If you’re looking to generate some passive income, dipping your toes into the real estate game is a common suggestion. But real estate investing refers to a wide range of potential strategies and asset types and choosing the right path is crucial in order to be successful.
Plus, you’ll want to make sure you get a full picture of the costs and fees associated with buying a new home or property. Mortgage experts can help you determine how much you can afford.
That path will be different for every investor, so it’s important to understand the pros and cons of each method before proceeding. We’ll break down the basics of real estate investing below, so you can get started with confidence.
Types of real estate investing
There are many viable options when it comes to real estate investing, but the methods vary wildly. Here are the most popular ways to get started.
House hackingBuying a rental propertyFlipping homesREITsCrowdfundingHouse hacking
House hacking is when you buy a home with multiple units, like a duplex or triplex, and live in one of the units while renting out the rest. Many investors find that the other units will cover the mortgage, maintenance and utility costs while leaving room for profit.
See what kind of mortgage rates you qualify for today to start crunching the numbers.
The downside of house hacking is that you have to live next to your tenants, so there will be less privacy. You may also have more frequent maintenance requests than if you were an off-site landlord.
Buying a rental property
Buying a home or apartment to rent out is one of the oldest real estate investment strategies – but it can also be one of the most challenging. To get started, you’ll have to find a property priced appropriately that you can purchase and then rent for a profit.
You also must decide between short-term and long-term rentals. A short-term rental with a company like Airbnb or VRBO can bring in substantial income, especially if you live in a tourist haven. Having a short-term rental may bring in more cash, but it also requires more day-to-day work.
If you have a long-term rental and don’t want the stress of late-night phone calls from tenants, you can outsource the work to a property management company. This will provide more peace of mind, but you’ll also have to sacrifice some of your profits.
If you’re considering buying a rental property, here’s how you can get started.
Flipping homes
Investors with construction experience may enjoy buying outdated or run-down properties, fixing them up and selling them for a profit. Flipping homes successfully involves either spending dozens of hours doing manual labor or hiring out work from qualified contractors. In general, the less you have to hire out, the bigger profit you’ll make.
Flipping homes is one of the most time-intensive ways to invest in real estate, and it can also be one of the riskiest investments. If you underestimate costs, you may end up just breaking even or even losing money. Plus, if you own the property for less than two years, you’ll have to pay capital gains taxes on the profit.
Since housing prices and building costs have increased since the COVID-19 pandemic began, home flippers may see lower profits than they would have previously.
REITs
A Real Estate Investment Trust (REIT) is an investment in a company that owns multiple types of real estate properties. REITs may include hotels, apartment buildings, malls, office buildings and more. When you buy a share of a REIT, you’re getting access to a variety of properties.
Buying shares of a REIT is the fastest way to invest in real estate. You can purchase REIT shares in an IRA, 401(k) or taxable brokerage account.
REITs may be a good option for consumers who want the benefits of real estate investing without the hands-on approach. You can buy REITs from popular investment companies like Vanguard, Charles Schwab and iShares. REITs are also the most liquid type of real estate investing because you can easily sell your shares at any time.
Crowdfunding
Crowdfunding involves buying into a major real estate project, like a new apartment building or a hotel. Your money will go toward funding the project.
Unlike investing in a REIT, crowdfunding is less liquid. If you want to pull your money out of the project, you may have trouble finding a buyer for your shares. You may also have to pay an early withdrawal penalty, which depends on the crowdfunding site.
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