How to Invest in Real Estate - 4 Simple Steps for Beginners

Real estate is often the most valuable investment a person owns. It is a critical driving force of the economy. Its value is a key indicator of an economy's health and most household wealth in the United States. Meanwhile, real estate investment is a good option if you're looking to invest your savings so you can have enough for retirement.

Real estate can be a valuable addition to an investment portfolio. Income-producing real estate investments will continue to generate income annually, unlike stock and bond investments which will liquidate down to zero over the years. investing in real estate can offer both immediate income and long-term appreciation.

That is to say, investing in real estate does not only provide you with a stable income stream, however, you will also have something to pass on to your dependents. Moreover, real estate investment can be quite simple. If you understand the basic factors of investment, risks, and economics. And are willing to do the research, finding the best places to invest in real estate could provide you with a solid income boost.

However, simple doesn't mean easy. Real estate investments, just like other investments don’t always pay off. Sometimes the real estate you invest in loses value over time. If you make a mistake, there are consequences that can range from minor inconveniences to major disasters.

Continue reading to learn more. This article summarizes everything you need to know about real estate investment, what it means, the best ways investors can make money on real estate, the benefits and possible pitfalls that come with investing in real estate, and more.

Understanding Real Estate Investment

Real estate is property consisting of land and any permanent improvements attached to it, along with its natural and man-made such as water, minerals, trees, buildings, homes, fences, and bridges. Real estate investment is the purchase, management, and sale or rental of real estate for profit.

Moreover, the improvement of realty property as part of a real estate investment strategy is generally considered to be a sub-specialty of real estate investing called real estate development. Someone who actively or passively invests in real estate is called a real estate entrepreneur or a real estate investor.

Furthermore, the main goal of investing in real estate is to put your money to work in order to have more in the future. Meanwhile, there are several costs of owning a real estate, such as the taxes you pay, utilities, maintenance, and insurance. The profit, or return you make on your investment must be enough to cover these costs and as well as the risk you make.

Moreover, to most new investors, real estate investment is the highest point of investment achievements. Unlike other investments such as stock and bonds, real estate means real or physical property, that is to say, they can be touched and stood up. Regardless of the market conditions, you still have a piece of something that is not going anywhere.

Categories of Real Estate Investment

In order to better understand what real estate investment is, we will be dividing the types of real estate into several categories. So you'll know what you are facing even if you intend on developing, acquiring, owning, or flipping real estate.

Commercial Real Estate Investment

These refer to properties that are used to carry out business-related activities. Commercial real estates or properties consist mostly of office buildings, shopping malls, and skyscrapers. As an investor, you can buy or even construct a commercial building with individual offices, and lease them out to companies and small business owners who would pay you rent to use the property.

Residential Real Estate Investment

These are properties that are used for housing purposes. Residential properties include houses, apartment buildings, townhouses, and vacation houses where an individual or family pays you to live in the property.

Industrial

Industrial real estate consists of properties, mostly vacant land and buildings used for industrial purposes, manufacturing, car washing, storage, etc. Individuals who make use of these properties pay a significant fee to the owner.

Retail

These consist of shopping malls, strip malls, and other retail storefronts. Individuals who invest in retail real estate generate income from rents paid by business owners that make use of the building for their activities.

Best Ways to Start Investing in Real Estate

Actually, there are a lot of different ways to get into the real estate market. And each comes with risks and benefits, and unique investment experiences. Here are some of the best ways to invest in real estate.

Buying Real Estate Investment Trusts (REITs)

Real estate investment trusts (REITs) are companies that own, operate, or finance income-generating real property or estate that you can buy shares from on the open market. A REIT is created when a corporation uses investors' money to purchase and operate income properties. Just like mutual funds, REITs provide an investment possibility for every individual investor to earn a share of income or dividend produced from real estate without direct investment in any property.

Unlike other private projects, most REITs are traded on major exchanges, just like stocks while some are not traded publicly. Moreover, REITs are best for investors who want exposure to the market without a traditional real estate transaction (without the time and cost commitment of buying your own property). Real estate investment trusts allow you to invest in real estate without physical real estate. You don't have to worry about property management or any of the day-to-day issues that come with real estate investment.

Flipping Properties

You don't have to buy rental properties to maximize your profit from real estate investment. Some people take it a step further, buying homes to renovate and resell. A common strategy is known as house flipping. Although TV shows often make it look easy, flipping like rental properties, takes a lot of work. Flipping properties remains one of the most costly and time-consuming ways to invest in real estate. Even though it also has the potential to generate the biggest profits.

Moreover, house flipping means buying, renovating homes, and learning to identify neighborhoods where you can sell your purchases at a premium. However, just as we said earlier, house flipping is not as easy as it may look on TV shows. Long story short, real estate investment by house flipping is for investors with significant experience in real estate valuation, marketing, and renovation.

Furthermore, flipping requires capital and the ability to oversee, or even do repairs as needed. And if your house flipping strategy involves renovation and construction, then, it means taking on extra risk and higher out-of-pocket costs. To sum up, flipping properties can be a very lucrative way of investing in real estate, but only if it is done in the right way by someone who has a significant experience of the market.

Investing in Rental Properties

One common way to invest in real estate is to buy a rental and lease it, or part of it. Rental real estate investment can be a great opportunity for individuals who have renovation and management skills. Rental real estate properties can offer steady cash flow as well as the possibility of appreciation over time. Though it also requires a great deal of effort on your part.

Moreover, it also requires significant funds to finance upfront maintenance costs and to cover vacant months. Unless you hire a property manager to help you with the property, you will be the one to find tenants, pay for ongoing maintenance, take care of repairs and deal with any other problems that arise.

Online Real Estate Platforms

Otherwise known as crowdfunding real estate platforms. It is a strategy that allows enterprises to raise capital from a large group of individuals. Real estate crowdfunding requires investing capital, although less than what's required to purchase properties straight away.

Real estate investment through online real estate platforms is for investors who want to join others in investing in a bigger commercial or residential deal. The online platforms connect investors who are looking to fund projects with real estate developers.

This can be done either through debt or equity. Investors hope to receive monthly or quarterly distributions in exchange for taking on a significant amount of risk and paying a fee to the real estate platform. However, the platform generally requires investors to commit to real estate investments for longer periods of time, five or more in most cases. It will be up to their discretion for you to be able to access some of your money before then, and you may even face early withdrawal penalties.

However, keep in mind that real estate crowdfunding offerings also come along with considerable risk. Like many real estate investments, these tend to be speculative and illiquid. That is to say, you can’t easily unload them the way you can trade a stock.

Pros and Cons of Real Estate Investment

Moreover, just like any other investment, there are benefits and possible pitfalls that come with investing in real estate. Below are the advantages and disadvantages of real estate investments:

Pros

• There's less risk and volatility than the stock market
• Can be a good source of cash flow
• Lots of tax deductions
• Properties will increase in value over time

Cons

• Potential returns are not as high as the stock market
• Real estate investments require a lot of cash
• Poor liquidity
• Management and maintenance with tenants and building issues can be difficult

Final Thoughts

Real estate investment is very lucrative and good, as it provides a steady cash flow. As with any other investments, there's profit and potential within real estate, regardless of the overall market condition. However, the main goal is to invest n properties that will increase in value over time. Like all investments, real estate investments don't always pay off. Sometimes the property you invest in losses value over time. To sum up, there are benefits and possible pitfalls that also come with investing in real estate. Having a better understanding of the real estate industry and types can help you organize your to-do list for the start in real estate investment.