Purchasing and owning real estate is a pleasant and profitable financial option. Unlike investors in stocks and bonds, potential real estate owners may use leverage to buy a property by paying a part of the entire cost now and then repaying the remainder, plus interest, over time. While a conventional mortgage typically needs a 20% to 25% down payment, as little as 5% is required to buy an entire home in certain instances. This ability to retain ownership of the asset immediately upon signing empowers real estate investors and landlords, who may then take out large loans on their primary residences to fund down payments on other properties. The question is, how do you start investing?
Consider Owning Rental Properties
Acquiring an investment property is the most apparent method to start as a real estate investor. When I speak to “investment property,” I’m talking about a home or business that you want to rent out to tenants rather than a house hack, which we’ll discuss later. Owning or investing in apartment buildings may be an excellent method to make investments while simultaneously accumulating wealth and earning income. The return potential is relatively high with a mix of revenue, asset appreciation, and the ease with which borrowing may be used when purchasing real estate.
On the other hand, Rental property ownership is not for everyone, and it comes with its own set of difficulties. Acquiring your first rental home may be a very costly endeavor. To qualify for an investment property loan, most lenders need a down payment of at least 25 percent, and it is wise to save aside funds to cover several months’ worth of costs in advance. If you own rental property, you know that vacancies occur, and things break. Even while rental properties may have a high rate of return, in the long run, they can have a high rate of return in the near term. They own a rental property, even if you employ a property management firm, maybe a time-consuming type of real estate investment.
Getting Real Estate Investment Trusts
When it comes to real estate investing, REITs, or real estate investment trusts, may be a fantastic option. To learn more about REITs, please see our basic introduction to real estate investment trusts. However, here’s a short rundown of what’s happening: Property investment trusts (REITs) are specialized corporations that own, manage, or generate revenue from real estate assets. Many real estate investment trusts (REITs) are traded on stock exchanges, allowing you to purchase them with a single click of the mouse and very little initial money. With most REITs, the buildings they hold are leased out, and rental income is the primary source of revenue. Some REITs have chosen not to own real estate instead of financing money transfers and collecting interest on the loans. Real estate mutual funds and real estate exchange-traded funds (ETFs) would also fall under this category.
When investing in real estate investment trusts, you don’t have to limit yourself to just one. You may buy a pre-assembled portfolio of REITs. The fact that not all real estate equities are classed as REITs is also worth mentioning here. Other options for investing in real estate via the stock market include property developers and construction companies.
House Hacking
House hacking is a cross between purchasing the main house and buying a rental property and buying a home with two to four apartments and living in one while renting out the rest. That is, purchasing a single-family house and renting out a room or two. House hacking is a low-cost method to start developing a rental portfolio. Since you live in the property, you benefit from primary residence financing, which has lower rates and down payments than property investment loans. After a set period (generally a year or two) of living in the property, you’re free to purchase another multi-unit home. But there’s a catch: Having your yard is valuable, but living in the same structure as your renters may be uncomfortable. For novice real estate investors who don’t require their own home, house hacking may be an option.
The fact that you must choose just one of these options is not a requirement. In reality, for most individuals, a mix of a few different real estate investment strategies may be the most profitable. Persons may, for example, invest in multiple real estate investment trusts while also planning to purchase a rental property within the next year or two. They may be considering adding a crowdfunded investment once they have built a strong “base” of investment properties with consistent cash flow and rock-solid real estate investment trusts.
