9 Easy Ways to Start Investing in Real Estate, Regardless of Your Experience

There certainly exists an array of perceived obstacles that may potentially dissuade one from partaking in real estate investments. Perhaps, you perceive it as an exclusive playground for the ultra-wealthy or dread the impending responsibilities tied to becoming a landlord, such as dealing with unforeseen tenant-related emergencies around the clock.

However, allow me to dispel these misconceptions. The arena of real estate investment is far from monolithic and exclusive. It offers a broad spectrum of opportunities that do not require gigantic amounts of wealth, landlordship, or even physical possession of property.

Let’s venture into an insightful discussion about how you, regardless of your present financial standing or investment objectives, can successfully navigate and profit from the world of real estate.

Should You Invest in Real Estate?

The concept of delving into real estate investment may seem daunting, particularly if you are at the nascent stages of your investment journey. However, this domain is surprisingly more within your grasp than you might realize. As with any prospective investment, it presents a unique blend of both strengths and weaknesses that need to be meticulously evaluated.

Outlined below are several such influential factors to ponder. Importantly, certain elements may not be applicable if you embark on the route of real estate investment without physically owning property. The decision to invest in real estate can be greatly informed by understanding these facets and aligning them with your personal investment strategy and risk tolerance.

The Advantages of Real Estate Investment

1. Gradual Appreciation in Value: Yes, real estate markets do experience fluctuations and cyclical trends. However, the general trajectory of property value remains a steady ascent over time. The quantum of annual growth varies across different regions, but the principle of appreciation holds.
2. Near-Impossibility of Total Loss: Unlike investing in stocks, where there’s a risk of total loss if a company goes under, the fact that real estate is a tangible asset significantly mitigates this risk. It is extremely rare for a property’s value to depreciate to nothing.
3. Diversification of Investment Portfolio: Real estate can be a crucial instrument in portfolio diversification, offering a degree of stability and insulation as property values do not fluctuate in tandem with stock market trends.
4. Potential Tax Benefits: Engaging in real estate investment may present tax advantages. For example, when purchasing a primary residence, you can deduct the interest on your mortgage. While this is not the case for investment properties, you can still amortize tax deductions against your generated revenue.
5. Creation of Passive Income: Real estate investment can serve as a source of passive income. Regarded as an effortless income stream, its benefits extend beyond ease. Unlike active income sources such as salaries, passive income is not prone to payroll taxes, letting you retain a larger portion of your earnings.

The Drawbacks of Real Estate Investment

1. Limited Liquidity: Unlike stocks that can be swiftly liquidated via a stock exchange in a fraction of time, real estate, inherently, has a longer sell cycle. The timescale to offload a property can span weeks, months, or potentially years, contingent largely upon prevailing market conditions.
2. Substantial Initial Investment: The entry barrier to property investment is notably high. Acquiring property necessitates either substantial cash outlay or securing a mortgage loan. Investment properties typically demand a down payment ranging from 15% to 25% of the property’s value, a considerable sum for many potential investors.
3. Extensive Preparatory Research: Investing in real estate is no hasty decision; it demands exhaustive preliminary work. Prospective investors must research the location in depth, assessing factors such as local amenities, crime rates, school districts, and future development plans, among others. Additionally, obtaining a professional property inspection is of paramount importance to ascertain the condition of the property and to avoid sinking funds into a less than satisfactory investment.

How to Invest in Real Estate: Exploring 9 Viable Entry-Points

Now we delve into the exhilarating core of our discussion: the strategies to effectuate your ambitions of investing in real estate. As alluded to earlier, our discourse will cater to both spectrums of potential investors: those eager to acquire physical property, as well as those who wish to tap into the real estate landscape without direct ownership of a property.

Let’s begin by exploring a suite of nine distinctly effective strategies for those aspirants who harbor the desire to buy property for their foray into real estate investment.

1. Homeownership

The most straightforward entry point into real estate investment is, quite simply, purchasing a residential property. Although an appreciation in property value is not guaranteed, the historical trend leans towards homeowners enjoying a substantial return on investment over time.

In fact, numerous studies assert that homeowners generally possess wealth which is over 40 times that of renters. It’s important to note the causality here: wealthier individuals are naturally more capable of affording homes.

Decimate the prevailing myth that a hefty 20% down payment is a prerequisite for home buying. There exists a host of financing options that demand far less up-front investment, such as:

• Federal Housing Administration (FHA) loans: You’re required to put down merely 3.5% if your credit score is 580 or higher.
• Veteran Affairs (VA) loans: These offer the luxury of a 0% down payment, although you may incur a 2.15% funding fee.
• United States Department of Agriculture (USDA) loans: Again, there’s no requirement for a down payment if your credit score is 640 or above.

Perhaps the most significant advantage of investing in your own home is the accumulation of equity. Initially, your mortgage payments would lean heavily towards the interest component, but over time, an increasing amount contributes to reducing the principal.

2. Landlordship

If you have the fortitude to grapple with the occasional troublesome tenant or unexpected middle-of-the-night maintenance crises, you might find becoming a landlord a suitable and rewarding venture.

