Real Estate Investment: Proven Ways To Invest As A Beginner

Real estate mutual funds and REITs, of course, provide superior market pricing and liquidity. Investing in real estate has long been a preferred means of generating wealth because it provides a route to both financial development and portfolio diversification.

Investment in Real Estate

With the ability to generate wealth and a consistent income, real estate can be a wise investment. They do, however, have a far stronger link to the stock market as a whole than direct real estate investments, which comes at the cost of increased volatility and diminished diversification benefits.

As with any investment, make careful to do your homework and research before making any decisions, and maintain reasonable expectations.

The Road to Investing in Real Estate

Real estate investing is not the same as working in the industry. Whether through rental income, property appreciation, or both, you invest with the hope of making a profit down the road. It’s a field where patience is needed because big profits sometimes take time to show. You have access to more real estate investing opportunities than ever before as a passive real estate investor (as we will get into). To participate, you usually don’t need to have a lot of in-depth real estate knowledge (with a site like Equity Multiple, for example). When you first start, there are a few fundamental concepts in real estate investing that you should be aware of. BASIC expertise may assist you in gaining confidence in any particular investment and in beginning to assemble a diverse real estate asset portfolio that complements your entire plan.

Here are a few things to review before you begin:

Risk factors: the kinds of hazards that a particular real estate investment might include, as well as how those risks might affect you as a passive investor.
The hold period: Make sure you know how long your money will be tied up if you are investing in private-market real estate rather than publicly traded REITs. Make sure you comprehend your redemption alternatives if you are investing in a private fund or non-traded real estate investment trust.
Protecting investors: where do you stand in the capital stack and, consequently, what payment priority do you have, if any?
How earnings are allocated to you and other equity investors is known as the promote structure (if you are investing in real estate private equity).

Although some homework on these subjects may be necessary, doing so will put you in a confident and prepared position to enter the real estate investing field. Make careful to inquire frequently and early on.

Past Prices

For good reason, real estate has long been regarded as a wise investment. Before 2007, historical statistics on housing seemed to indicate that prices might rise endlessly. The average home sale price in the United States rose year from 1963 until 2007, when the Great Recession began, with very few exceptions.

At the start of the COVID-19 pandemic in the spring of 2020, home prices did experience a little dip. Still, house values shot up, hitting record highs by 2022 as vaccinations became more widely available and worries about the pandemic subsided.

Using the most recent data available, Q1 1963–Q1 2024, the Federal Reserve Bank of St. Louis created this figure to illustrate average sales prices. American recessions are indicated by the regions that are light gray-colored. FRED is the St. Louis Federal Reserve Bank. “Average Sales Price of Houses Sold for the United States.”

Properties for Rent

You become a landlord when you invest in rental homes, so you need to think about if you’ll be happy in that position. You will be in charge of finding renters, maintaining the property, handling any issues, and paying the mortgage, property taxes, and insurance as the landlord.

Being a landlord requires a hands-on investment unless you hire a property manager to take care of the technicalities. Taking care of the rental and the property may require round-the-clock attention, and it’s not always a fun task. On the other hand, you can reduce the likelihood of experiencing serious issues if you carefully select your homes and tenants.

Rent collection is one way that landlords generate revenue. The location of the property affects the amount of rent you can charge. Determining the ideal rent can still be challenging because charging too much would drive away tenants and charging too little will result in money being lost.

Renting enough to pay costs up until the mortgage is paid off, at which point the bulk of the rent is profit, is a popular tactic.

Appreciation is the other main source of income for landlords. When the time comes, you might be able to sell your property for a profit if its value has increased, or you could be able to borrow against the equity to fund your next venture. Although real estate tends to appreciate, nothing is certain.

Reselling Homes

Real estate flippers are a whole different breed from buy-and-rent landlords, just like day traders are from buy-and-hold investors. Flippers purchase real estate to own it for a little time—typically three to four months—and then sell it swiftly to make a profit.

There are two main methods for selling a house quickly:

Fix and modernize. Using this strategy, you purchase a home that you believe will appreciate specific renovations and repairs. Ideally, you finish the job as soon as feasible and sell for more money than you initially invested (including the renovations).

Resell and hold onto. This kind of flipping operates uniquely. Rather than purchasing a home and renovating it, you invest in a quickly expanding market, hold it for a few months, and then sell it for a profit.
You carry the risk that you won’t be able to sell the property for enough money to make a profit with any kind of flipping. Because flippers typically don’t have enough cash on hand to cover long-term mortgage payments on houses, this might be problematic. However, if done correctly, flipping real estate may be a profitable method to invest.

REITs

A corporation (or trust) established to employ investor funds for the acquisition, management, and sale of properties that generate income is known as a real estate investment trust (REIT). Like stocks and exchange-traded funds (ETFs), REITs are purchased and sold on major exchanges.

The company must distribute 90% of its taxable income to shareholders as dividends to be recognized as a REIT. In contrast to a typical business, which would have to pay taxes on its profits, reducing the amount of returns it could give to shareholders, REITs can avoid paying corporate income tax by doing this.

Though they also provide the chance for appreciation, REITs are suitable for investors who seek consistent income, much like equities that pay dividends regularly.

Real estate investment trusts (REITs) engage in a diverse range of properties, including office buildings, healthcare facilities, malls (which constitute around 25% of all REITs), and mortgages. The advantage of REITs over other real estate investment kinds is their high liquidity. Commission for Securities and Exchange of the United States. “Investor Bulletin: Publicly Traded REITs.”

Investment Groups for Real Estate

REITs, or real estate investment groups, resemble miniature mutual funds specifically designed for rental properties. A real estate investment group can be your best option if you’d like to own a rental property but don’t want the headaches of landlords.

