Real Estate Investing: A Simple Breakdown of Each Method

The financial freedom that comes with real estate investing can be tremendous when done right. Real estate investing can offer many benefits, including the potential for high returns, a stable income stream, and asset appreciation. It can also be a long-term investment that allows you to diversify your existing portfolio and provide you with financial security in retirement.

The problem is that most new investors don’t know how or where to invest in real estate. There are so many different types of real estate investments, including residential properties, commercial properties, land, and many more, that it can be overwhelming for a beginner.

So, how do you get started in real estate investing? This article will explain exactly how you can start real estate investing in 2022.

What Are The Benefits Of Investing In Real Estate

Did you know that over Ninety percent of all millionaires have become so through owning real estate? That may sound crazy, but it’s true. Real estate investing offers many benefits that other investments simply can’t match.

Some of the most notable benefits include:

  1. A tangible asset: You can see and touch your investment, unlike stocks which are just numbers on a screen.
  2. Passive cash flow: With real estate, you can invest in properties that generate a consistent income stream each month. This can help diversify your existing investment portfolio and provide financial security in retirement.
  3. Investment opportunities: Another great benefit of real estate investing is the sheer number of investment options available. You can invest in residential properties, commercial properties, land, and more. Plus, many investors invest in real estate through a variety of different strategies, including flipping properties, renting out properties for income, and more.
  4. Leverage: You can control property worth much more than the amount of money you invest.
  5. Principal pay down: As you invest in real estate, you slowly build equity in your properties. This can help increase your net worth over time and give you more financial security.
  6. Steady income: Real estate investment properties can provide a steady stream of rental income that you can rely on to meet your financial obligations.
  7. Appreciation: Property values usually always increase as long as you invest in the right location. This can help you generate a large return on your investment when you sell.
  8. Tax advantages: The IRS allows real estate investors many tax breaks, such as the ability to write off depreciation, mortgage interest, depreciation, and capital gains exclusions. All of this helps reduce your tax burden.
  9. Cash out refinance: You can access the equity in your investment property through a cash out refinance and use that money for other investments.

Different Types of Real Estate Investments

Now that you know some of the benefits of investing in real estate let’s look at the different types of investments you can make and the pros and cons of each approach.

Residential Properties

The most common type of real estate investment is a residential property, such as a single-family home, condominium, or townhouse. These properties are usually easier to finance and generate income through renting. The downpayment needed for these properties is anywhere from 3.5% to 20% depending on the type of loan you get.

An FHA loan will require a 3.5% downpayment, while a conventional loan will require at least 5%. However, suppose you’re looking to invest in a rental property. In that case, you’ll likely need to put down 20% to avoid paying Private Mortgage Insurance.

Pros:

  • Residents usually take better care of the property since it is their home.
  • You can invest in properties located in desirable neighborhoods where values appreciate.
  • You have more control over your tenants and the condition of your investment.

Cons:

  • You are responsible for all repairs and maintenance on the property.
  • You are also responsible for finding and screening tenants.
  • The income you generate is dependent on the tenant paying their rent on time.

Commercial Properties

Commercial properties are any properties used for business purposes, such as office buildings, retail centers, industrial warehouses, etc. These types of properties can be more challenging to invest in due to their size and complexity. Still, they often generate significant returns with proper management.

Pros:

  • Commercial properties often have longer leases than residential properties, providing more stability.
  • Tenants usually take better care of the property since it is their place of business.
  • You can charge higher rents for commercial properties since businesses are willing to pay more for the extra space and amenities.

Cons:

  • You are responsible for all repairs and maintenance on the property.
  • You may have to invest more time finding tenants if you are not using a leasing agent.
  • Commercial properties can be located in less desirable or expensive areas, which can negatively impact your rental income.

Land

Investing in land is a great way to diversify your portfolio and invest for the long term. Land is generally considered a safer investment than real estate, but it can take longer to generate returns.

Pros:

  • Land is a very resilient asset that can be counted on to retain its value.
  • You can invest in land as a long-term investment or invest and hold it until a future date when the demand for development increases.
  • Land usually appreciates over time, giving you an advantageous return on your initial investment.

Cons:

  • Land does not generate income and may require more maintenance than other types of real estate.
  • Land can be difficult to value and invest in since it is often sold based on future potential or use.

REITs

A REIT, or real estate investment trust, is a company that owns and operates income-producing real estate. REITs are required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends. This makes them a great way to invest in real estate while also getting access to tax breaks and other benefits.

Pros:

  • REITs offer a great way to invest in real estate without putting down a large amount of money.
  • REITs are required by law to distribute most of their income, which means you can receive regular dividend payments.
  • REITs offer diversification and can be less risky than other types of investments.

Cons:

  • REITs are often traded on the stock market, which means they can be subject to market fluctuations and other risks associated with investing in stocks.
  • REITs may also invest in mortgages or other types of loans, which means you could potentially lose your entire investment if the REIT defaults on their debt.

Join Crowdfunding Platforms

A crowdfunding platform is a passive investment similar to REITs. It is a popular option for small real estate investors. Instead of investing through corporations and trust, investors pool together money and look for interested real estate sponsors or developers.

