Real Estate Investments: Getting Started

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Real Estate Investments
There are several different types of real estate investments you can pursue such as REITs, REIGs, purchasing a rental property, or even buying your own home. However, it’s important to consider all the potential pros and cons of each type of real estate investment, such as requiring a large amount of capital up front.

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Real estate has long been an asset of choice for those who are looking for opportunities to create supplemental income. 

Real estate could potentially offer a consistent cash flow from rental income. On top of rental income, investors may be able to benefit from asset appreciation over the long term. 

But real estate investing isn’t necessarily easy, but some forms of real estate investing may pose fewer barriers than others. 

Active real estate investing offers the benefit of direct ownership, but also requires large commitments of time, lump sums of money, and ongoing responsibility. 

On the other hand, passive real estate investing significantly lowers barriers to entry, expanding access to real estate investments, and sometimes with much less maintenance required.

Are you ready to be an investor? Let’s chat “real estate investing”. Read on to learn about different real estate investments and the pros and cons of each. Or, use the links below to jump to a section of your choosing. 

Active vs. Passive Real Estate Investments 

Active and passive investing are two real estate terms you’ll hear a lot. While these two types of real estate investments are very different, they both offer several potential benefits. Here’s what you need to know about active vs. passive real estate investments.

Active Real Estate Investing

When you hear the term “real estate investing”, you probably picture purchasing and selling or renting a property. These types of real estate investment are known as active real estate investing. They involve:

  • Hands-on real estate purchases
  • Active property management
  • Market knowledge 

Active real estate investing demands a wealth of real estate and financial acumen. But when done right, it can be an extremely lucrative investment. 

Passive Real Estate Investing

If you’re not ready to buy a house, you can still reap the rewards of supplemental income and asset appreciation through passive investing. Plus, passive investors can receive the benefit of greater real estate diversification without the ongoing responsibilities of landlording or significant risk of flipping. 

If you aren’t ready to commit to a large down payment for a single property, a passive investment can lower the financial barrier. Where properties can range from tens of thousand to millions of dollars in acquisition and operation fees, passive investments are typically more accessible. Plus, they allow you to make money in your sleep

In addition to requiring less capital, a passive investment also requires significantly less maintenance from an investor. The responsibilities, and ultimately the success of a property, fall on the shoulders of the investor in an active investment. In a passive investment, an investor only provides capital and lets the investment professionals take it from there. 

6 Common Types of Real Estate Investments

There are several different types of real estate investments you may potentially choose. Each type of investment comes with benefits and drawbacks that you may use to decide how you want to invest. Below, we’ll break down 6 common types of real estate investments.

  1. Real Estate Investments Trusts (REITs)

Real estate investment trusts (REITs) are like mutual funds for real estate. Your money is put in a pool with other capital used to invest in income-generating real estate assets.

There are a variety of potential benefits with REITs, including:

  • Accessibility: Real estate investing for beginners may be tough with direct real estate investments due to the cost involved. With REITs, you can invest in real estate without a large amount of capital.
  • Liquidity: While direct real estate investments are generally very illiquid, REITs are similar to investing in stocks in that they can be bought and sold from day to day. This means that your money isn’t necessarily going to be tied up in long-term investments.
  • Professional management: With REITs, everything is handled by a professional management company. You don’t have to worry about the day-to-day work that comes with managing real estate investments.

These potential benefits may be attractive to real estate beginners, but there are some potential drawbacks you may want to consider as well. 

Here are some of the potential downsides to investing in REITs:

  • Share prices: Like stock prices, REIT share prices can drop with decreases in property values. In this sense, REITs could potentially be a risky investment.
  • Fluctuating revenue: Revenue from REITs also depends on occupancy rates, which means that revenue may potentially fall as a result of property vacancies. 
  1. Real Estate Investment Groups (REIGs)

Real estate investment groups (REIGs) are another option you may potentially consider if you’re looking for a new real estate investment opportunity to pursue. While REIGs are similar to REITs on the surface, there are some key differences.

Flexibility and opportunity make REIGs an attractive investment opportunity for some. Here are some of the benefits:

  • More capital: Pooling money may potentially allow investors to get access to the capital they need for larger real estate investments.
  • Shared responsibility: Since everybody in the group has a vested interest in the success of your real estate investment, there’s usually a sense of shared responsibility.
  • Flexibility: You could potentially take a hands-on approach or let the group operate as a hands-off real estate investment depending on your situation.

