How to Invest in Real Estate

By Rebekah Green on 12/25/2024.

Understanding how to invest in real estate can open a world of financial opportunities. Whether you're aiming for long-term appreciation, seeking quick returns through house flipping, or looking to generate passive income from rental properties, real estate offers diverse investment avenues. You can also explore commercial property investment or alternative real estate investment strategies.

However, getting started in real estate investment requires knowledge and awareness of your options. In this article, we'll cover:

Beginner's guide to real estate investment, including purchasing your first home as an investment and acquiring your initial investment property for either long-term holding or flipping.
Advanced real estate investment methods, such as property development and commercial property investing.
Alternative investment approaches, including Real Estate Investment Trusts (REITs), crowdfunding, and real estate syndication.

By the end of this article, you'll have a comprehensive understanding of various property investment options, enabling you to choose the strategy that aligns best with your current financial goals and future aspirations.

How to Start Investing in Real Estate as a Beginner

For newcomers to property investment, the traditional approach often begins with purchasing a personal residence. Subsequently, classic real estate investors typically acquire a second property specifically for investment purposes.

Let's delve deeper into these beginner-friendly options.

Buying Your First Home

Your primary residence is indeed an investment. Over time, you'll be paying off your mortgage debt and witnessing the growth of your equity. Eventually, you may choose to sell the property for a profit or enjoy living mortgage-free in it.

Additionally, you could consider "house hacking" by renting out a portion of the property to cover some or all of your mortgage while you reside in the rest.

Buying your own home as an investment comes with several advantages:

Instead of spending money on rent each month, you're building equity in a valuable asset.
You can leverage the equity you've accumulated to finance further investments.
There are tax benefits associated with homeownership.
Obtaining funding for a primary residence is typically easier, especially for first-time homebuyers. There are programs tailored for new homeowners, and lenders often offer loans with lower down payments for primary residences compared to investment properties.

However, there are also potential drawbacks to consider:

Unless you implement house hacking, you won't generate monthly income from your investment.
Regular maintenance and unforeseen repair expenses are part of homeownership, requiring careful budgeting.
After the initial purchase, you'll be responsible for managing the property on your own without ongoing expert real estate advice.

Buying Your First Investment Property

Once you've owned your primary residence for a while, you'll likely gain confidence as a property owner and have saved enough funds to consider purchasing a property specifically for investment purposes.

When it comes to your first investment property, there are typically two traditional routes to consider: buy-and-hold or fix-and-flip.

Buy & Hold

Buy-and-hold entails owning the property for the long term and generating income by leasing it to tenants.

You have the option of long-term rentals, typically under annual leases, or short-term vacation rentals, ranging from nightly to monthly stays.

Short-term rentals can yield higher income but demand more active management due to frequent turnovers and the need for continuous cleaning. They are viable mainly in areas with consistent tourist traffic, and they often experience higher vacancy rates.

Long-term rentals may yield lower income but offer stability and require less attention. They can be suitable for any area with local demand for extended accommodations.

The primary advantages of buy-and-hold investing include:

Monthly rental income.
Tax advantages.
Tenant payments contributing to mortgage reduction, thereby increasing equity.

However, potential drawbacks include:

Ongoing maintenance costs, in addition to the initial investment.
Risks associated with tenants, such as rent defaults or property damage.
Time and expenses involved in finding new tenants and preparing the property for occupancy.

Fix & Flip

Fix-and-flip projects involve purchasing distressed properties, renovating them, and then selling them, typically within a timeframe of 10-14 months.

The primary advantages of fix-and-flips include:

A relatively quick turnaround compared to other real estate investments.
Control over the renovation process, allowing for personalized upgrades and improvements.
High potential for adding value to the property through renovations.
The satisfaction of seeing tangible results from property upgrades.

However, there are potential downsides to consider:

Significant upfront cash is required for the purchase, closing costs, and renovations.
Hands-on involvement is necessary throughout the renovation process to ensure it stays on schedule and within budget.
Experience is crucial for success in flipping, but gaining experience often involves making costly mistakes.
Identifying suitable properties requires market analysis, and deals with the most potential may be located outside of your local market.
There's pressure to find a buyer quickly to minimize losses incurred while the property is on the market.

Advanced methods of investing in real estate

After establishing ownership of your primary residence and acquiring one or more investment properties, you may be prepared to explore more sophisticated avenues of real estate investment.

One option to contemplate is venturing into real estate development or commercial property investment.

How to develop real estate projects

Real estate development often entails acquiring a property, demolishing existing structures, and erecting new projects from the ground up. These developments might encompass multi-family rental properties, commercial office spaces, or industrial complexes.

The advantages of development include:

The thrill of constructing something new.
Potential for significant returns as the project adds value.
Swift sales in areas with high demand or ongoing rental income once the development is finished.