However, bear in mind that being a landlord extends way beyond merely obtaining monthly rent payments. Responsibilities include screening prospective tenants diligently, enlisting a legal expert to assist in penning an ironclad lease agreement, and adhering to local landlord-tenant laws.

Your budgetary considerations as a landlord will include mortgage payments, property taxes, home insurance premiums, and additionally, a distinct landlord insurance policy. Furthermore, you must also factor in routine maintenance life cycles, emergency repair reserves, and possibly dealing with occasionally vacant property. Be aware that tenants may not treat a rented property with the same tender care as an owned one.

Prepare yourself for potential scenarios where tenants may face financial hardships and consequently fail to furnish rent payments.

PRO INSIGHT
Active landlords have an income-offset advantage through tax deductions. They can legally deduct up to $25,000 for rental property-related losses if their annual income is less than $100,000. The deduction amount reduces progressively for those with incomes between $100,000 and $150,000.

3. House Flipping

Should you frequently tune into HGTV, you may harbor the impression that you possess extensive knowledge about the art of house flipping. However, the unvarnished truth from seasoned house flipping professionals unveils a stark contrast between televised perceptions and actual realities.

Rather than focusing on extravagant home makeovers, the heart of house flipping lies in meticulous research and mathematical precision. Identifying the ideal house often entails rigorous work and engaging in a competitive battleground for the most promising property. Securing financing is no less challenging given that, as revealed by the 2019 House Flipping Report by ATTOM Data Solutions, approximately 56% of house flippers utilized cash for their acquisitions last year.

Surpassing the initial investment in purchasing the property, extraneous costs encompassing materials, labor, taxes, insurance and much more can rack up figures between 20% – 33% of the property’s post-renovation worth. That statistic, unveiled by Todd Teta, ATTOM Data Solutions’ Chief Product Officer, is a testament to the numerous overlooked expenses that often accompany a house flipping venture.

Nevertheless, monumental repairs aren’t an invariable component of the equation. A savvy subset of house flippers operate differently, investing in a property situated in an appreciating real estate market. Their strategy involves holding onto the property for several months and, without implementing a single change, flipping it for a profit. This methodology underscores the diverse strategies involved in house flipping, proving it to be a multifaceted endeavor rather than simply a real estate gamble.

4. House Hacking

For those seeking to simultaneously secure the dual status of homeowner and landlord in a singular transaction, the concept of house hacking presents a viable solution. In this approach, one procures a multifamily property, leveraging the income generated from tenant rental payments to offset mortgage and associated expenses.

The appeal of house hacking lies in its dual benefits – living rent-free while steadily building equity in your property. This strategy, however, calls for preparedness to deal with inevitable maintenance and repair tasks. An additional consideration is the quality of the tenants, as their proximity could influence your living environment.

House hacking is a pragmatic method of diversifying your real estate investment portfolio, even if funds for a substantial down payment are lacking. If you are considering financing a property with a maximum of four units, qualifying for a Federal Housing Administration (FHA) loan requiring as little as 3.5% down payment becomes a potent possibility. In certain scenarios, your prospective rental income could even serve as a qualifying factor for the loan.

An alternate spin on house hacking involves acquiring a single-family home as your primary residence while allocating a portion of the property for rental purposes. A testament to this inventive approach is Kristine Dowhan from St. Petersburg, Florida, who actualized her dream home purchase, using Airbnb to facilitate mortgage payments. Thus, house hacking manifests as an innovative strategy for navigating the complex arena of real estate investment.

5. Invest in a Vacation Property

Imagine owning a veranda-laden beach house in Florida, nestled among rustling palm trees. The prospect of acquiring a vacation property is an attractive prospect, offering numerous financial rewards. Short-term rentals can command substantial rates in comparison to long-term leases, though these rates fluctuate seasonally. Vacation properties are typically situated in regions marked by above-average real estate appreciation rates, rendering them lucrative long-term investments.

Facilitating the process, platforms like Airbnb and VRBO simplify the marketing of your property to potential vacationers. However, should you decide to delegate management responsibilities of your property to professional services, anticipate management fees to constitute approximately 25% of the revenue your property generates.

PRO INSIGHT
If you rent out your primary residence for a duration of less than 15 days annually, you may be exempt from reporting the earned income to the Internal Revenue Service.

Now, let’s explore three approaches tailored for aspiring real estate investors uninterested or unable to make a direct property purchase.

6. Venturing into REIT Investment

A Real Estate Investment Trust (REIT) is a corporation or firm that capitalizes on income-generating assets such as residential complexes, hotels, shopping malls, office buildings, medical facilities, and warehouses. These trusts offer investment opportunities to external shareholders through the sale of shares in their real estate ventures.

