Investing in real estate can be a lucrative wealth-building strategy. However, real estate investing for beginners can also be intimidating. There are numerous different types of real estate investments all with varying pros, cons, risks, and potential rewards. Here are the benefits of investing in real estate as well as an explanation of several different options to consider.
The benefits of investing in real estate
Potential for appreciation
Historically, real estate appreciates over time. CoreLogic, which provides data and analytics for home prices, reported that January 2022 showed the highest level of home appreciation in 45 years (19.1%). While this doesn’t mean real estate will appreciate at that rate each year, it does mean that overall, real estate investments will grow in value long term.
Passive income
Investing in rental properties can create passive income and cash flow over time. With the right planning, your tenants can provide income, all while you maintain ownership of your real estate holdings.
Diversification
Owning real estate can provide necessary diversification to your overall investment portfolio. Rather than holding only stocks, for example, investing in real estate spreads risk across different assets.
Inflation hedge
Historically, property values tend to rise, even during periods of rapid inflation.
Hedge against market volatility
Real estate experiences less volatility than other investment types, which can create stability in the middle of general market fluctuations.
Types of real estate investments
Rental property
There are nearly 20 million rental properties in the United States. Investors purchase commercial or residential rental properties with the goal of earning income from rent payments. The amount of rent an investor can earn depends on the location, condition, and type of property. Investors can earn rent via short-term leases or through long-term leasing, such as renting to tenants on an annual basis.
Pros
- With the right research and planning, you can earn steady cash flow from your rental property.
- Rental properties help diversify your overall investment portfolio.
- Historically, real estate is an appreciating asset.
Cons
- You have to manage the property or hire someone to manage it for you.
- It can be challenging to find qualified tenants.
- It’s possible you’ll encounter periods of vacancies and unexpected maintenance expenses.
How to get started
- Research various markets to decide where to purchase your rental property, keeping in mind there might be investment opportunities in other states.
- Speak with several lenders to determine your financing options. Securing a mortgage for an investment property typically has different requirements than applying for a mortgage for a primary residence.
Vacation property
According to recent data, revenue from vacation rentals is projected to be over $19 billion in 2023. Unlike rental properties, vacation properties are investments purchased with the intention of renting to short term tenants on vacation. There are many different sites, like Airbnb and VRBO, that help investors market their vacation properties and secure renters.
Investors generate income by renting these homes on a temporary basis, such as a week. The amount an investor can charge for a night at a vacation property depends on demand, location, amenities, and the season. For example, beach-front rentals are more in demand during the summer than in the winter.
Pros
- In highly sought-after locations, vacation properties can earn high nightly rates.
- If you own one, you can enjoy the rental property yourself.
Cons
- It can be a challenge to manage a property from a distance and handle issues from afar.
- If you hire a property manager to manage your property, it can cut into your profits.
How to get started
- Like rental properties, it’s important to do thorough research before buying a vacation property.
- Purchase a property in an area that is known for a high occupancy rate; that is, in a location where vacation rentals are typically booked.
- Consider various factors like HOA fees, property management from a distance, cleaning in between guests, and which online platforms offer the best visibility.
Fix and flip properties
Flipping properties means purchasing properties that need upgrades, making renovations, and selling them for a profit. Investors earn money when they finish renovations and sell the home they purchased for a profit.
Pros
- It’s possible to earn large profits from flipping houses. ATTOM, a leading data company, reported the average gross profit from a home flip in 2022 was $67,900 nationwide. Although impressive, this represents a decrease from previous years, a trend beginning investors should consider.
- Unlike holding onto real estate long term, flipping properties means you can earn returns quickly,
Cons
- You could encounter more renovation costs than expected, and one unexpected problem could eat away at profits.
- Legal problems can arise.
- You will likely be carrying the mortgage and making mortgage payments while you complete renovations, which will not create cash flow like a rental property.
- If you own the property less than a year, you could be subject to short-term capital gains taxes.
How to get started
- Study the market and the process to ensure you’re making a solid financial decision.
- Identify a mentor who has experience flipping properties.
- Keep in mind flipping properties requires real estate financing to acquire the property and renovate it. Additionally, selling the property comes with fees like closing costs and real estate agent commissions.