When a firm purchases or constructs a group of buildings—typically apartments—it permits investors to purchase them through the company and become a member of the group. One or more self-contained residential units may be owned by a single investor.

All of the apartments are managed by the firm that runs the investment group, which also handles tenant placement, advertising, and upkeep. A portion of the monthly rent is withheld by the corporation in return for this management.

Investment groups come in multiple varieties. As a precaution against sporadic vacancies, the ordinary version’s lease is in the investor’s name and each unit pools a share of the rent. Thus, even if your apartment is unoccupied, you will still get enough money to cover your mortgage.

The quality of an investment group depends solely on the business providing it. Theoretically, it’s a secure way to start investing in real estate, but organizations might impose the kind of exorbitant fees that plague the mutual fund sector. Research is crucial for any investment, as always.

Limited Partnerships in Real Estate

A real estate investment group and a real estate limited partnership (RELP) are comparable. It is a company set up to purchase and manage a collection of properties, or occasionally only one. But RELPs are only around for a limited period.

The general partner is a seasoned property manager or real estate development company. The real estate project will then look to outside investors for funding, in return for a limited partner’s portion of the ownership.

Although the properties of the RELP may generate revenue for the partners regularly, the real reward will come when the properties are sold—ideally for a healthy profit—and the RELP dissolves.

Mutual funds specifically for real estate

Investments in REITs and real estate operating companies are the main focus of real estate mutual funds. With very little initial investment, they offer the chance to obtain diversified real estate exposure. More asset selection is available to investors through them than through purchasing individual REITs, depending on their strategy and diversification objectives.

These funds are fairly liquid, much like REITs. The fund’s research and analytical data are another important benefit for individual investors. Information about recently acquired assets and management’s assessment of the performance and feasibility of particular real estate investments as well as real estate as an asset class may be included.

A family of real estate mutual funds can be purchased by more adventurous investors, who can strategically overweight particular property types or geographic areas to optimize returns.

Why Make a Real Estate Invest?

Because it offers competitive risk-adjusted returns, real estate can improve the risk-and-return profile of an investor’s portfolio. In contrast to bonds and stocks, the real estate market is generally less volatile.

Comparing real estate to more conventional forms of income return reveals another allure. This asset class is particularly appealing when Treasury rates are low since it normally trades at a yield premium over US Treasuries.

Protection and Diversification

The possibility for diversification that comes with real estate investing is another advantage. Real estate typically rises during periods of stock market decline since it has a poor and occasionally negative correlation with other main asset groups.

In other words, adding real estate to a portfolio can increase return per unit of risk while reducing volatility. The better the hedge, the more direct the real estate investment: Publicly traded, less direct instruments, such as REITs, will represent the entire stock market’s performance.

Direct real estate also entails less principal-agent conflict or the degree to which the investor’s interest is reliant on the honesty and skill of managers and borrowers because it is supported by physical real estate. There is some protection available even for more indirect investments. For instance, REITs require that at least 90% of their income be distributed as dividends.

Hedging against Inflation

The positive correlation between GDP growth and demand for real estate is the reason behind real estate’s ability to withstand inflation. Rents rise in response to the demand for real estate, which boosts economies and raises capital values.

As a result, real estate typically manages to keep capital’s buying power by partially offsetting the impact of inflation on renters and partially absorbing it through capital growth.

Leverage’s Power

Leverage is a technique that is unavailable to stock market investors when investing in real estate, except REITs. Leverage refers to the use of debt to fund a larger purchase than you can afford.

A stock purchase requires payment of the entire purchase price at the time the order is placed unless you are purchasing on margin. And even then, because of that enchanted financing technique called a mortgage, the proportion you can borrow is still far lower than it would be with actual estate.

A 20% down payment is often required for traditional mortgages. However, you may be able to get a mortgage that demands as little as 5%, depending on the location of the house you invest in.

This implies that for a small portion of the whole worth, you can gain ownership of the entire property and the equity it contains. Of course, how much ownership you have in the property depends on the size of your mortgage, but you have power from the moment the papers are signed.

This gives landlords and real estate flippers alike confidence. They can take out a second mortgage on their houses and make down payments on two or three more. They own these assets even though they have only paid for a small portion of their overall value—whether they rent these out to tenants who cover the mortgage or hold out for a chance to sell for a profit.

How Can My Portfolio Get Real Estate Included?

Ordinary investors can acquire REITs or funds that invest in REITs in addition to directly purchasing properties. REITs are pools of investments that control and/or own real estate, as well as their mortgages.

Why Is Property Seen As An Inflation Protective Asset?

Inflation-related increases in home prices are common. The reason for this is that new home buyers have to bear the increased costs incurred by homebuilders due to inflation. Still, the cost of existing dwellings increases with inflation. Your fixed monthly payments on a fixed-rate mortgage become progressively more affordable as inflation increases. Furthermore, you can raise the rent to keep up with inflation if you’re a landlord.

Why Do Interest Rates Affect Home Prices?

Since real estate is such a large and expensive asset, financing its acquisition frequently requires taking out loans. As a result, increases in interest rates increase the cost of mortgage payments for both new and current adjustable-rate loans, such as ARMs. Because they have to account for the expense of maintaining the property month-to-month, this may deter buyers.

Conclusion

Investing in real estate can be profitable. And it doesn’t have to be an expensive project. You can invest in real estate in a variety of ways, from purchasing a physical property and renting it out to purchasing modest shares in real estate funds. Regardless of which approach you pick, diversifying your portfolio with real estate assets can help you weather short-term market turbulence and grow your wealth over time.

Even so, putting your money in real estate may make it more difficult to access than liquid investments like stocks and bonds. So, before you invest, thoroughly consider your investing time horizon and the type of investment structure that best suits your particular goals.