An Introductory Guide to Investing in Real Estate

Your house is most likely the first thing that springs to mind when you consider real estate investing. Naturally, there are many more possibilities available to real estate investors when it comes to selecting assets, and they are not limited to actual real estate.

Historical Prices

For good reason, real estate has long been regarded as a wise investment. Prior to 2007, historical statistics on housing seemed to indicate that prices might rise endlessly. Between 1963 and 2007, when the Great Recession began, the average sale price of homes in the United States grew annually with very few exceptions. When the COVID-19 epidemic started in the spring of 2020, home values did experience a little decline. But as vaccination programs spread and worries about a pandemic subsided, house values surged and by 2022 they had reached record highs.

The average sales prices from 1963 and Q1 2022 (the most current data available) are displayed in this chart from the Federal Reserve Bank of St. Louis. U.S. recessions are shown by the regions that are light gray tinted.

Rental Establishments

Purchasing rental homes makes you a landlord, so you should think about whether you’ll feel at ease in that capacity. As the landlord, your duties will include finding renters, maintaining the property, handling any issues, and paying the mortgage, property taxes, and insurance.

Being a landlord requires a lot of work, unless you employ a property manager to take care of the administrative duties. Taking care of the rental and the property might be a full-time, sometimes unpleasant, task, depending on your circumstances. But, you may reduce the likelihood of experiencing serious issues if you carefully select the tenants and buildings you lease.

Rent is one of the ways landlords may generate revenue. The location of the property will determine the amount of rent you may charge. Even so, it can be challenging to figure out the ideal rent since you risk losing money if you charge too little or driving away tenants if you charge too much. One typical tactic is to collect enough rent to meet costs up until the mortgage is paid off, at which point the majority of the rent is turned into profit.

Appreciation represents landlords’ other main source of income. When the time comes, you might be able to sell your home for a profit if its value has increased, or you could be able to borrow against the equity to fund your next venture. Although real estate tends to appreciate, nothing is certain.

This is especially true at times when the real estate market is extremely volatile, as it was most recently during the COVID-19 epidemic. The United States’ median real estate prices increased by an astounding 38% between February 2020 and March 2022. Many people are questioning whether prices are about to plummet owing to the sharp increase.

Reselling Homes

Real estate flippers are a whole different species from buy-and-rent landlords, just like day traders are from buy-and-hold investors. Flippers purchase real estate with the goal of owning it for a little time—typically three to four months—and then selling it swiftly to make a profit.

There are two main methods for selling a house quickly:

Fix and modernize. Using this strategy, you purchase a home that you believe will appreciate in value with certain renovations and repairs. Ideally, you finish the job as soon as feasible and sell for more money than you initially invested (including the improvements).

Resell and hold onto. This kind of flipping operates in a unique way. Rather of purchasing a home and renovating it, you invest in a quickly expanding market, hold it for a few months, and then sell it for a profit.

You carry the risk that you won’t be able to sell the property for enough money to make a profit with any kind of flipping. Because flippers typically don’t have enough cash on hand to cover long-term mortgage payments on houses, this might be problematic. However, if done correctly, flipping real estate may be a profitable method to invest.

REITs

When a company (or trust) is established with the purpose of using investor funds to buy, manage, and sell properties that generate income, a real estate investment trust (REIT) is founded. Just as stocks and exchange-traded funds (ETFs) are purchased and sold on major exchanges, so too are REITs.

90% of the entity’s taxable income must be distributed to shareholders as dividends in order for it to be recognized as a REIT. By doing this, conventional companies would have to pay taxes on their profits, which would reduce the amount of returns they could give to their shareholders. In contrast, REITs avoid paying corporate income tax by doing this.

REITs are suitable for investors who need consistent income, much like equities that pay dividends on a regular basis, even though they also provide the chance for capital growth. Real estate investment trusts (REITs) engage in a diverse range of properties, including office buildings, healthcare facilities, malls (which constitute around 25% of all REITs), and mortgages. The advantage of REITs over other real estate investment kinds is their high liquidity.

Investment Groups for Real Estate

REIGs, or real estate investment groups, resemble miniature mutual funds specifically designed for rental properties. A real estate investment group can be your best option if you’d want to own a rental property but don’t want the headaches of landlording.

A corporation will construct or purchase a group of structures, usually flats, and then permit investors to purchase them via the company, therefore becoming a member of the group. One or more independent living units may be owned by a single investor. However, the business running the investment group oversees each unit and handles all maintenance, marketing, and tenant placement. The business receives a portion of the monthly rent in return for this management.

Investment groups come in several forms. In the normal form, each unit pools a portion of the rent to protect against sporadic vacancies, and the lease is in the investor’s name. In other words, even if your apartment is unoccupied, you will still get paid enough to cover the mortgage.

An investment group’s caliber is solely determined by the business providing it. Theoretically, it’s a secure method to start investing in real estate, but organizations may impose the type of exorbitant fees that plague the mutual fund sector. Research is crucial for any investment, as always.

Limited Partnerships in Real Estate

A real estate investment group and a real estate limited partnership (RELP) are comparable. It is a company set up to purchase and manage a collection of properties, or occasionally only one. But RELPs are only around for a limited period of time.

The general partner is a seasoned property manager or real estate development company. The real estate project will then look to outside investors for funding, in return for a limited partner’s portion of the ownership. The true reward comes when the properties are sold—ideally at a significant profit—and the RELP dissolves later on. The partners may receive periodic distributions from the revenue generated by the RELP’s properties.

Mutual Funds for Real Estate

REITs and real estate operating businesses are the main investments made by real estate mutual funds. With comparatively little cash, they offer the chance to have diverse real estate exposure. They provide a far wider range of assets to investors than purchasing individual REITs, contingent on their approach and diversification objectives.

These funds are fairly liquid, much like REITs. The fund’s research and analytical data is another important benefit for individual investors. Information on recently acquired assets and management’s assessment of the performance and feasibility of particular real estate investments as well as real estate as an asset class may be included. A family of real estate mutual funds can be purchased by more adventurous investors, who can strategically overweight particular property types or geographic areas to optimize returns.