Real estate investing has always been a popular choice for investors, despite the current market conditions.
While high interest rates may be causing a temporary slowdown, experts predict that investors will return to real estate with renewed vigor once rates fall.
Fortunately, there are many ways for consumers to invest in real estate beyond the traditional route of becoming a landlord.
With the advent of new business platforms, it has become easier than ever to invest in real estate without requiring large amounts of cash upfront.
This article will explore some of the most popular methods for investing in real estate and provide insights on how to make the most of these opportunities.
Investing in Real Estate in 2024
Real estate investing can be a great way to build wealth over the long term. With the housing market expected to loosen up further in 2024, now may be a good time to consider investing in real estate. Here are five top ways to invest in real estate.
1. Buy Your Own Home
Buying a home is one of the best ways to invest in real estate. It offers numerous benefits such as building equity in your home from your monthly payments, rather than paying rent which always seems to rise year after year.
If you’re planning to stay in an area long-term, it can make sense to purchase a home because you’ll be able to lock in a monthly payment that may be as affordable as rent.
Plus, banks treat owner-occupied properties more favorably, giving borrowers a lower mortgage rate and requiring a lower down payment. You may also be able to deduct interest expenses from your taxes.
However, owning your own home is not a good investment at every price, as homebuyers of the 2000s learned. You need to consider the ongoing costs of property maintenance, sizable down payment, and potential for foreclosure if unable to pay the mortgage.
2. Purchase a Rental Property and Become a Landlord
If you’re ready to step up to the next level, you might try your hand with a residential rental property such as a single-family home or a duplex.
One of the bigger advantages of this kind of property is that you know the standards of the marketplace and the market may be easier to gauge, as opposed to commercial properties, such as a shopping center.
Another advantage is that it may take a lower investment to get started, for example, with a single-family house.
You may be able to get into a property with $20,000 or $30,000 instead of the potentially hundreds of thousands required for a commercial property. You may be able to buy it even cheaper if you’re able to find an attractive distressed property via foreclosure.
However, owning a rental property requires hands-on management (for the right type of person), need to keep up with mortgage payments regardless of tenants, ongoing costs of property maintenance, larger down payment than for owner-occupied properties, and high commissions.
On the other hand, you can enjoy capital appreciation, growing rents and equity over time, and 1031 tax-free exchanges.
3. Consider Flipping Houses
House-flipping has become more of a popular avenue to investing in real estate, but it requires a keen eye for value and more operational expertise than becoming a long-term landlord.
Typically house-flippers find undervalued properties that need to be cleaned up or even completely renovated. They make the required changes, and then charge market value for the houses, profiting on the difference between their all-in price (purchase price, rehab costs, etc.) and the sales price.
However, house-flipping requires hands-on management, need to keep up with mortgage payments even if no income is being generated, upfront costs of property renovation, requires a keen eye for value, and the ability to organize and manage a team of professionals.
On the other hand, you can enjoy magnified returns through leverage, potentially quick gains on investment (if you have the skills), buying undervalued property and rehabbing, selling for more and repeating, and 1031 tax-free exchanges.
4. Buy a REIT
Buying a REIT, or real estate investment trust, is a great option for those who want the returns of real estate with the liquidity and relative simplicity of owning a stock.
REITs have numerous advantages over traditional real estate investing, and may make the process much easier. You can start with almost any amount of cash, and enjoy hands-off management, depreciation write-offs allow property to generate tax-free cash flow, price appreciation, and tax write-offs for mortgage interest.
However, investing in REITs is not without its own downsides. Like any stock, the price on a REIT can fluctuate as the market gyrates. So if the market declines, REIT prices may go with it.
That’s less of a problem for long-term investors who can ride out a dip, but if you need to sell your stock, you may not get what it’s worth at any single point in time. If you’re buying individual REIT stocks, you’ll need to analyze them carefully, using the tools of a professional analyst.
5. Use an Online Real Estate Platform
Online real estate platforms allow investors to access real estate deals from the comfort of their own home.
These platforms offer a variety of investment opportunities, from residential to commercial properties, and can be a great way to get started in real estate investing without a lot of money or expertise.
You can invest in a wide range of properties with as little as $500, and enjoy hands-off management, diversification, and potentially higher returns than
Pros and Cons of Investing in Real Estate
Pros
Investing in real estate offers several advantages that make it an attractive investment option. Some of the pros include:
- Long-term appreciation while you live in the property: Real estate values tend to appreciate over time, which means that your investment could increase in value while you live in the property.
- Potential hedge against inflation: Real estate investments can serve as a hedge against inflation, as property values and rents tend to increase with inflation.
- Leveraged returns on your investment: Real estate investments can be leveraged, which means that you can use borrowed money to increase your potential returns.
- Passive income from rents or with REITs: Real estate investments can generate passive income through rents or with Real Estate Investment Trusts (REITs).
- Tax advantages: Real estate investments offer several tax advantages, including interest deductions, tax-free capital gains, and depreciation write-offs.
- Fixed long-term financing available: Real estate investments can be financed with long-term fixed-rate mortgages, which can provide stability and predictability in your investment.
Cons
Despite the many advantages of investing in real estate, there are also several drawbacks to consider. Some of the cons include:
- Appreciation is not guaranteed, especially in economically depressed areas: Real estate values can decline in economically depressed areas, which can negatively impact your investment.
- Property prices may fall with higher interest rates: Rising interest rates can lead to a decline in property values, which can negatively impact your investment.
- A leveraged investment means your down payment is at risk: If the value of your investment declines, you could lose your entire down payment.
- May require substantial time and money to manage your own properties: Managing rental properties can be time-consuming and expensive, which can reduce your potential returns.
- Owe a set mortgage payment every month, even if your tenant doesn’t pay you: If your tenant doesn’t pay rent, you are still responsible for making your monthly mortgage payment.
- Lower liquidity for real property, and high commissions: Real estate investments are less liquid than other types of investments, and selling real property can involve high commissions and fees.
Potential investors should ask themselves questions across three broad areas:
- Financial resources: Do they have the resources to invest in a given real estate investment? How much do they depend on their day job to keep the investment going?
- Willingness: Are they willing to act as a landlord? Do they want to meet the demands of running a house-flipping business?
- Knowledge and skills: Do they have special skills that make them better-suited to one type of investment than another? Can they repair their rental property or fix a flipper and save a bundle on paying professionals?
In conclusion, investing in real estate can offer many advantages, but it also has several drawbacks that must be carefully considered. Potential investors should carefully evaluate their financial resources, willingness, knowledge, and skills before making any real estate investment decisions.
Conclusion
Real estate investing can be a lucrative option for investors looking to generate income during retirement. However, it is important for investors to carefully consider their budget and ability to manage their investment before making a decision.
There are a variety of options available for different budgets, but investors should ensure that they are willing and able to commit the necessary time and resources to manage their investment effectively.