Unlike REITs, you cannot sell these investments quickly. Your ability to sell them depends on some real estate market variables. However, by pooling together money with other investors, you can achieve handsome dividends on properties that you wouldn’t usually have access to as an individual.

Just keep in mind that it might be some time before an investor can start getting dividends from crowdfunded properties. That’s why you should commit to a long-term goal of at least a few years if you choose to go this route.

Pros:

  • Crowdfunding platforms offer access to a wide range of real estate investments, from single-family homes to commercial properties and land.
  • Investors can invest small amounts of money and still receive returns that are higher than traditional savings accounts or bonds.
  • Unlike REITs, crowdfunding doesn’t require you to invest in a specific property or project.

Cons:

  • Crowdfunding platforms may not invest all of the money that investors put into them, which can result in lower returns or less predictable income.
  • Investing in crowdfunding platforms is generally riskier than other real estate investments since you have less control over what happens to your money.

Invest in Vocational and Short-Term Rentals

Vacation rentals, also known as short-term rentals, are a type of real estate investment that allows you to rent out your property for short periods of time. This can be a great way to generate income from your real estate investments while also getting the opportunity to use the property yourself.

Pros:

  • Vacational rentals can be a great way to generate income from your real estate investments.
  • You can often deduct expenses related to the property, such as mortgage interest, property taxes, and maintenance costs.
  • The rental income from vacation rentals is often more predictable than other types of real estate investments.

Cons:

  • Vacational rentals may require more work than other types of real estate investments, such as finding and screening tenants, managing the property, and dealing with maintenance issues.
  • Vacational rentals may be subject to zoning regulations and other restrictions in some areas.
  • The income from vacation rentals can be seasonal, which means you may have periods of time when the property is vacant.

Join Real Estate Investment Groups

Real estate investment groups are a type of syndicate that allows you to invest in real estate with other investors. These groups are usually managed by a professional who finds and controls the properties on behalf of the group.

Pros:

  • Real estate investment groups offer diversification and can help mitigate some of the risks associated with investing in real estate.
  • You can often invest with a small amount of money, making real estate investing more accessible.
  • The professional management of real estate investment groups can help to reduce the amount of work required to invest in real estate.

Cons:

  • Real estate investment groups may charge fees, which can eat into your profits.
  • The properties in real estate investment groups may be located in different areas, making it difficult to keep track of your investments.
  • You will have less control over the property than if you were to invest directly.

Purchasing and Flipping A Property

Purchasing a property and then flipping it, or selling it for a profit, is a type of real estate investment that can be very lucrative. However, it’s essential to understand the risks and opportunities involved before taking on this type of investment.

Pros:

  • You have the potential to make a significant profit if you purchase a property and sell it for more than you paid.
  • You have complete control over the property and can make all of the decisions about how to improve it.
  • You can often deduct expenses related to the property, such as mortgage interest, property taxes, and repair costs.

Cons:

  • It can be challenging learning how to find a rental property worth purchasing and then flipping without extensive research.
  • There is a risk of losing money on the property if you are unable to sell it for more than you paid.
  • Another con is that it can take a lot of time and effort to find a property, purchase it, and then make the necessary repairs before selling it.

Real Estate Investing For Beginners: Platforms To Get Started

If you’re interested in getting started with real estate investing but don’t know where to start, there are a few platforms that can help.

  • Fundrise is a low-cost real estate crowdfunding platform that allows you to invest in private real estate for as low as $1,000.
  • Realty Mogul is a real estate crowdfunding platform that allows you to invest in various properties, including office buildings, retail centers, etc. The minimum investment varies by the fund, but they are all at least $5,000.
  • Streitwise offers real estate investment trusts (REITs) to investors of all financial backgrounds to own commercial property. Boasting an impressive track record of 20 straight quarters of 8% annualized returns, you can get started on the platform with a minimum investment of $5,000.
  • Robuilt offers a mentorship program on how to build an Airbnb empire through his Host Camp platform.

Key Takeaways

There are many reasons why you should invest in real estate. For starters, real estate investing helps in achieving equity. For example, when you pay your mortgage, most of that money goes toward paying down the property’s value. However, you’re simply paying the landlord’s mortgage when you’re renting.

Also, when you invest in rental properties, the income you get from the rental will help you pay the mortgage. You can start investing in maintenance, repairs, and other properties with your profit.

Real estate also offers you leverage since you can acquire real estate at a fraction of the full cost. By paying a portion of the total price, you can still enjoy all the benefits of owning the property like rental income, property appreciation, build-up equity, and tax write-offs.

Suppose you don’t want to go through the process of actually acquiring a property. In that case, you can invest in real estate through crowdfunding platforms like Fundrise and Realty Mogul for as low as a few thousand dollars.

There is no silver bullet strategy. None of these strategies are without risk. It takes time, ambition, and flexibility for any of these to work correctly. However, if you’re interested in getting started with real estate investing, hopefully, this article has given you a better understanding of some of the different options available to you.

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