While REIGs have their potential advantages, you may also face these challenges:

  • Effort: If you’re taking a hands-off approach, there may be issues regarding how well the people who are choosing to take a hands-on approach are handling things.
  • Disagreements: Disagreements regarding which properties to invest in may potentially make it difficult to move forward on opportunities, which may result in some groups losing out on investments that could have been profitable.
  1. Online Real Estate Investing Platforms

By allowing individuals to invest in REITs and obtain private equity in real estate, online real estate investing platforms offer a convenient, tech-focused investment opportunity. There are several different platforms available.

Online real estate investing platforms may offer a more realistic investment opportunity for those with lesser capital. Here are some of the things that make these platforms effective:

  • Accessibility: Small investment minimums and easy online access may make these platforms a more accessible real estate investment opportunity for some.
  • Simplicity: Because many of these platforms offer REITs, you get the benefits of a simpler investment as a result of professional management.
  • Variety: There are several online real estate investing platforms to choose from, many of which allow you to choose between different investment portfolios.

Of course, online real estate investing platforms aren’t without their drawbacks. In addition to the tech barrier that exists for some people, here are some of the other potential downsides of online real estate investing platforms:

  • Accredited investors only: Many of these platforms are only available to accredited investors, which may make them less accessible.
  • Additional fees: Convenience and professional management come at a cost, which usually means there are additional fees when you’re using an online real estate investing platform.
  1. Buying a House

There’s always the good old-fashioned real estate investment: buying a house. Buying a house may potentially benefit you in several ways, including giving you a place to live and helping you build equity over time.

The benefits you get from buying a house may vary depending on the home. Here are some of the potential upsides of buying a house as a real estate investment:

  • Equity: Buying a house could help you to build equity over time as you pay that house off. This could be a way to achieve better financial standing and increase the total value of your assets.
  • Appreciation: There’s a chance the home you buy will increase in value, which means you could potentially profit off your purchase.
  • Passive income: If you decide to rent out the home, you may potentially earn a passive income while working to pay off your mortgage.

As exciting as it is to buy a house, it’s not all sunshine and rainbows. There are also a handful of drawbacks to buying a house:

  • Capital: Buying a house requires a lot of capital. Even if you secure a mortgage, you still have to put a certain amount of money down, which may be a barrier to buying a house for some.
  • Upkeep and management: When you own a home, you’re responsible for taking care of it and making sure all the bills are paid. When it’s time for expensive repairs, the money comes out of your pocket.
  1. Rental Property

Rental properties have been the default choice for average investors who want to step into the world of real estate investing. 

Investing in a rental property has obvious upsides. Those include: 

  • Regular income: A rental property is a regular and recurring source of monthly income as long as it remains occupied 
  • Tax deductions: There are a wealth of tax deductions that come along with being a landlord, including the cost of maintaining the property, mortgage interest, property taxes, and more
  • Appreciation: Generally speaking, properties tend to increase in value over time, which can enable to you raise rent and increase income over time

While this option certainly has the potential to offer supplemental income, it also comes with many ongoing, hands-on responsibilities – and its profitability depends entirely on the investor. Here are challenges you may face when investing in rental property: 

  • Upfront costs: In addition to the down payment on the rental property, you may need to perform repairs and renovations to get the rental up and running 
  • Illiquidity: A rental property is also considered an illiquid investment, meaning that an investor should expect to tie up their money in the asset—typically for years
  • Time: Being a landlord can be a time-consuming job; not only do you need to handle rent collection, but you’ll also need to be available around the clock for maintenance issues and more 
  • Vacancy: In order for your rental investment to remain profitable, you’ll need to keep it occupied; finding new occupants for your building takes both time and effort
  • Risk and liability: In addition to needing to comply with state and federal rental laws, landlords may face evictions, property damage, litigation, and more 

Investing in a rental property is a serious commitment. It’s easy to see how a side hustle like this can turn into a full-time job. An investor must have the knowledge to assess, buy, and manage the property in order to turn a profit each month. Without this expertise, you risk not earning a profit at all, or worse, losing money.

  1. Property Flipping

For those looking for an active real estate investment without the long term commitment, flipping investment properties is an appealing choice. In 2021, 323,465 single-family homes and condos were flipped in the U.S., which was a 26% increase from 2020.

You’ve probably seen shows about flipping on home renovation networks. Investors purchase a dated house with good bones, update it with fresh paint and modern appliances, and voila! They turn tens of thousands of dollars in profit. 

