Our culture is obsessed with investing in real estate. Shows like Million Dollar Listing, Fixer Upper, and even the curiously named Zombie House Flipper draw consistently positive ratings. This obsession started with the housing boom in the 1990s, survived the ’08 crash, and continues to this day in TV shows, magazines, books, and a whole host of media dedicated exclusively to the pursuit of wealth through real estate investing.
A leading source of wealth for millions of Americans is real estate.
Despite this massive media interest, you probably still have some questions about how exactly you can start investing in real estate. This article describes how you can start investing in real estate, starting tomorrow.
You can invest in real estate and do all of the work yourself: Buying, managing, renting, maintaining, selling. Our you can outsource the work to professionals, and you are strictly the investor who reaps most of the gains.
How to Invest Directly in Real Estate
Purchasing a property is the best way to start taking an active role in building your real estate portfolio. However, purchasing an investment property is just the start of a process- to generate a return on your investment you must take additional steps: Updating the property, renting it, providing maintenance services, and eventually selling it when you can reap a substantial profit.
Rental Properties
You can purchase a single-family home, condo, or multifamily building and rent space to tenants. Many lenders offer real estate investment loans and mortgages which you can use to obtain rental properties with a limited amount of cash down, typically somewhere between 10 and 20 percent for an investment property. You can take an active role by managing the property on your own or hire a management company to oversee the asset.
Fix and Flips
Alternatively, you can purchase a home that is in less than pristine condition, repair it, and sell or “flip” it to another investor or anyone in the market for a new home. Fix and Flip projects are not for beginners, and having some construction experience, or the ability to oversee a renovation project is highly recommended before starting a fix and flip. You can also rent the property out to a tenant at a higher market rate after you complete renovations.
Vacation Properties
With the rise of Airbnb, VRBO, and other homestay platforms, it has never been easier to get into vacation rentals. You can purchase a vacation home in a desirable area, like a beach or near a national forest, and rent out rooms to tourists. Your marketing costs will likely be lower, but if you choose to use a digital platform like Airbnb they will take a cut of the profits. Vacation homes investments require significant capital investments, as they tend to be nicer than standard homes- after all, your customers will all be on vacation!
Commercial/Retail/Office Properties
If the residential sphere is of no interest, you can jump into the commercial real estate arena. Commercial real estate investors purchase office buildings, restaurant buildings, retail facilities, and other business-oriented real estate, and rent the space out to business tenants. Your ROI is typically higher with a commercial asset, but there can also be more risk than the residential sector.
Commercial leases tend to be longer, and there are many ways to structure a tenancy that are advantageous for landlords. Many commercial tenants use single, double, or triple net leases where some, or the majority of property maintenance and expenses are covered by the tenant- which can be fantastic if you want a hands-off management experience and a long-term, stable tenant.
Interested in learning more about commercial real estate investing? Contact Light Tower today!
How to Indirectly Invest in Real Estate
If you are trying to develop a diversified portfolio of real estate properties, sometimes purchasing a single large asset is not the best idea. Indirect real estate investments allow you to benefit from the cash flow and appreciation of real estate without direct ownership.
Real Estate Investment Trusts
REITs are companies that typically own or finance income-producing real estate as a primary revenue source. There are real estate investment trusts for both the commercial and residential RE sectors. REITs are either debt (mortgage) or equity-based, with the vast majority being the latter. Most REITs payout in the form of annual dividends, with the vast majority of returns coming from this source.
Real Estate Mutual Funds
Real estate mutual funds are a pool of real estate-related investments, which are controlled by an investment manager. Mutual funds enable investors to diversify their portfolio, and to add real estate without actually purchasing property or land. Real estate mutual funds have different objectives – some are slanted towards generating income, while others aim for growth. They are purpose-built to reduce risk, but like any investment, they are subject to the vagaries of market forces, and any shockwaves in the real estate sector will eventually affect real estate mutual funds.
Real Estate ETFs
An ETF, or Exchange Traded Fund is a basket of securities that track an underlying index. In the case of Real Estate ETFs, they track various segments of the market. Some examples include the home construction industry, mortgage companies, multi-family ownership groups, and more. ETFs tend to be safer than directly purchasing real estate, but the average ROI for real estate ETFs is lower.
Investing With Professional Guidance
Let’s face it- all investment markets are complex and require some specialized expertise to be successful. While you may be an expert in what you do, whether that is helping patients as a physician, or working as a software developer- your primary expertise is probably not in the real estate market – after all, you are reading a guide on how to invest in the real estate market. You may be taking unnecessary risk, unless you have the time, energy, and drive to immerse yourself in the world of real estate investing.
There is an alternative. Instead of dedicating your valuable time and energy to learning the ins and outs of the multi-family apartment market in a particular city or reading a white paper about mortgage security ratings – why not work with professionals who have dedicated their careers to producing wealth for clients by investing in real estate?
The Benefit of a Trusted Advisor
A knowledgeable intermediary can help you maximize your returns, while also handling the heavy lifting when it comes to finding market opportunities in the real estate space. They can also help you avoid costly mistakes and poor investments that impact investors who are new to the real estate investment marketplace.
If you are on the fence about investing in real estate, or you are just getting started, it pays to speak to a real estate professional who can do the work for you.