Have you thought about investing in real estate but assume you don’t have enough money or don’t know the correct terms?
It’s a common misconception that you must be either wealthy or a real estate expert to invest in real estate. The fact is that anyone can invest in real estate in one form or another, even if they only have a little money to start.
Real estate is a great way to diversify your portfolio. Whether you invest in real estate directly or indirectly, real estate investors enjoy the healthy returns they receive on their investment.
If you’re a newbie, read this guide to learn how you can start building wealth through real estate too.
What Does It Mean to Invest in Real Estate?
Investing in real estate can mean several different things. It means you buy a house att means you buy a household onto it and rent it out to tenants. You earn not only the appreciation the home gains but also monthly cash flow from rent payments.
There are many other ways to invest in real estate, which we’ll discuss below. Overall, it means that you put your money in real estate either in equity (owning the property) or debt (loaning the funds to buy the property).
No matter how you invest in real estate, you may earn monthly cash flow, capital gains from appreciation, or interest on your loan.
When you invest in real estate, you diversify your investments, so you aren’t relying on the measly savings account rates banks pay today or putting all your money at risk with the stock market, which we all know can crash in the blink of an eye.
Who Qualifies to Invest in Real Estate?
You don’t need to be an accredited investor to invest in real estate. Many people falsely believe this is the case and avoid real estate until they have more money or more experience.
You don’t need it, though. Anyone can invest in real estate if they have the desire and a little money to invest.
If you want to invest in physical real estate (owning the property yourself), you’ll need a down payment. Still, with decent credit and a low debt-to-income ratio, you can borrow the rest, allowing you to leverage your investment much more than any other investment allows.
If you don’t want to own real estate, to qualify, you just need to meet the minimum investment requirement, which in many cases is less than $1,000.
What Are the Benefits of Investing Real Estate?
Like any investment, real estate has its pros and cons. There are risks, but without risks, there aren’t rewards, right? When you invest with plenty of support, as you’d get from Roofstock Marketplace, you can enjoy the benefits of real estate investing without worrying too much about the risk.
Here are the top benefits of investing in real estate:
- Cash flow – If you buy and hold real estate or invest in a property’s equity (REIT), you may earn cash flow. In the case of buying and holding real estate, you’ll make monthly cash flow from the rent. After you pay your mortgage and the property expenses, the remainder is yours. This is a great way to save for another investment, put away for a rainy day, or use to supplement your retirement income.
- Financial security – Real estate naturally appreciates. Of course, there are times when values fall, but the market typically bounces back. If you are in it for the ‘long haul,’ you’ll likely enjoy great appreciation, which means greater profits when you sell the property. Many people use real estate investments as their long-term retirement plans. They know at some point during retirement, they can sell the property using a service like Roofstock Marketplace, make a profit and use the funds to supplement their retirement income.
- Tax benefits – If you invest in real estate to buy, hold, and rent out, you can write off your expenses just like a business owner. Even though it’s an investment, it’s a business too. You’ll lower your tax liability and increase your profits just by owning a property and enjoying its appreciation and cash flow.
- You have control – When you invest in stocks or bonds, you have zero control. The only say you have is when you buy and sell the asset. All your earnings and investment potential rely on the company you invest in, but you’re the boss when you invest in real estate. You control the rents, how long you own the property, and you can even force some appreciation by making improvements to the property.
Top 5 Ways to Invest in Real Estate
Now that you’re intrigued about investing in real estate, here are the top 5 ways to invest in it.
1. Buy Rental Properties
There are a few ways you can buy rental properties. You can buy them from a real estate agent using the MLS system or even a for-sale-by-owner property. You negotiate the sales price, close on the home, and market the property to find renters.
You can also use a service to buy a turnkey property or property with tenants in it. You’ll eliminate the steps above after you buy the home. It’s like becoming an instant landlord – you own the property and have tenants already living in the property. Roofstock Marketplace makes it easy to buy turnkey properties. They provide all the information you need to make an informed decision, even allowing you to purchase investment properties out of state.
