Passive income. Equity. Monthly rents. Tax breaks. These are some of the benefits that come with investing in real estate.
But while investing in apartment buildings, commercial properties and single-family homes can bring extra income each month and big paydays, it also comes with risk. The goal is to invest in properties that increase in value over time. Real estate investments, though – like all investments – don’t always pay off. Sometimes the real estate you invest in loses value over time.
If you understand the risks and are willing to do the research, investing in real estate could provide you with a solid income boost. Here’s a look at what real estate investing entails and the benefits and possible pitfalls that come with it.
What Is Real Estate Investing?
You have plenty of options when it comes to investing in real estate. You can purchase a single-family home, rent it out and collect monthly rent checks while waiting for its value to rise high enough to generate a big profit when you sell. Or you can purchase a small strip mall and collect monthly rents from hair salons, pizza restaurants, mattress stores and other businesses.
You can go bigger and invest in an apartment building with dozens of units, collecting a steady stream of rent checks from your tenants each month.
The key is to do your research to find out which type of real estate investing is the best fit.
REITs
Buying into REITs , short for real estate investment trusts, is one of the easiest ways to invest in real estate. Why? With a REIT, you invest in real estate without having to worry about maintaining or managing any physical buildings.
REITs are companies that own real estate, anything from retail properties to apartment buildings, hotels, offices or warehouses. When you buy into a REIT, you purchase a share of these properties. It's a bit like investing in a mutual fund, only instead of stocks, a REIT deals with real estate.
You can earn money from a REIT in two ways: First, REITs make regular dividend payments to investors. Secondly, if the value of the REIT increases, you can sell your investment for a profit.
You can invest in a REIT just as you would invest in a stock: REITs are listed on the major stock exchanges. The National Association of Real Estate Investment Trusts says that about 145 million U.S. residents are invested in REITs.
Residential Properties
Sinking your money into investment properties can also prove lucrative, though it does require some work. First you buy a residential property, either a single-family or multifamily building, and purchase it, usually financing this purchase with a mortgage loan.
You can then either live in the property or rent it out as you wait for it to appreciate in value. If you rent out the property, you might be able to use these monthly checks to cover all or part of your monthly mortgage payment. Once the property has appreciated enough in value, you can sell it for a big payday.
The challenge, of course, is that the property you purchase isn’t guaranteed to increase in value. You can lower the odds of a bad investment by researching local neighborhoods to find those in which home values tend to rise. You should also work with real estate agents and other professionals who can you show historic appreciation numbers for the communities you are targeting.
You will have to be mindful of location. A home on a busy street might be more affordable but might not appreciate as quickly as one located on a quiet side street. An apartment building located next to public transportation might see a quicker jump in value than one located miles away from the nearest commuter train station.
If you don’t want to take phone calls late at night from tenants complaining about furnaces that aren’t working or roofs that are leaking, you’ll have to pay a property management service. These services handle the daily work of maintaining and operating properties. They’ll also send repair technicians to properties that need emergency maintenance.
Commercial Properties
You can earn money by investing in commercial properties much the same way you do by investing in residential real estate: First you buy your property. Then you charge monthly rents to tenants. If the property’s value rises, you can sell the commercial space for a hefty profit.
There are many types of commercial properties in which you can invest. You can purchase an office building and charge companies to rent space in that building. You can purchase strip centers or other retail properties and charge monthly rent to business owners. You can even purchase a warehouse and charge rent to manufacturing companies or retailers who need to store their products.
The risks are the same as they are when investing in residential real estate: There is never a guarantee that your commercial properties will increase in value, which is why researching the properties and the communities in which they sit is so important. You might also struggle to find enough tenants to fill that office building or retail center you purchased.
House Flipping
Investors who want to make money quickly often turn to house flipping. This is when you purchase a home for a lower price, renovate it quickly and then sell it for a fast profit. The key, of course, is to buy the right home. You’re not interested in monthly rents when flipping a home. Instead, you need to purchase a home for the lowest possible price if you want to make a good profit when selling.
Again, research is key. You want to find a home in an attractive neighborhood, one that attracts plenty of buyers. And you need to make sure the repairs required for the home aren’t so costly that they’ll swallow any potential profit.
If you’re handy enough to handle renovations on your own, you’ll greatly improve your chances of making solid profits through house flipping.
10 Reasons To Invest In Real Estate
While investing in real estate does come with potential pitfalls and does require research, it can also bring plenty of cash to your bank account. Here are some of the most important reasons to invest in real estate. (Just remember: Appreciation and cash flow aren’t guaranteed. You must research properties and neighborhoods to increase your odds of generating a profit.)
1. Steady Cash Flow
Owning real estate is a way to boost your monthly income. Whether you invest in commercial real estate or residential, you can rent out your space to tenants. You’ll then receive monthly income in the form of rent checks. Just be careful: You’ll need to research the payment histories of your tenants if you want to reduce the chance that these tenants will one day stop paying their rent.
2. Great Returns
If the real estate you own increases in value over time, you can sell it for a solid profit. Remember, though: Appreciation isn’t guaranteed. You’ll need to invest in the right property to see those big returns.