- Take your time finding the right property and identify a home that can generate a profit, even after all renovation costs and selling fees are taken into account.
Fractional real estate investing
Fractional real estate investing is when you invest in a share of a property, like an apartment building. With fractional investing, many different investors put their resources together to fund a large real estate purchase. Because investors are partial owners in the property, they can earn a percentage of rent income as well as earn money in the event the property sells in the future.
Pros
- The biggest benefit of fractional real estate investing is that it can be a passive investment.
- Unlike traditional rentals, vacation rentals, or house flips, you don’t actually have to visit the property, collect rent, or organize necessary maintenance tasks.
Cons
- Like many real estate investments, the con is that fractional real estate investing comes with risk.
- Investors, especially beginning investors, should research online platforms and the opportunities they present before deciding to move forward.
How to get started
- There are various real estate crowdfunding platforms that allow investors to learn about fractional real estate opportunities.
- Sometimes, you have to be an accredited investor in order to participate, so take the time to learn about requirements before identifying potential properties to invest in.
E-REITs
An e-REIT is an electronic real estate investment trust. Similar to mutual funds, e-REITS are pooled investments. Investors can buy shares, much like buying a stock. That way, beginners can invest in real estate without actually having to purchase a property directly. E-REIT investors earn money through dividends and property appreciation.
Pros
- Like mutual funds, e-REITs are managed by financial professionals. They use their knowledge to decide which real estate opportunities to include in the fund.
- E-REITs allow you to invest in real estate without having to directly manage tenants.
Cons
- Market fluctuations can negatively affect your earnings.
- Be aware of fees and other costs that might come with buying and selling your shares.
How to get started
- Use a directory to find a list of REITs.
- Open an account with a company that offers e-REITs as an investment option.
- Thoroughly research different funds and choose ones with a solid track record that match your risk tolerance.
How to begin your investing journey
If you’re interested in becoming a real estate investor, here are some concrete steps to get started.
Set financial goals
Identify your investment objectives: Knowing your investment goals can help determine which type of investment property is right for you. Are you interested in passive income, long-term wealth building, or quicker financial wins?
Determine your risk tolerance: Real estate can be lucrative but also risky. Having a good understanding of your personal risk tolerance can help you identify opportunities that are best for you.
Conduct market: Take your time to research real estate markets and decide the best type of property to buy at the best time for you. Understand what your upfront costs might be and whether or not you’re comfortable purchasing and managing real estate long distance.
Explore financing options
There are numerous ways to secure financing to start investing in real estate. Explore different options to decide what’s best for you. You can save cash for a property, take out a new mortgage, leverage your home equity, take out a short term loan, or secure private investments. Your terms will likely depend on your credit score, credit history, income, and other factors.
Understand mortgage requirements: If you decide to apply for a mortgage for your investment property, speak to a lender to determine your eligibility. Buying an investment property typically has different requirements than purchasing your primary residence.
Assess the potential impact of interest rates: Interest rates fluctuate, so take the time to determine whether or not current interest rates will impact your profit margins.
Build a plan
Consult with professionals: When deciding to pursue a new type of investment, it’s important to consult with professionals. Surround yourself with people who share the same goals and get recommendations of trusted professionals in the industry who can help you achieve your goals.
Create a realistic investment plan and timeline: Give yourself enough time to research and plan your real estate investments carefully. Gain as much knowledge as possible before putting your hard earned money towards a real estate investment. It’s always better to be over prepared and to have more money than necessary to make your first real estate investment rather than to come up short if renovations or market fluctuations require you to spend more money than you originally thought.
Implement risk management strategies: Once you know the type of real estate investment you want to make, be sure to implement risk management for your investing strategies. This means ensuring you have adequate insurance coverage, screening tenants, and completing your due diligence for all decisions. Recognize that while some things may be out of your control, planning and taking your time to choose contractors, tenants, and investment opportunities can help you avoid large, unexpected costs down the road.
Final thoughts
Even though real estate investing for beginners can be intimidating, it’s worth taking the time to learn about the many different investment options available to you. With enough time, research, and planning, investing in real estate can help you to achieve many of your long term financial goals as well as create a legacy for your family in the future.
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