Real estate has historically been a reliable way to see a significant return on investment over time, even when the stock market is in turmoil. Since 2011, the average sale price of a home has nearly doubled from $259,700 to $516,500. And residential homes are just one small piece of the overall equation. As the market appreciates and individual properties generate steady passive income, you can see both short-term and long-term gains from different types of investments.
While real estate investing was limited to high-wealth individuals and accredited investors, today, every investor has options to invest with far less than a typical down payment.
What is real estate investing?
Real estate investing is a wealth-building strategy centered around purchasing properties (or shares in them) like single-family homes, apartment buildings, and commercial real estate spaces like restaurants or shops.
There are many ways to invest, from buying properties to rent or resell to investing smaller dollar amounts into fractional real estate investments.
Benefits of investing in real estate
Investing in real estate can bring both short-term passive income and long-term appreciation of your net worth. Here are some of the biggest benefits of real estate investing.
- Property appreciation: As property values fluctuate, the value of any investments you’ve purchased may increase substantially, helping you build equity in your investment.
- Rental income: One of the biggest draws to investing in rental property is that you can receive reliable monthly cash flow that may immediately offset your investment.
- Tax benefits: Real estate comes with tax benefits. For example, you can write off depreciation and the cost of repairs on the property you own. Plus, any gains you see over time will be taxed as capital gains rather than income, which is taxed at a lower rate than your standard paychecks.
- Steady and stable gains: While it is impossible to predict exactly how your investments may appreciate over time is impossible, investing in real estate is generally considered a conservative strategy. With some exceptions, the housing market has continued to rise over time.
Ways to invest in real estate
There are many different ways to invest in real estate, and what’s best for you may depend largely on how much capital you have to invest and how much work you’re willing to do to realize gains.
Purchasing rental properties directly
The two main asset classes of rental real estate are residential single family homes and condos or multi-family homes like apartment buildings and commercial investment properties, restaurants, retail spaces, or offices. In some parts of the world, rental property may include docks or moorings for example, houseboats on lakes or canals, or boat-based businesses, such as tour boats, ships, or floating businesses.
Investing in fractional real estate
Real estate investment platforms like Arrived enable people to break into investing with a lower barrier to entry. Instead of dealing with interest rates, down payments, lenders, mortgages, and credit scores, investors buy shares in these properties.
With fractional real estate, as the property appreciates, so does the value of your share or shares and you’ll see a portion of the rental income, too. Bonus? You won’t ever have to serve as a landlord. Experts manage Each Arrived home independently, protecting investors from the hassles of managing their own properties.
Real estate investment trusts, or REITs, are companies that invest in properties and share dividends with investors. Some operate like publicly-traded stocks, giving investors shares in the company, while other non-tradable REITs may sell shares of a specific property.
If they adhere to certain strict guidelines, REITs can get tax benefits to help make them lucrative investments. These companies’ portfolios generally include a diversified range of commercial and residential real estate assets. They are typically seen as reliable investments, and you may already have shares in one through your 401(k) or Roth IRA without realizing it.
Each Arrived property operates as a separate REIT, which means investors benefit from passthrough taxation and the Qualified Business Income deduction for improving ROI for investors.
Real estate mutual funds
Real estate mutual funds allow investors to access a highly diversified portfolio of real estate investments. These funds primarily invest in REITs and property management companies.
So, just like mutual funds that invest in a wide array of stocks offering you a tiny slice of dozens or hundreds of separate investments real estate mutual funds offer investors a way to gain from a wide range of profitable real estate investments for a low cost. You can invest essentially any amount into a mutual fund even as little as $5 or $10, depending on which platform you use to make the purchase.
Real estate investment groups
Real estate investment groups are organizations whose primary purpose is to invest in real estate. They may buy and hold properties, or buy them to renovate and re-sell them. They do not qualify as REITs, which are subject to limitations and disclosures like other stocks, and therefore are not required to make the same kinds of disclosures. These groups consist of private shareholders and their stock is not publicly traded.
Wholesalers essentially act as middlemen between the buyer and seller of a real estate property. When a homeowner or real estate investor owns an asset they want to offload quickly but don’t have the time, resources, or tools to find a buyer quickly, a wholesaler can take on that part of the process for a profit.
Essentially, the wholesaler and seller will agree to a price and then the wholesaler will try to find a buyer willing to pay more than that amount. Wholesaling is usually done with properties considered to be fixer-uppers, and buyers are generally investors looking to renovate and flip them for a profit.
How to fund real estate investing
If you’re not flush with capital, you can still invest in real estate. The first step is to decide whether you want to purchase a property solo or opt for a managed investment like fractional real estate.
Purchasing properties directly
If you’re looking to buy a property to rent out, it may be wise for you to leverage a smaller down payment, such as 5% or 10%, if you can immediately offset the full mortgage costs and property taxes with reliable rental income. Just be aware that you will generally have to pay mortgage insurance, which can be pricy until you’ve paid off a certain amount of the loan, so it may be prudent to reinvest any rental profits in paying off the mortgage until you can bring those costs down.
Mortgage interest rates for individual investments are generally lower than rates for personal loans. You may be eligible for a larger mortgage if you’re buying a property where you can expect to have reliable rental income, especially if you’re planning to be a live-in landlord.