2. Fix and Flip Homes
If you love fixer-upper shoes, you may consider fix and flip homes. You’ll need a good eye for detail since you’ll need to find undervalued properties. Fix and flip properties only work when you can find a home selling for less than its potential value. You buy the property, fix it up and sell it for much more than you paid for it, walking away with the profits.
To buy fix and flip homes, you need the money or financing to buy the property and fix it up. You also need an extensive network of professionals to help you find the property, do the renovations, and price it to sell.
If you don’t want to take possession of a property but have an extensive network of investors on your side, consider wholesaling.
Wholesalers don’t buy the properties, but they seek them out, finding the deals in different areas. When they find a deal, they make an offer and sign a contract.
Wholesalers invest in real estate in two ways:
- Buy the property and sell it immediately – Wholesalers with enough money to buy a home in cash will buy it at the undervalued price they negotiated and then sell it to an investor in their network for a higher price, walking away with the profit. The transactions occur within a week or so of one another, so the wholesaler doesn’t put a lot of money on the table for long.
- Have a double closing – Some wholesalers don’t physically buy the property. Instead, they enter a contract to buy the property with the seller and get into a contract with a buyer for a higher price. Both transactions close simultaneously at the title company, with the money from the investor (the end buyer) paying the original seller. The wholesaler remains the middle man and makes the profit off the difference between the end sales price and the price he bargained with the seller.
4. Investing in REITs
If you’re not ready to invest in physical real estate, you can invest in Real Estate Investment Trusts. This is a good option for beginners as you can invest with little money and you don’t have any responsibilities.
Most investors start with an equity REIT or investing in an income-producing property. A REIT is like buying shares of the property. You get paid in dividends based on the property’s income. REITs often pay higher dividends than traditional stocks and are a great way to diversify a stock portfolio and/or get your feet wet investing in real estate.
Some investors invest in debt REITs. They don’t provide the same dividends, though, since debt REITs invest in the money loaned to investors to buy properties. You’ll earn a fixed interest rate and have a set date that you’ll make your principal back.
5. Real Estate Crowdfunding
You’ve likely seen crowdfunding sites by now. They pool all investors’ money together to invest in a large project, in this case, real estate. Just like investing in physical real estate, though, this can be risky too.
Do your research before investing in crowdfunding. Know who the money is going to and their track record in building, maintaining, and managing an investment property. Ensure the investor is experienced and has handled investments well before, or you could lose your investment.
Choosing the Right Real Estate Investment
The key to choosing the right real estate investment is looking at your budget, goals, and risk tolerance.
- How much money do I have to invest?
- Do I have good enough credit to get another mortgage?
- Am I willing to risk owning a property and all that goes along with it, including maintenance, the finances, and finding/keeping tenants?
- Would I prefer a less risky investment that invests with other investors to buy bigger real estate properties?
- Am I trying to diversify my investment portfolio, or is this my first investment?
When you do a little soul searching, you’ll determine what’s right for you. Investing in real estate can be a great way to make monthly cash flow, earn appreciation, and set yourself up to meet future goals.
If you’re thinking about investing in real estate, make sure you have the right support. Using a real estate agent in the area may seem wise. Still, if they aren’t experienced in investment properties, they may not know how to find the undervalued properties that will provide you with the most significant profits and/or cash flow.
Instead, use a reputable platform that caters to investors, selling properties both with and without tenants. On a platform like Roofstock Marketplace, you’ll find an extensive selection of properties with all the financial information you need to make a decision keeping your risk tolerance, goals, and timeline in mind.
The Bottom Line
Investing in real estate can be the perfect first investment or a great addition to your portfolio if you’ve already started investing. Real estate can offset your portfolio’s risk since diversification is so important.
You don’t need to know a lot about real estate or have a lot of money. As long as you have 20% – 30% of the purchase price to put down and you can qualify for a mortgage, you’ll be able to leverage your investment and enjoy the great returns real estate offers.