Chapter 08: Real Estate Investing (A Beginner’s Guide)

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So far in our investing series, we’ve covered a lot of important information about investing, like the benefits of investing, how to create an investment plan, and how to invest in stocks. But in this chapter, we’ll be going over real estate investing. The purpose of this chapter is to provide you with a solid understanding of how to start investing in real estate.

There are various ways you can invest. You can invest in stocks. You can invest in retirement accounts. You can invest in mutual funds and ETFs. But one of the most common ways to invest is in real estate. Real estate can be an extremely lucrative long-term investment. If you want to make passive income to build your wealth, investing in real estate is one opportunity you may want to consider. 

But before you start buying and renting out properties, you may want to familiarize yourself with how real estate investing works. In this chapter, we’ll be going over how to invest in real estate, the different types of real estate investment options, why investing in real estate might be an opportunity to consider, and more. You can read the entire chapter for a comprehensive understanding of how to invest in real estate, or you can use the links below to skip to a section of your choice.

Why Should You Invest in Real Estate?

You most likely know someone who invests in real estate in some way. Maybe they’re a landlord and rent out properties. Or maybe they flip houses on the side. Real estate investing is very popular, and for good reason! In fact, approximately 35% of Americans believe that real estate is the best long-term investment.

However, real estate investments don’t always pay off. Real estate investing can be time-consuming and expensive, and you can also invest in real estate that loses value over time. So before you choose to invest in real estate, it’s important to weigh the pros and cons so you can decide if it’s the right choice for you.

Pros and Cons 

There are many pros and cons of investing in real estate, such as:

  • Generating passive income: Investing in real estate can be a great idea for generating a passive income that you don’t have to work for every day. Owning real estate can also be a way to generate a steady cash flow and boost your monthly income.
  • Properties can appreciate in value: Real estate properties often increase in value over time, which means that you can potentially sell them for a lot more than what you paid.
  • Building equity: When you pay down your mortgage payment, you’re building equity for yourself, which is a part of your net worth. The more equity you build, the more leverage you’ll have to buy properties, which can increase your cash flow even more.
  • Diversifying your investment portfolio: Real estate investments can also be a great way to diversify your investment portfolio. Generally, investors strive to have both long-term and short-term investments in their investment portfolio so they can try to reduce their risk in the event of economic turmoil.

But just as there are many pros of investing in real estate, there are also some cons, including:

  • Time consuming: Investing in real estate is a long process, so if you’re looking to make money quickly, it’s probably not the right choice for you. 
  • Can be risky: Real estate generally isn’t considered a low-risk investment because the real estate market can be extremely volatile. Real estate income can also be variable. There are some months when you might be making a lot of money, and other months where all the money you’ve made has to go towards maintenance. 
  • Expensive: Buying real estate properties can be very expensive and the transaction fees can be costly. In addition to mortgage payments, you may also have to pay commissions, insurance, closing costs, and various other fees that can add up over time. 
  • Properties can decline in value: Your real estate properties may appreciate in value, but it’s also possible that your property can decline in value over time, which means you could end up losing money. 

It’s very important that you’re aware of these pros and cons before you choose to invest in real estate. Whether you become a landlord or flip houses, you need to be sure that investing in real estate is the right choice for you.

Are There Tax Benefits to Real Estate Investing? 

Yes, there are various tax advantages related to investing in real estate. When you own an investment property, you can deduct various expenses from your taxes, like your mortgage interest, maintenance fees, property insurance, and several other costs.

If you make a profit off of selling your property for more than what you paid, that gain also won’t be taxed as income. It will be taxed as capital gains, which is usually taxed at a lower rate than income.

What Kinds of Real Estate Investment Options Are There? 

There are several different kinds of real estate investments that you can choose to invest in. You may want to familiarize yourself with these options so that you can choose the best one for you.

Rental Properties

Buying rental properties and becoming a landlord is a very common type of real estate investment. Owning rental properties is a very hands-on option because you have to actually manage the properties. However, there is a lot of flexibility when it comes to rental properties. You can do long-term properties and rent them out for 12-month periods, or you can do short-term rentals, like with Airbnb.

With rental properties, you have the opportunity to make money off your tenants who pay you rent. Rental properties can also appreciate in value and you could potentially make a considerable profit if you sell the property for more than what you paid for it.

 
Real Estate Investment Trust (REITs)

Real estate investment trusts (REITs) are another popular option if you want to invest in real estate but don’t want the full responsibility of managing a rental property. REITs are a way to invest in real estate without actually buying the physical property. REITs are companies that own properties like office buildings and retail spaces. 

REITs can be a solid investment option for a few reasons. They tend to have high dividends because the companies are required to give at least 90% of their net income to their investors. REITs can also be an option for diversifying your investment portfolio. However, REITs are also subject to frequent fluctuation and typically come with high management fees.


Real Estate Investment Groups (REIGs)

Real estate investment groups (REIGs) are businesses that focus on buying, selling, and financing properties. Usually, a real estate investment group will buy a set of condos or apartment units and then sell the individual units to investors who then become part of the group.

The company that buys the property will manage finding tenants and taking care of maintenance. There is a chance for larger returns with real estate investment groups because they typically diversify their investments to maximize profits. There are also fewer limits with how REIGs operate compared to REITs. However, it’s also possible that the group fees cost more than the profits and if the group is run by inexperienced individuals, it can pose a lot of risk.

Real Estate Limited Partnerships (RELPs)

A real estate limited partnership (RELPs) is a type of real estate investment group. A RELP is a group of investors who combine their money to invest in real estate property. With a RELP, there will be several investors and a manager who watches over them. 

RELPs can generate a high profit, but it can also be a very risky investment. There are also potential tax benefits of RELPs because the net income or losses are given to the partners of the group annually.


Real Estate Mutual Funds 

Real estate mutual funds are a type of investment that’s made up of securities of companies that buy real estate with money from investors. Real estate mutual funds are a fairly easy way to invest in real estate because you have a manager who chooses your investments and you collect any dividends. This is a more hands-off approach to real estate and is an option for those who have a lower risk tolerance.

Flipping Houses 

Flipping houses is probably the most involved and risky type of real estate investment, but it can also make you the most money. When you flip a house, you basically buy a home, make a bunch of renovations, and then hopefully sell it for more than what you paid.

If you make the right renovations and the housing market is doing well, you stand the chance to make a considerable profit from flipping your house. But unfortunately, the housing market can be extremely volatile, so there’s no way to know if you’ll actually make money from flipping a house. It can also be really difficult to not overspend when it comes to making renovations on a house, so you have to budget very carefully.

Buy Your Own Home

You might not realize it, but buying your own home is actually a way of investing in real estate. When you buy your own home, you start to build equity with your monthly mortgage payments, which you can use to buy even more properties. Over time, your home may also appreciate in value and you can potentially make a profit from selling it. Buying your own home may not be as lucrative as the other types of real estate investments, but it’s definitely something to think about.

In Conclusion

To prepare for the future, you may want to create a financial plan and learn how to manage your money. And if you want to build your wealth and increase your cash flow, investing in real estate can be a lucrative opportunity. Investing in real estate can help you take control of your financial future by creating a second stream of income and helping you build equity.

But before you can go ahead and become a landlord, it is crucial that you know how to invest in real estate—which you should now have a much better understanding of after reading this chapter. Investing in real estate has its pros and cons, so it’s important that you understand the basics of investing in real estate before you make any decisions.

And once you’re more familiar with how to invest in real estate and whether or not it’s the right choice for you, you can move on to the next chapter in our investing series, which covers everything there is to know about calculating return on investment.

Sources: Gallup

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.

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