If you’re looking to buy a property that will serve as both your primary residence and a source of rental income, you may also be eligible for federal, state, or local programs that help individuals access financing for home ownership. Check with your local government to see what’s available in your area.
Personal loans are unsecured debt, which means it’s money financed to you without being tied to an asset like a house or car. You may be able to get a personal loan to cover the down payment on a property you’re planning to pay down with rental income. Just be aware that while these loans are sometimes easier to get than a traditional mortgage, they’re usually much smaller and may come with higher interest rates.
Keep in mind, beyond the purchase price of a home, you’ll also need to pay for ongoing costs like homeowners insurance, taxes, and property maintenance. You may also need to invest substantial capital to improve a home, particularly if you purchase a fixer-upper.
Fractional real estate investments
If you’ve never invested in real estate before, investing through a fractional real estate platform like Arrived can make it considerably easier. You won’t have to compare lenders, apply for a mortgage, search for property, manage tenants, or deal with maintenance hassles. Instead, you can browse available properties, invest anywhere from $100 to $15,000 per property, and receive a proportionate share of consistent monthly rental income. Not only that, but you’ll benefit from home appreciation, too.
How to find your first real estate investment property
Figuring out how to break into real estate investing can initially seem overwhelming. There are so many different kinds of properties to choose from, and virtually unlimited markets to get into.
MLS, or multiple listing services, allow real estate agents and brokers to share data about available properties. If you want to buy a real estate investment property, you can start by searching sites aggregating listings from different agencies and MLSs. Zillow, for example, is one that’s widely used by prospective buyers and renters.
Real estate agents
A real estate agent can help you make the process much more streamlined, as they have access to tools you may not, and they may also have knowledge of properties coming on the market soon that could be a good fit for your needs. They can help you navigate the local market, negotiate with the seller for a better rate, and understand what home features are most desirable to renters in the area.
When a property enters foreclosure, banks typically sell them to the highest bidder at auction. You’ll generally need to pay a deposit upon winning the bid and pay the balance in cash within a few weeks of the sale. You can learn of auctions through sites specializing in foreclosure sales. Make sure to do your due diligence before agreeing to make the purchase. While you may not be able to tour the property, and there may not even be photos available of the interior, you can research nearby property values and how they’ve changed over time, as well as typical rental prices in the area.
Real estate platforms
Real estate platforms are ways to invest in properties with other investors for shared gain. Arrived, for example, sells shares in vetted properties in neighborhoods with high potential for long-term growth. You can buy shares of such homes for far less than a down payment, and without needing to apply for funding through a lender the way you’d traditionally need to if you were investing alone.
Mistakes to avoid when investing in real estate
Even though real estate can produce significant gains over time, it’s not a foolproof game. Consider these common mistakes before you jump into something that might seem like a good deal at face value.
Don’t invest with the wrong partner
While it can be challenging to go into investing alone and financially unfeasible for many, you want to make sure you don’t make a rash decision and build a partnership that won’t last. If you’re investing with someone else, make sure you know them well and fully discuss what to do if everything goes sour such as if the market tanks or one of you wants out.
Also, make sure you have a contract that lays everything out and states clearly who owns what and where your responsibilities lie. Don’t assume you’ll never have issues if you’re going into it with someone you’ve worked with before; people can react unpredictably when life throws them curveballs, and it will protect your personal relationship as well to have clear contracts to follow should the need ever arise.
Don’t underestimate renovation costs
Especially if you’re new at investing, it can be easy to get emotionally invested in the potential of something that seems like a good deal. But it’s worth hiring an expert if you need to understand how much it will cost to get something up to code or to renovate it into a first-time homebuyer’s dream. A simple kitchen renovation can easily double in cost if you’re not careful.
Don’t rush into it
You’ve heard it before, but it’s worth saying again: If it seems too good to be true, it probably is. A great deal on a house that needs a little TLC could involve a nightmare hiding in the wiring, foundation, or even the property’s water rights, depending on where you’re buying. Do your due diligence. Ask all the questions, even those you’re afraid are too dumb, and don’t get caught with a bad investment due to a rash decision.
Don’t move too slowly, either
You know the other old adage, too: the best time to buy was yesterday, or 10 or 20 or 50 years ago. While you don’t want to rush into an investment that could turn out to be a liability in the long run (especially since real estate is an illiquid investment you can’t often offload quickly) you also don’t want to wait too long and let an opportunity escape you. Do your research, know how much you’re able and willing to invest, and move when the time is right.
Don’t underestimate what it takes to be a landlord
If you’ve never managed a property before, avoid a rude awakening by researching and talking to someone who’s done it. Know your local laws and what’s required of you. Landlord obligations and rental laws can vary on a town-by-town basis.
In some college towns, for example, there are laws against how many unrelated people can live in the same house. And some popular vacation spots have significant restrictions against short-term rentals through platforms like Airbnb. Don’t make the mistake of buying a property in a place where you can’t actually realize the benefits you’ve bought it for.
Easily invest in rental homes
Investing through a crowdfunding platform like Arrived can take away nearly all of the stress of real estate investing. Now you can buy shares of properties, earn rental income, build equity through home appreciation, and let us handle the rest.
The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The views reflected in the commentary are subject to change at any time without notice. View Arrived’s disclaimers.