3. Long-Term Security
Real estate is a long-term investment, meaning you can hold it for several years as you wait for it to appreciate. At the same time, if you rent out your real estate you can earn monthly income while you wait for your property’s value to rise.
4. Tax Advantages
Investing in real estate comes with tax benefits. You can deduct several expenses associated with owning an investment property, including your property taxes, mortgage interest, property management fees, property insurance, the costs of ongoing maintenance, the cost of repairs and the money you pay to market your property to potential renters. If you sell your property for more than you paid for it, the gain you realized won't be taxed as income. Instead, it will be taxed as capital gains, which typically come with lower tax rates than does income. If you invest in opportunity zones – neighborhoods that are in need of investment – you'll pay even less in capital gains.
5. Diversification
Adding real estate to your investments boosts your diversification, which can protect you in times of economic turmoil. Say certain stocks are suffering because of an economic downturn. The investment properties in your portfolio might still be increasing in value, protecting you from the losses your other investments are taking.
6. Passive Income
Investment properties bring much-desired passive income, that which you don’t have to work for every day. Say you charge rent on a single-family or multifamily property. The rent checks that come in each month are an example of passive income.
7. Ability To Leverage Funds
When investing in real estate you probably can’t afford to buy properties in full. After all, that single-family home you plan to rent might cost $200,000 or more. That’s where leverage comes in. Leverage in real estate means you’re using other people’s money to purchase properties. In this case, you’ll take out loans from banks, mortgage lenders or credit unions and pay them back over time. This allows you to add to your real estate holdings without spending the full amount of money you’d need to buy them on your own.
8. Protection Against Inflation
Real estate investments are considered protection against inflation. When the prices of goods and services are rising, home values and rents typically increase, too. Investment properties, then, can provide you with rising monthly income and appreciation to help protect you financially when the costs of everything else is going up, too.
9. Chance To Build Capital
The big goal of real estate investing is to increase your cash, otherwise known as building capital. When you sell a property that has risen in value, you’ll boost your capital. The key, of course, is to invest in the right properties that will rise in value.
10. Fulfillment And Control
Owning investment properties comes with other benefits that aren’t financial. When you own investment real estate, you are your own boss, which is fulfilling to many investors. You can also make a difference in your community, providing homes for renters or bringing businesses to commercial properties that will provide much-needed services to their communities.
How Real Estate Compares To Other Investments
All investments come with pros and cons. Here’s a look at how real estate compares to other popular investment types.
Real Estate Vs. Stocks
Real estate is less volatile than stocks, whose value can rise or fall more quickly. But real estate is less liquid than stocks: It’s easier to sell your stocks and gain access to your money than it is your real estate investments.
Real Estate Vs. Bonds
Bonds are one of the safer investments. You usually won’t lose money by investing in them. Their gains tend to be smaller, though. You have the chance to make higher gains by investing in real estate, though your risk of losing money is also higher.
Real Estate Vs. CDs
Investing in CDs is similar to investing in bonds: These are among the safest of investments, and it’s rare to lose money when investing in them. But like bonds, your gains are generally lower than what you might earn when you invest in real estate.
Real Estate Vs. Mutual Funds
Mutual funds are a long-term investment. Generally, if you hold onto your mutual fund investments long enough, they’ll increase in value, though appreciation is not guaranteed. Like with stocks, it’s easier to invest in mutual funds than in real estate. Real estate investments, though, can provide a hedge against the economic downturns that can cause mutual fund investments to fall in value.
The Challenges Of Investing In Real Estate
While investing in real estate brings the potential for a large payday, it also comes with some challenges and risks.
Liquidity
Real estate is not a liquid investment. Once you invest your money in a single-family home, apartment or commercial property, you’ll have to sell that property – or the portion of it that you own – to get your money. Other investments, such as stocks and bonds, are far more liquid. It’s easy to sell stocks to get access to your money.
Starting Capital
You’ll also need more money to get started in real estate investing. Homes and commercial properties aren’t cheap. You might need to apply for mortgage loans to purchase these properties. Investing in mutual funds, CDs and stocks typically requires far less starting capital.
Time
The profits usually don’t come quickly with real estate investments. Yes, you might charge rent to commercial or residential tenants. But often these payments only cover the cost of your mortgage payments or the other costs associated with maintaining an investment property. The big profits come when you sell the property for more than what you paid for it. To hit that goal, though, you usually must wait several years for your properties to increase in value.
Location
Location is key when investing in real estate. Your property probably won’t increase in value if it isn’t located in a community where real estate prices are on the rise. This means you’ll have to do plenty of research to find the right investment property in the right location.
Take Advantage Of Real Estate Investing
Now that you know the ups and downs of real estate investing, are you ready to buy your first investment property? Investing in commercial properties, multifamily buildings or single-family homes can bring big returns if you do the necessary research. Whether you are still wondering if you should buy a house, wondering how to buy a house or you are ready to apply and buy, investing in real estate could boost your income.
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