How to invest in real estate: A Complete Guide for 2022
What kinds of real estate are available for investment?
People typically invest in one of four types of real estate:
- Residential real estate, such as townhomes, condos, and single-family rentals (SFRs), as well as modest multifamily structures with no more than four units.
- Commercial real estate, such as strip malls, office buildings, sizable apartment complexes, or sites having a mix of business and domestic space.
- Industrial property, such as warehouses, distribution centers, cold storage facilities, and properties for research and development (R&D).
- Property that will be developed or used in the future, such as agricultural land used to grow crops or raise cattle, subdivision lots, and individual lots on which to erect a house or other structure.
Tips for real estate investment
Real estate can be invested in a variety of ways, such as by wholesaling, flipping homes, and buying stock in limited liability or real estate partnerships (LLC).
Here are 4 popular real estate investment ideas for investors looking for a well-balanced mix of possible risk and profit in their portfolios.
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Renting out single-family dwellings
Buying a single-family rental (SFR) house is another well-liked real estate investment idea. The ideal SFR may provide nearly all the benefits that a real estate investor seeks, including regular rental income, long-term property value growth, and tax advantages.
According to the most recent Single-Family Rental Investment Trends Report, the rate of increase in vacant-to-occupied rent over the previous year increased by 12.7%. Since May 2020, the annualized monthly rent growth for properties that are already occupied has averaged 8.1%, vs a historical average of 3.3%. Single-family rental property occupancy rates are at 95.3%, the highest level since 1994.
ETFs and real estate investment trusts
Companies called real estate investment trusts (REITs) buy, hold, and manage a variety of real estate, such as residential rental properties, student housing, commercial real estate, and special purpose real estate like mobile phone towers. Online stock trading is available for publicly traded REIT shares, just like it is for any other type of stock. One of the benefits of investing in a REIT is that they must distribute 90% of their income to investors in the form of dividends.
The real estate sector’s securities are held in baskets by real estate exchange-traded funds (ETFs).
Crowdfunding for property
Platforms for real estate crowdfunding give investors a means to invest small sums of money in significant real estate endeavors including single-family rental house developments, apartment buildings, office buildings, and shopping malls.
Contrary to publicly listed REITs, however, funds invested in crowdfunds may be locked up for several years, and crowdfund shares are typically illiquid and challenging to sell. The fact that some possibilities are only open to authorized investors with a net worth of at least $1 million (excluding a primary property) or with an annual individual income of $200,000 or more is another possible disadvantage of crowdfunds for real estate.
Why should I invest in real estate?
Real estate investments are made for a variety of purposes, such as generating rental income, gaining from long-term potential value growth, and lowering taxable net income.
One of the special aspects of real estate as an investment asset class is that it would be possible to attain all three of these outcomes simultaneously while utilizing other people’s money: income, long-term profit, and tax savings.
Leverage your real estate investments
Leverage, sometimes known as other people’s money, is frequently used to fund the purchase of real estate by individuals who participate directly in the market by owning property such as a single-family rental (SFR) house.
Assume an investor pays $120,000 for an SFR to demonstrate how leverage works. One option is to pay cash; another is to leverage the home acquisition by putting down a 25% down payment of $30,000 and borrowing the remaining amount.
Let’s now say that the house is now worth $166,000 after five years. If an investor had paid the full purchase price in cash, the profit would have been $56,000, and the cash-on-cash return would have been 47% ($56,000 profit/$120,000 cash invested for the buying price).
The creation of a consistent monthly cash flow is another reason people invest in real estate.
Depending on the type of real estate held, an investor may make money through dividend payments from a REIT or crowdfund, or by directly owning a property, they may receive an annual cash return.
Benefit from long-term growth
Long-term holdings of housing prices often increase in value, yet there may also be periods when property prices fall.
The median sales price of homes sold in the United States has climbed by more than 25% since the second quarter of 2020 and by more than 94% since the end of the Global Financial Crisis (GFC) of 2007–2009, according to the Federal Reserve.
The median sales price of homes sold during the GFC did, however, fall by around 20%. Millions of homeowners lost their houses during these two years to foreclosure, allowing some buyers to acquire affordable homes while they awaited the real estate market’s recovery.
Advice on selecting a single-family rental
Directly owning rental property needs work and preparation in addition to the potential for recurring income that investing in a single-family rental may provide. Before investing in a single-family rental house, investors may want to take the following advice into account:
- Pay off personal debt with a high-interest rate to free up extra funds for when and if needed.
- For an investment property loan, a down payment of 25% of the purchase price must be saved or raised.
- Find a place where there is a high demand for rental property, a growing population, and a thriving job market.
- Analyze existing and upcoming rental income, operating costs, and the expected return on investment to crunch the figures.
- Contribute to a capital expense account to ensure that money is set aside for significant renovations and upkeep.