There are three primary categories of REITs:

1. Equity REITs: These trusts represent the most prevalent type of REIT, owning physical properties and generating revenue primarily from leasing spaces.
2. Mortgage REITs: These trusts act differently by investing in the debt underpinning real estate properties, i.e., mortgages. They either directly finance mortgages, purchase existing mortgages, or undertake a combination of both, yet they do not maintain direct ownership over physical properties.
3. Hybrid REITs: These REITs incorporate the features of both Equity and Mortgage REITs, owning physical properties and simultaneously investing in mortgages.

REITs often concentrate on a specific property type, allowing investors to buy, for instance, hotel-centric, office-focused, or health care-dedicated REITs.

Most REITs are publicly traded on stock exchanges, allowing you to purchase them as effortlessly as you would purchase any company stock, using your brokerage account or either a Roth or traditional Individual Retirement Account (IRA).

By legal obligation, REITs must distribute a minimum of 90% of their taxable income to their shareholders. This mandate often results in above-average dividend yields for shareholders, rendering REITs an attractive source of passive income.

However, it’s critical to note that, given their reliance on relatively stable real estate income, REITs may not exhibit the same potential for exponential growth as conventional stocks. Hence, they should be considered as an avenue for steady earnings rather than rapid asset appreciation.

7. Pledge Your Capital Towards a Real Estate Mutual Fund or Exchange-Traded Fund

Investing in Real Estate Investment Trusts (REITs) undeniably comes with its unique merits, but it often narrows your exposure to a specialized property type, consequently impeding your ability to effectively diversify your real estate assets.

To attain an eclectic blend of investments and cushion against the hazards of over-concentration in a single asset class, a pragmatic solution would be to channel your finances towards a Real Estate Mutual Fund or an Exchange Traded Fund (ETF). Both these financial instruments amalgamate numerous REITs into one consolidated investment platform, thereby providing you with an expansive diversification opportunity to distribute your risk across a variety of property types.

An essential point of distinction between these two investment instruments lies in the method of acquisition. While mutual fund shares are directly procured from the investment company, ETF shares are traded on public stock market exchanges. This important differentiation needs to be considered while developing your investment strategy and may influence your preference based on its suitability to your financial objectives and risk tolerance.

8. Invest in Stocks Associated with Real Estate

Exploiting financial instruments such as REITs, real estate mutual funds and ETFs enables participation in the real estate market, reaping benefits sans the ownership of tangible property. However, investing in tangible property isn’t the only gateway into the real estate market. An ingenious approach would be to indirectly connect with the real estate industry through the purchase of stocks from companies that thrive in a prosperous real estate climate.

Noteworthy examples of such flourishing spaces encompass:

• Digital real estate platforms such as Zillow and Redfin, which have revolutionized the property market through their convenient and efficient online services.
• Enterprises engaged in homebuilding, who have a direct correlation with the real estate sphere.
• Real estate brokerage firms, which seamlessly facilitate transactions within the property market.
• Home improvement stores, which see an upsurge in business in a robust real estate market as new home owners seek to personalize their spaces.
• Purchasing shares in these businesses allows you to indirectly benefit from their success, thereby offering another unique entry point into the lucrative real estate market.

9. Venture into Real Estate via Crowdfunding Platforms

Leveraging crowdfunding platforms is a novel and compelling way to invest in real estate. If you’ve ever stumbled upon a surging Kickstarter campaign, you’re already privy to the core concept of crowdfunding. Essentially, a host of investors collectively finance an ambitious initiative, such as the conception of a groundbreaking product or a business start-up.

Applying this financial strategy to real estate, you’re typically investing in a singular property venture. Such investments inherently bear high-risk, high-reward attributes primarily due to this concentration in a single project. Many such opportunities, in fact, remain reserved for accredited investors – individuals who either boast at least $200,000 in annual income ($300,000 if married), or maintain a net worth of $1 million, discounting their permanent residential property.

However, certain online platforms have bridged the gap to make crowdfunded real estate accessible to everyday investors. Websites like Fundrise democratize this investment domain – extending opportunities to non-accredited investors and making it possible to venture into real estate with as little as $500. Such platforms epitomize the spirit of broad-based participation in the real estate market, ensuring it’s not just a playing field for elite, high net worth individuals.

Should I Invest in Real Estate?

Well, if you’re financially prepared for retirement, and you’ve built a robust emergency fund while also settling any high-interest debt, then dabbling in real estate could indeed be an astute next step on your financial journey.

Bear in mind, though, as with any investment venture, real estate thrives best when viewed from a long-term perspective. Adopting this viewpoint enables you to ride out short term market fluxes and capitalize on the asset appreciation that typically occurs over the course of time. Moreover, it minimizes the burden of significant expenses such as closing costs and other associated fees.

It’s prudent to approach such investments judiciously and gradually – rash decisions to bulk purchase properties or disproportionately inflating your portfolio with real estate holdings may not fetch the desired results. Begin on a smaller scale, incrementally increasing your stake as you grow confident and familiar with the market.

Investing in real estate could be a savvy maneuver to bolster your wealth generation strategy if carefully executed, echoing the words of the esteemed Mark Twain: “Buy land. They’re not making it anymore”. An informed real estate investment could transform into a valuable legacy, a scarce commodity that continually escalates in value with time.