In truth, flipping investment properties is a much more complex process. For one, not all property flippers perform renovations on their purchases. Some simply jump at an undervalued property and instantly turn it for a profit. For those who do perform renovations, decisions and changes must typically be performed rapidly if you want it to have the best chance at being lucrative. 

House flipping is truly high-risk, high-reward. When a flip goes well, investors could reap the benefits, including: 

  • Quick return: Real estate flipping can turn a significant profit very quickly; it takes about six months on average to flip a house 
  • Market stability: Generally speaking, the real estate market is predictable and fairly unsusceptible to large and unexpected fluctuations 
  • Can be hands-off: If an investor doesn’t plan on performing renovations on the property, house flipping can be a fairly hands-off process 

Again, high-risk comes along with this high-reward. Real estate flippers may face significant risks, including: 

  • Market knowledge: If you want to turn a property for a profit, you typically need to have in-depth knowledge of the real estate market; otherwise, you risk making significant investing mistakes
  • Loss: There’s always the potential that a property simply won’t sell at the price you expected, and that may leave you at a loss 
  • Upfront costs: Just like purchasing a rental property, flipping comes with significant up-front costs; this is especially true if you plan on performing renovations on your investment 
  • Taxes: A significant boon on a real estate investment can shoot you into another tax bracket, increasing your tax liability

Benefits of Adding Real Estate Investments to Your Portfolio

While real estate investing isn’t right for everybody, there are some potential benefits of adding real estate investments to your portfolio. For example, there are certain tax breaks and tax deductions you may qualify for as a result of your real estate investments. Here are some of the potential benefits:

  • Generate cash flow
  • Qualify for tax breaks and deductions
  • Build equity
  • Increase value through appreciation
  • Potential collateral

Risks of Real Estate Investments 

Of course, there are also potential risks when you’re investing in real estate as opposed to buying stocks or investing in gold. It’s important to keep in mind that real estate investments are far from a guaranteed source of money. Here are some of the potential risks of real estate investing:

  • Vacancies
  • Problem tenants
  • Bad locations
  • Negative cash flow

How Do I Start Investing in Real Estate?

Wondering how to get started with real estate investing? You may want to consider your financial situation before you start investing in real estate, but here are some tips when you decide to start:

  • Identify your budget so you know how much you have to invest
  • Figure out your investment goals so you can choose investments that suit those goals
  • Compare your investment options
  • Consider working with a financial advisor

Track Your Real Estate investments with Mint

With the right tools and the right investments, real estate investing can potentially be very lucrative. However, it’s important to understand your budget, your goals, and your investment options before you invest.

With the Mint app, keeping track of your real estate investments is a breeze. You can use Mint to track all your investments in one convenient place, so you can make sure you’re always on track to meet your investing goals.

Sources: ATTOM 

This is for informational purposes only and should not be construed as legal, investment, credit repair, debt management, or tax advice.  You should seek the assistance of a professional for tax and investment advice.

Third-party links are provided as a convenience and for informational purposes only. Intuit accepts no responsibility for the accuracy, legality, or content on these sites.

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Kendall Davis
Kendall Davis

Written by Kendall Davis

Kendall Davis leads the Investments Team at Fundrise, the first investment platform to create a simple, low-cost way for anyone to unlock real estate’s historically consistent and exceptional returns. Since joining in 2014, Kendall has built out investor relations for the company, focusing on all aspects of the Fundrise investor experience and furthering the company’s mission to democratize real estate investing. Stay up to date with the latest from Fundrise through their social channels:Facebook, Twitter and LinkedIn. More from Kendall Davis

Sources

Let’s chat real estate investing. Read on to learn about different ways to invest in real estate, and the pros and cons of each.

6 responses to “Real Estate Investments: Getting Started”

  1. Hello, great article thanks for sharing. Fundrise looks really promising, however I’m a British national living in Vietnam therefore am not eligible. Are there other companies you could recommend that operate for international investors like myself? Kind Regards. James

  2. Great insight! When the article mentions passive real estate investing within portfolios; is it the same as stock portfolio? But instead with homes? So essentially I’m investing in multiple homes? How does that work?

  3. You completely ignored a common solution for the landlord hassle. I employ a property management company to handle our rental properties. It does cut into our profit, but without them, I couldn’t own more than 3-4 houses. It has enabled me to run my business as more of an investment than a business with daily hassles.

    • Having a management company maintain your properties is only one solution to a multi faceted problem that comes with active real estate investing.

      You completely ignored the capital requirement issue, which is the biggest hurdle anyone will have to overcome to even get started in the first place.

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