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If you’re looking to conquer the US real estate market, understanding the basics of investing in real estate becomes necessary.
- Americans consider real estate investment the best long-term investment compared to any other type of asset.
- Gallup also indicated that 35% of Americans chose to invest in the real estate market.
Over the past 50 years, real estate has emerged as a prominent vehicle for investment. Today’s Investors are more inclined towards real estate investment than other investments.
But! Wait a second! If you want to cover the basics of investing in real estate, you must delve deeper into this guide.
So, Let’s start with the basics of investing in real estate!
What is Real Estate Investing?
Real estate investment for beginners is buying property (as a part of an investment) rather than a primary residence to generate income. You can understand this as any piece of infrastructure, land, structure, or other tangible assets that are immobile yet transferable to earn profit out of it.
Real estate investment has become a vital component of wealth and helps you achieve your long-term financial goals. The main objective of these investments is to purchase property to generate capital growth and income. This category includes Farmhouse, residential, retail, business, and leisure investments.
Why do Real Estate Investing?
For millions of Americans, real estate investment is their topmost preferred option because of the following reasons:
1. Diversification & Protection
The first benefit of investing in real estate for beginners is its diversification capability. Real estate has a negative (in some cases) and low correlation with prominent asset classes, which means if the value of stocks is reducing, real estate value will rise.
Adding real estate investment to a portfolio can lower its volatility and, in turn, offer higher returns considering the risk factor. Direct the real estate investment, better the hedge. In the case of less direct, publicly traded vehicles, like REITs, will reflect the stock market’s overall performance.
2. Tax Benefits
Real estate can be a profitable investment without charging heavy taxes. You can take several deductions to offset income, including depreciation deductions and management expenses.
Furthermore, regulations such as 1031 opportunity zone funds and exchange funds can negate taxes.
3. Inflation Hedging
Real estate’s inflation-hedging ability stems from the excellent relationship between real estate demand and GDP growth. With economic expansion, the demand for real estate drives higher rent, which translates into higher capital values. Hence, real estate trends maintain capital’s purchasing power by passing inflationary pressure on tenants and inculcating some inflationary pressure in capital appreciation.
11 Basics of Investing in Real Estate in the USA
1. Land Speculation
Land Speculation takes place when you buy land with the intent of reselling it. You can own the land in some areas but sell the mineral or water rights to other firms like oil and gas companies or mining operations.
Land Speculation is a short-term form of real estate investment. A savvy Investor who understands the industry needs they are courting—farmers, commercial developers, oil and gas miners, or homebuilders—can make a profit by picking the right land parcel at the right time at the right price.
Land speculation is simple, but it can be problematic. You need to understand your land’s benefits for its specific market, potential, and current value. Hiring an expert to document all these will be beneficial for you.
2. Property Flipping
Real estate flippers are different from buy-and-rent landlords. Flippers aim to purchase a property with the intent of holding it for a short term (less than three months) and selling it quickly to earn a profit. You can use FlipSplit to renovate and resell the property.
The two major approaches to property flipping are:
Repair & Update: This approach allows a real estate investor to purchase a property that will rise in value after undergoing repairs and updates. You complete the repair quickly and make the property ready to sell at a price that exceeds your investment.
Hold & Resell: This property flipping method works differently. Instead of purchasing a property and fixing it up, you purchase in a fast-growing market, wait for months or years, and then sell at a profit.
3. Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) are the funds type that you can purchase open market shares. Similar to private real estate projects, REITs are traded like stocks only. They are the liquid, which means you are okay with losing money if you want to convert it into cash quickly. The best REITs you can buy in 2024 is American Tower Corporation, with a dividend yield of 3.2%.
With REIT investing, you need not worry about daily property issues or property management, but you need to be concerned with the REIT’s leadership and how the money is being spent. With other fractional real estate investments, you need to be sure that, with the low debt, they should have a fair equity amount in case of a market downturn.
The entity should pay out 90% of taxable profits as dividends to shareholders (to qualify as a REIT.) By this, they avoid paying corporate income tax compared to a regular company that would be taxed on its profits. Therefore, the returns could easily be distributed to its shareholders.
4. Real Estate Investment Groups (REIGs)
Real Estate Investment Groups (REIGs) are mutual funds for rental properties. If you want to buy a rental property but avoid being a landlord, a real estate investment group might be your ultimate solution.
A company will build or buy some buildings, usually apartments, allowing the investors to purchase them via a company by joining the group. If we talk about real estate for beginners, a single investor can have various or one unit of self-contained living space. However, the company manages the investment group and units and takes care of advertising, finding tenants, and maintenance. In return for this management, the company takes a monthly percentage of rent.
