The different ways to invest in real estate: A complete guide
The housing market in the US is hot, right now. Red hot. Last year, house prices soared by an incredible 18.8%!
Low inventory and favorable mortgage rates are causing bidding wars for homes. It was expected to slow down, but the signs are that it’s as hot as ever into 2022.
With mortgage rates expected to rise, now could be a great time to get in while it’s cheaper. But what are the best ways to invest in real estate?
Some of them are more hands-off than you might realize! Let’s take a closer look.
Become a Landlord
When you think about investing in real estate, chances are you think of becoming a landlord. This can give you a lot of control. You can manage the property yourself, choose your own tenants, and then care for maintenance and rent collection yourself.
Alternatively, to attempt to earn a more passive income, you can work with a property management company. This option is more expensive but it lets you keep your day job.
If you have the capital to purchase a property outright, you are in a good position. You won’t need to worry about mortgage rates rising. Buy smart and you should also benefit from an appreciating asset, plus some tax breaks.
It’s not without its risks though. Vacancies can be very costly and you need to buy the right rental in the right area. Get the wrong tenants and you could face huge repair bills and costly evictions.
Plus, if you use financing to buy your property, you’re vulnerable to rising interest rates.
Buy a Vacation Rental
The rise of online vacation rental platforms like Airbnb and the pandemic has created a domestic tourism boom. If you’d like to cash in and have a sweet vacation pad to escape to now and then, this could be a great option for you.
The downside? There’s lots and lots of work involved in managing a vacation rental.
You have to market it. Clean it and replenish stocks between each visit. Plus, vacation homes are more prone to serious wear and tear than regular rentals.
But on the flip side, if you manage it right, or get someone to do that for you, you could have a nest egg for your retirement. Plus, many expenses are tax-deductible.
Buy and Flip a Fixer-Upper
There are a couple of short-term ways to invest in real estate and probably the most popular is flipping houses.
If you already own an extra property, now could be the time to flip it. House prices have risen astronomically, but that rate of growth can’t last. If the work is only cosmetic, this could be your chance to strike gold.
Generally, the rule of thumb with flipping houses is to buy a bargain house that only needs superficial repairs. Choose a popular style of home in the right area. But be prepared for homes that just won’t sell and the possibility of slimmer profit margins than you had hoped for.
Build and Sell a House
You know we mentioned there’s an inventory shortage across the nation right now? Why not neatly sidestep that issue by building a house yourself!
Building a spec house has its advantages over buying a house to flip. First, you know what you’re getting into. You buy a plot of land and you build it to spec – no surprises.
New construction costs are usually a lot more predictable. A fixer-upper can throw up all kinds of unexpected headaches, from ancient plumbing to termites.
Second, spec construction loans can make this achievable. You’ll have to comply with the lender’s builder and property requirements. But it’s a great way to build family homes, townhouses, and even condos to sell on.
Invest in an REIT or REIG
An REIT or REIG can be a great form of investing for beginners. They allow you to invest in real estate without getting your hands dirty.
Real Estate Investment Trust (REIT)
Investing in REITs is like buying shares in property. And REIT uses money from investors to buy and manage properties. Other types of REITs invest in real estate debt, such as mortgages.
Some REITs often invest in commercial buildings, such as retail parks, hotels, and healthcare facilities. There are also residential REITs that own and operate apartment buildings. This can be lucrative in certain markets where homeownership is expensive.
The key benefit of an REIT is that the IRS requires them to pay out 90% of their taxable income each year to their shareholders.
Real Estate Investment Group (REIG)
If you like the idea of buying real estate but don’t want to manage it, an REIG could be a good option.
Typically, an investor buys or builds a multi-unit residential building. They then sell the individual units to investors- this is when you buy into the REIG. The REIG then manages the building.
You take home the rent, minus management fees. A bonus is that there is usually a fund established to guard against temporary vacancies. When it works well, you get an appreciating asset and a steady income.
Real Estate Crowdfunding
In the world of real estate investments, crowdfunding is one of the newest and potentially most interesting options. It can be risky, but it also allows you to make small investments.
The concept is that many people invest usually small amounts of money in a real estate project or building. They are then entitled to a portion of the profits.
That said, you currently need to be a US-accredited investor. That is someone who can invest in securities that are not registered with the SEC. Generally, this refers to higher net worth individuals.
Choosing the Best Ways to Invest in Real Estate
With so many ways to invest in real estate open to you, there’s likely to be one that suits your needs. If you want to make real estate investments your day job then being a landlord or vacation homeowner could be ideal.
Find a fixer-upper or build a spec house for a short-term real estate investment option. Alternatively, invest for the long-term with a hands-off option.
Head over to our Real Estate section now for more hints, tips, and insights.