However, there are potential drawbacks:

Development necessitates substantial capital, surpassing the requirements of purchasing income properties.
Zoning regulations must be adhered to, potentially restricting development to specific areas.
A team of experts, from real estate analysts to architects, is essential.
Building from scratch entails more potential for errors.
Returns may take years to materialize, tying up your investment for an extended period.

How to invest in commercial real estate

Diversifying your real estate portfolio beyond low-unit residential properties could lead you to consider commercial real estate investing.

Commercial properties encompass a wide range of categories, including:

Offices
Retail stores
Shopping centers
Restaurants
Hotels
Fitness centers
Medical facilities

This diversity in commercial real estate offers continual opportunities for investment, providing a way to diversify your assets and mitigate the risk of economic fluctuations.

Here are some key benefits of commercial real estate:

Long-term leases: Commercial properties often offer leases ranging from 1-10 years, providing stable cash flow for buy-and-hold strategies.
Favorable financing rates: Commercial real estate investments typically access favorable financing rates.
Tax benefits: Commercial property ownership can offer various tax advantages.
Portfolio diversification: Adding commercial properties to your portfolio further diversifies your investments.

However, there are potential downsides to consider:

Substantial capital requirements: Commercial investments often require significant upfront capital, and obtaining financing can be challenging.
Specialized knowledge: Successful commercial property ownership requires understanding aspects such as commercial leases, common area maintenance charges, and tenant improvements.
Higher risk: Traditional commercial types like retail and office spaces may carry higher risk levels compared to standard residential properties due to changing market demands.

Alternative ways to invest in real estate

If you're interested in real estate investment but lack the necessary cash to purchase a property independently or lack the time to manage a development project, alternative investments could be a more suitable option for you.

1. Crowdfunding

Real estate crowdfunding refers to the practice of pooling funds from multiple investors to purchase a property and share in the profits. This approach can encompass various investment types we've previously discussed, including buy-and-hold residential, fix-and-flips, new developments, and commercial properties.

The benefits of investing through crowdfunding include:

Low minimum investment amounts, often starting as low as $10,000.
Leverage, allowing investors to access projects they might not afford individually.
Diversification potential by spreading investments across multiple projects.
Flexibility in terms of budget and time frames.
Passive income since projects are managed by sponsors or managers.

However, there are potential downsides to crowdfunding:

Limited performance history due to the relatively recent emergence of online crowdfunding platforms.
Lack of control over project direction.
Limited liquidity as investments are typically tied up for the project's duration.
Ownership may be in the form of debt rather than equity, meaning investors own the debt rather than the property itself.

2. REITs

If liquidity and diversification are priorities for your investment strategy, Real Estate Investment Trusts (REITs) may be worth considering. REITs function similarly to mutual funds but consist of stocks in real estate-related companies.

The advantages of investing in REITs include:

Low investment minimums, often requiring only a few hundred dollars to purchase shares.
Moderate liquidity, as REITs are traded on the stock market like stocks and bonds.
Automatic diversification, as each REIT share comprises stock from multiple real estate companies.

However, there are some potential drawbacks to REIT investments:

Lack of control over specific projects or real estate companies included in the REIT portfolio.
Absence of direct ownership of the underlying real estate assets, as investors are purchasing shares in real estate companies rather than the properties themselves.

3. Real Estate Syndication

Real estate syndication stands out as a distinct form of crowdfunding where investors collaborate with a fund sponsor to form a single legal entity for investing in projects. This arrangement establishes a clear and transparent ownership structure, offering several advantages beyond traditional crowdfunding:

Project Selection: Investors have the opportunity to choose specific projects, providing greater control over their investment portfolios.
Equity Ownership: Syndication typically grants investors equity ownership in real estate projects, offering potential for higher returns compared to other crowdfunding models.
Transparency: Investors often have access to the entity's records, ensuring transparency throughout the investment process.
Professional Management: Syndication involves a professional team of experts, including architects, designers, and market analysts, who oversee the entire transaction from inception to completion.

However, one potential downside of syndication is the requirement for investors to qualify as accredited investors:

This necessitates meeting specific income or asset thresholds, which may limit participation for some individuals. Nonetheless, investors can pursue other property investments to build equity and income over time, eventually meeting the criteria for accredited investor status and gaining access to more exclusive investment opportunities.

Alternative ways to invest in real estate

Get started with Hezekiah today to unlock the exceptional advantages of syndication investments. Simply complete the quick sign-up process, undergo accreditation verification, and select your preferred investment project(s). Then, sit back and witness the progress on your development project as our seasoned team expertly manages the intricacies on your behalf.

With Hezekiah, real estate investing becomes both gratifying and hassle-free. Don't miss out—sign up now!

Resources

Begin Investing or Get in Touch

Get Started