When investing in real estate, the goal is to invest your money to work today so that you will have more money later. The profit or return you make on your investment should be enough to cover the risks you take and the taxes you pay. There are other costs to owning real estate, such as utilities, maintenance, and insurance.
Real estate investing can be really simple once you understand the basics of investing, economics, and risks. You buy real estate, avoid going bankruptcy, and make money through rent, all so you can buy even more properties.
But keep in mind that "simple" does not mean "easy". If you make a mistake, the consequences can range from minor annoyances to major disasters.
Four Ways To Make Money by Investing in Real Estate
When you invest in real estate, there are four main ways you can make money:
Real Estate Appreciation
This is what happens when the value of the property rises due to the change in the real estate market. For example, the land around your property can become more scarce or occupied (for example, if a major shopping mall is built nearby). Or you may have made improvements to the property that made it more attractive to buyers. Estimating the value of real estate is a difficult game, because it is not easy to predict. It's riskier than investing in cash flow income.
Cash Flow Income
This type focuses on buying and operating real estate such as apartment buildings. Then you get a cash flow from the tenant's rent. Cash flow income can also come from other types of real estate besides residential buildings, such as storage units, office or retail buildings, and rental homes.
Real Estate-Related Income
This income is common for specialists in the real estate industry, such as brokers. They can earn money from commissions on properties they helped the client buy or sell. Property management companies sometimes keep a portion of the rents in exchange for managing day-to-day operations.
Ancillary Real Estate Investment Income
For some, this can be a huge source of profit. Additional real estate investment income includes things like vending machines in office buildings or laundry rooms in rental apartments. In fact, this is a small business within a larger real estate investment. It allows you to make money from a semi-captive group of clients.
Tips for Your First Property Investment
There are several ways in which you can purchase your first real estate investment. If you are buying real estate, you can use the debt by taking out a mortgage against a property. The use of leverage is what attracts many real estate investors: it allows them to acquire properties that they cannot afford.
To manage risks and protect yourself, consider investing in real estate through special types of legal entities rather than investing on your behalf. These include limited liability companies or limited partnerships. You should consult with an attorney to determine which method is best for you. If an investment goes bankrupt, or someone slips and falls, resulting in a lawsuit, these legal entities can protect your personal assets. This means that the worst that can happen is that you will lose the money you invested. You'll have peace of mind knowing that your retirement accounts and other assets need to be out of your reach.
Pros and cons of Real Estate Investing
• Less risk and volatility than the stock market
• It can be a good source of cash flow
• Lots of tax deductions
• The Properties give good performance in the long run
• There is little potential for aggressive recurrence
• May require a lot of money
• Low liquidity
• It can be difficult to deal with tenants and construction problems
Pros of Real Estate Investing
• Less risk than the stock market: The real estate market is not subject to large fluctuations like the stock market. It doesn't have the same gain potential, but you can count on a steady slope most of the time.
• Steady cash flow - When you have enough rental properties, you can count on a steady stream of income for your business.
• Good tax breaks: You can deduct all kinds of expenses from your taxes. These include mortgage interest, depreciation, property taxes, and more
• Long-term returns are usually positive: Over time, most properties will increase in value.
Cons of Real Estate Investing
The potential returns are not as high as the stock market: From 1991 to 2019, the S&P 500 rose more than 600%; Home prices increased by only about 160%.4.5
- Investing in real estate can require a lot of money: If you really want to earn a steady stream of income, you need enough cash on hand. Whether it's a private owner or a loan, you'll need to be able to pay for building improvements, maintenance, and more.
Properties are not liquid investments: You cannot convert property into cash as quickly as when selling shares.
Tenant management and building maintenance can be challenging - Whether you hire a property manager or manage it yourself, property management can be fraught with unexpected hassles. This can include back rentals, roof leaks, power outages, and more.
Frequently Asked Questions (FAQ)
What is passive real estate investing?
Passive real estate investing is when someone buys a real estate investment trust. It is the trust that handles the day-to-day management of real estate. Passive real estate investing can be beneficial for those who want a more practical approach to real estate investing.
Is your personal home a good place to start investing in real estate?
Yes, investing in home ownership is a great long-term investment. If done correctly, it can improve your credit score, provide you with a source of capital, and increase your net worth, which can aid in your real estate investing endeavors.
What are the five types of real estate?
A good understanding of the different types of real estate can help you organize your to-do list to start investing in real estate. The five property types are residential, commercial, industrial, retail and mixed use. Each requires its own financing, responsibilities and a long-term plan.
The Balance does not provide advice on taxes, investing, or financial services. The information is provided regardless of the investment objectives, risk tolerance or financial circumstances of any particular investor and may not be suitable for all investors. Past performance is not indicative of future results. Investing carries risks, including the possibility of losing capital.
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