involves owning a house, duplex, or other multifamily unit, living in one unit while renting out the other(s).
Because of this, you may be able to pay off your mortgage early or even cover all of your living expenses, making it so that you are effectively living there rent-free.
How one may profit financially from owning rental property
charging your renters a rent that is more than what it costs you to run your business
Asset appreciation (selling for more than you paid when the property has increased in value)