How to Get Started in Real Estate Investing
Whether you’re looking to go all-in and become a landlord or dabble from a distance through a REIT, real estate investing offers many advantages over stocks and bonds, such as only having to pay a portion of the investment up front in the form of the down payment. And given the long-term stability of a real estate investment, it’s often a lucrative strategy for your financial future.
But where to start? Investopedia breaks down real estate investing into four paths to choose from. Consider the following and see which one might be right for you:
1. Becoming a Landlord. If you’re looking to buy a property to rent out for ongoing rental income, you’ll need substantial funds up front in order to cover regular maintenance needs, as well as mortgage payments for if/when you don’t have a tenant. The good news, of course, is that once the mortgage is paid off, your rental property is a pure source of income – not to mention the fact that the property is likely to appreciate over time. Fair warning, however, unless you intend to hire a property manager, make sure you have the skills, desire and time to take on repairs and requests from your renters.
2. Real Estate Investment Groups. Real estate investment groups are like small mutual funds that invest in rental properties. Typically, a company buys or builds apartments or condos and allows investors to purchase them through the company, thereby, joining the group. As the investor, you can own one or multiple units, and the lease is usually in your name. The company operating the group, however, is in charge of managing the units, maintenance, finding tenants, etc., and takes a portion of the monthly rent for these services. A safety net is built in, as all units pool a portion of the rent to cover a unit should it have a vacancy. Generally viewed as a safe way to invest in real estate, due diligence is required to ensure you’re investing in a legitimate company.
3. Flipping. More formally known as real estate trading, this type of real estate investing is for those who have plenty of capital, as well as the ability to facilitate timely repairs. Flipping is for those who have a keen understanding of real estate markets and valuation, and can spot a good deal, as real estate traders usually look to turn a profit by selling undervalued properties in just three to four months. Pure property flippers, in fact, don’t invest in improving a property; they see that the property has the intrinsic value needed to turn a profit without renovations. The downside to trading is that if you can’t turn the property fast enough, and don’t have enough cash on hand to pay the mortgage, your losses will quickly accumulate.
4. Real Estate Investment Trusts (REITs). For those who want exposure to real estate investing without some of the above risks, REITs – which are bought and sold on the major exchanges like any stock – are often the way to go. A REIT is formed when a corporation or trust uses investors’ money to purchase and operate income properties. A REIT must pay 90 percent of its taxable profits as dividends in order to maintain its REIT status. If considering a REIT, be aware that there are both equity REITs that own commercial property, and mortgage REITs, which focus on income from mortgage financing.
Think about which of the above options might fit the bill for your investment strategy, and let real estate pave its way onto your portfolio.