You’ll be able to see various versions of investment groups. In the standard version, the lease goes in the investor’s name, and all the units pool a rent portion to protect against occasional vacancies. This means you’ll have a sufficient chance to pay off the mortgage if your unit is empty.
5. Short-term Rentals
Short-term Rentals are the best way to make extra money with accessory dwelling units (ADUs) or spare houses on your property. When making short-term rental units out by the day or week, you can be selective regarding the person who holds the keys. You can also experience remarkable returns that you could experience with a regular residential lease.
Remember that the neighborhood that houses the short-term rental property permits you to do that kind of transaction since several towns and homeowners associations are on the verge against the landlords of short-term rentals. Moreover, you must also be on top of your customer support game since guests’ reviews can examine the popularity and demand of your rental property.
6. Small-scale Residential Rental Properties
Some people prefer investing in real estate by purchasing small residential properties. A couple of duplexes or a house might be the best starting point to offer you a feel for being a hands-on landlord. Most small landlords prefer to pick their renters and handle the maintenance. As you move on with the basics of investing in real estate and creating your property portfolio, it will be good to hire a property manager.
We understand the landlord business since we have all rented something at some point. But you’ll also need to enforce your leases and maintain the property, including collecting rents from stubborn tenants and calling the backhoe and plumber when a sewage line suddenly collapses.
7. Large-scale Residential Rental Properties
Like small-scale residential rentals, large-scale rental properties are generally permissive. These are usually larger housing communities or apartment buildings with a single owner or a residential housing portfolio. Unless you have a cash-available amount, you will invest in these properties. The group can be of a few friends who have cash to invest or a company that permits you to purchase a share.
These portfolios can be an excellent way to learn the basics of real estate investing without any construction or landlord experience. You need to pay attention to the company managing your investment portfolios. They must have a paper (cash) and debt cushion to upkeep the property and define future goals.
8. Commercial Real Estate
Investing in commercial real estate can have different meanings. You can create a small self-storage facility or purchase a series of empty warehouses in a mini-mall, industrial park, or even an office building. Keeping these properties on lease requires a distinct skill set, but in the end, commercial properties have higher values than residential real estate, which carries higher rents.
Commercial real estate can be challenging. Some types of rent are complex in down markets. When entering directly into commercial real estate, having a good real estate agent or property manager on your side is crucial. There are manifold ways to profit from commercial real estate. You can even take advice from CBRE, the global commercial real estate investment and services leader.
9. Use an Online Real Estate Investing Platform
The basics of investing in real estate involve using an online real estate investing platform. This platform connects developers to new investors who want to finance projects via equity or debt. Investors hope to get monthly or quarterly distributions in exchange for facing significant risks and paying a fee to the platform.
Unlike many real estate investments, these are illiquid and speculative, which means you cannot quickly unload them like you do stock trading.
You may require money to make money out of it. Various online investing platforms are only open to accredited investors, as the Securities and Exchange Commission mentioned. Some popular online real estate investing platforms are RealtyMogul, EquityMultiple, Fundrise, and many more so that you can easily build your real estate portfolio.
10. Rent Out a Room
You could rent your part of your home to dip the edge of your toes in the real estate waters. These arrangements can substantially lower housing costs, allowing people to stay in their homes as they offer benefits from price appreciation on their property.
You can also add some roommates and make a mortgage payment more attainable for people. Renting out a room makes you feel more accessible rather than a fancy concept of real estate investing for beginners. If you have a spare room that is useless to you, it’s good to rent it out.
11. Real Estate Mutual Funds
Real Estate Mutual Funds invest mainly in real estate operating companies and REITs, providing the ability to obtain diversified real estate exposure with a small amount of capital. They offer investors a much more comprehensive selection of assets that can be achieved via purchasing individual REITs, depending on their diversification and strategic goals.
These are liquid funds, just like REITs. Another essential benefit to retail investors is the research and analytical information offered by the fund. This includes management’s perspective on performance and viability and details on acquired assets of particular asset classes and real estate investments. Speculative Investors can invest in real estate mutual funds, overweighting specific property regions and types to accelerate returns.
Final Take
This guide on the basics of investing in real estate not only discusses different ways of real estate investments but also explains why to invest in them. As an investor, you must think of several factors, such as how much capital you have to invest, how much time you have, and whether you want to be the one who can deal with the inevitable household issues.
So, “Think Twice and Wise” before buying and selling any real estate property to earn a multi-bagger profit.
Happy Real Estate Investing!
