Real Estate Investing: What Is It And How Do You Get Started?
Ashley Kilroy6-minute read
June 25, 2021
Investors have more choices than ever, but many stick by real estate even with all the options out there. According to a recent Bankrate survey, it just barely sits under the top spot as America’s favorite way to invest.
The survey says that part of the reason is because up-and-coming age groups, like younger millennials, prefer real estate. So, if this is the investment of the future, it may be worth your while to see how it works. Read on to learn the many benefits of real estate investing.
What Is Real Estate Investing?
Real estate investing is a popular vehicle for investors due to its potential for profit. Choosing the right property and assets gives an investor the chance to generate a cash flow. This income can build up over time, too. Investors can also look forward to money-saving opportunities with tax breaks and the security of portfolio diversity. So, they’re cushioned if another asset fails.
There are two branches of real estate investing you will run into: active and passive – the difference between the two lies in whether you directly own the property or not. So, investing in real estate to rent out as a vacation home is different from purchasing a tax lien on a house.
5 Major Types Of Real Estate Investments
You have plenty of options when it comes to investing in real estate. Some allow you to invest directly in a physical property, while others use an indirect approach. Each one suits a different type of investor, so do your research prior to choosing a direction.
When you purchase physical properties with the intent to earn an income from them, either through rent or appreciation, those structures are called an investment property. You can view the income that it makes as the return on your investment. While it’s possible to invest alone in real estate, there are situations where multiple investors may purchase a property together. The number can vary from two and onwards.
There is a wide range of ways for an investor to make a profit off of real property. Some of the most popular methods include flipping houses, rental properties, Airbnb investing, micro flipping, and build-to-rent homes.
Real estate investment trusts, abbreviated as REITs, are companies that make a profit on real estate. They may own and even operate income-producing properties, from residential buildings to hospitals. Investors seek them out because they offer liquidity. There are also different types of REITs for an investor to choose from, such as mortgage REITs and residential REITs.
Mortgage bonds are created when lenders pool mortgages to sell off to real estate investors. Assets secure these bonds, primarily in the form of real estate, although they may include other real assets as well.
Since there are properties backing the bond, investors can depend on this as protection. For example, if you default on your loan, the investor that owns your mortgage can sell the real estate as collateral. This ensures the bondholder that the principal gets paid and they won’t lose money on their investment.
Tax Lien Investing
Tax lien investing works indirectly. Traders purchase tax lien certificates, which the local government creates when the owner of the property fails to pay their property taxes. Buyers then purchase these certificates through an auction. The original owner can pay the tax lien investor back; however, the investor can claim it if the home forecloses.
Mortgage-backed securities (MBS) are a promising option to diversify portfolios. Like REITs, an MBS comprises multiple mortgages that the loan issuers bundled together and then sold to traders on the bond market. It’s an indirect way to invest in the mortgage business since the investor does not need to buy or sell the loans directly.
How To Start Investing In Real Estate
When considering a real estate investment, there are many factors to keep in mind. Knowing who you are as an investor and how the market operates will help you start.
Review The Basics
Investors need to build up a knowledge of how real estate works before they dive into it. That involves a foundation of basic know-how, from profitability to cash flow to financing. Learning the vocabulary and key concepts will then help you when you approach bigger topics such as how to make money in real estate and building a real estate portfolio.
Assess Your Risk Tolerance
Although every investment is different, each one has its unique risks. As an investor, your risk tolerance depends on your personal circumstances. That, in turn, will help you decide which investments to take on. Some are less volatile, like money market accounts, while others are more, like futures.
If you don’t know how to navigate the risk of investing, consider ways to take strategic risks. You may have to reevaluate your emotions or revise your strategy.
However, one of the best ways to mitigate risk is to build a diversified portfolio. Trading in various assets with different risk levels will cushion you if one happens to fail. In addition, building a strong portfolio lays the foundation for understanding your unique overall approach to real estate investment and portfolios of property.
Choose A Market
Your goals and financial situation will determine where you should focus your efforts. But if there is one factor in real estate investing that is unavoidable, it’s location. Every investor needs to focus in on the type of location they want to invest in. Certain areas are highly sought after on the hot real estate markets, making them competitive but promising. They’re typically fast-growing locales with opportunities and entertainment available. So, you may need to research what the best place to invest looks like to you.
Evaluate Potential Properties
You will want to assess the real estate investment risk of your portfolio. Examine the market’s volatility at the time you want to begin investing. Learning when to time your moves with the movement of the market is critical for any wise investor. Furthermore, it’s vital to research the property you will invest in, even if it’s indirectly. Various traits can make a real property less valuable, such as its location or condition.
You can help determine the profitability and volatility of an individual property through tools, such as analytic software and reporting services.
Figure Out Financing
Financing your investment property is just as important as finding one. However, it’s not the same as financing a primary residence. You may have to seek out opportunities specifically geared towards your needs. Some ways you can go about it or start an investment project include:
- Real estate crowdfunding: asking the public to help fund the venture.
- Holding multiple mortgages: taking on more than one mortgage to help finance multiple properties, although some banks which limit this.
- Loans for flipping houses: obtaining a loan from a private lender to specifically fund a house-flip.
- Opportunity zones: investing in a disadvantaged community, which provides tax benefits under the Tax Cuts and Jobs Act of 2017.
Monitor Your Performance
Investors should evaluate their real estate investments as they go. There is a catalog of ratios and calculations you can rely on to get perspective on your progress. Some work better for certain properties, like residential versus commercial, so it’s important to research before using one. Examples of metrics you may need include net operating income (NOI), internal rate of return (IRR), and operating expense ratio (OER).
Should You Invest In Real Estate?
Real estate investment comes with its risks. For example, you may lose money on a property in the process of flipping the structure, getting your real estate investment ready to rent, or selling it. However, you can avoid money loss with research and a well-constructed strategy. That allows you to enjoy the benefits of investing in real estate, such as stable income and potentially high returns.
You can determine whether investing is right for you by examining your personal goals and finances. Individuals who have a low risk tolerance may want to consider investments that have a similarly low volatility. Or, if you don’t want to commit a significant amount of money to one property, you can choose one of the indirect methods. Like this, you can decide the investment based on your needs and wants.
The Bottom Line: Find An Investing Strategy That Fits Your Style
Becoming a real estate investor may feel like a plunge, but it includes a large span of investment options. Anyone can find their niche in it as a result. So, all it takes is some research and a strong investment strategy. You can review your position and goals with a financial professional beforehand to see if it’s the right move, too. Because investing begins with a plan before it starts with money, consider your next step to buying an investment property.
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