Real Estate Investing is a popular investment for investors, and it has created more billionaires than any other asset class. However, this investment vehicle also carries certain risks, and it’s important to understand how these risks can impact your returns. In addition, a thorough understanding of local market trends can help you make the most informed decisions when investing in real estate.
The most common way people invest in real estate is to purchase a primary residence. This strategy involves taking out a mortgage, making monthly payments and building equity over time. Ultimately, this equity can be cashed in on when the property is sold. However, this type of investing can be costly and time-consuming.
Another common way to invest in real estate is to buy rental properties. This is a more passive investment strategy, as investors generate income through rent and may also receive tax benefits. However, this type of investing can be more volatile as home prices rise and fall.
Finally, some investors opt to “flip” properties. This involves purchasing distressed properties, renovating them and then selling the property for a profit. The profits generated by this strategy are the new sales price minus the initial purchase price, renovation costs and carrying expenses (mortgage payments, insurance, maintenance, etc). This type of investing is not for everyone as it requires substantial upfront capital and can be extremely risky.
Real estate investments are unique in that they are tangible assets, which have intrinsic value derived from both the land and improvements (buildings attached to the ground). Well-chosen real estate can appreciate in value at a rate that outpaces annual inflation. This is why real estate can be an attractive component of a diversified portfolio.
Investors can find real estate opportunities through a variety of channels, including private equity funds, direct property investments and real estate investment trusts (REITs). The most common type of REIT is a publicly-traded REIT, which offers investors a way to diversify their exposure to commercial real estate with a single, low-risk, liquid investment.
Investors can also use online platforms like Fundrise and Crowdstreet to invest in individual real estate projects. These platforms vet sponsors and deals, and investors can participate with a minimum investment of $500. However, these types of investments are often illiquid until the project is complete. Lastly, direct real estate investments require active management from the investor, which can be time-consuming for some investors.