HGTV has spurred a phenomenon of unprecedented interest in real estate investing for beginners. Whether it’s lower-budget investments like those shown in “Flip or Flop” and “House Hunters” or the hunt for an extravagant investment property in “Million Dollar Listing,” real estate investing has never been so mainstream.
Luckily, with more shows available than ever before about real estate investing, any potential real estate investor, regardless of experience, can be entertained and educated at the same time. While it’s certainly entertaining to watch and learn on HGTV, real estate is a serious investment strategy that provides a powerful way to build wealth for your future.
Of course, when you get serious about taking the next step, learning more about real estate investing for beginners and doing your due diligence is essential. So you’ve come to the right place.
In this beginner’s guide, we’ll explore what real estate investing is all about, and four ways new investors can make money with this investment strategy.
What Is Real Estate Investing?
Like many other types of investments, real estate investing involves putting your money to work for you. In traditional real estate investing, the investor buys a property hoping their investment will appreciate in value over time and possibly generate income along the way.
And like other investments, real estate investing involves balancing risks with returns. It’s important to carefully calculate whether your potential return will cover the costs of owning the property — like taxes, utilities, insurance, and ongoing maintenance.
The goal is to have more money in the future because of the investment. Sounds simple, but making that happen involves several moving parts.
Real Estate Investing for Beginners: 4 Ways to Make Money
The first step is to understand how to make money with real estate investing. There are several ways, but we’ll examine the four most common below.
Real Estate Appreciation
Appreciation occurs when your property increases in value because of a couple things.
The first is improvements you’ve made to the property.
Whether you’re making improvements to a home you live in or you’re taking a shot at flipping houses, you hope the improvements will trigger price appreciation. For example, upgrades like a bathroom or kitchen renovation can make your property more attractive to potential buyers and will likely increase the value of the property.
Your property may also appreciate because of fluctuations in the housing market.
For example, if inventory is low or your area has undergone a rejuvenation and is now especially desirable, demand will likely drive housing prices up.
Of course, nothing is certain, which makes relying solely on appreciation rather unpredictable and risky. Not all improvements you make will provide a return on investment, and the real estate market goes both up and down.
Cash Flow Income
Purchasing real estate and using it as a rental property to generate cash flow income adds predictability and, therefore, mitigates risk for real estate investors.
Here’s how it works. You buy a rental property, whether it’s a single-family or multifamily house, one or more apartment or office buildings, or even a storage facility. You then rent the space to tenants and generate rental income.
When you invest to generate income, you are essentially working toward creating passive income for yourself. But that income will not necessarily be passive at first. There are, of course, drawbacks to this option as well.
First, you’ve got to find renters. And they need to be reliable renters who won’t trash the place and will pay on time. You’ve also got to ensure that your pricing is set appropriately. Then, you’ve got to maintain the property and respond to ongoing renter requests for repairs and improvements. When renters move out, you’ve got to bring that relationship to closure and find new renters.
For new investors just getting started with real estate who might not possess that skill set, you can hire a property manager or a property management company. But that is another expense you’ll have to incorporate into your budget. Airbnb and other similar platforms can help take some of this off your plate, but they’ll also take a chunk of your proceeds along with it.
Real Estate Stocks
Investing in tangible real estate property, as in the above two examples, is typically less volatile than investing in the stock market.
And while investing in real estate property can be an attractive option, many looking to become real estate investors opt to invest by instead purchasing real estate stocks. You can purchase them individually or as part of mutual funds.
Why? You can enjoy all the benefits of real estate investing without becoming a landlord. Real estate stocks involve no worries about property management and provide higher liquidity, require lower entry cost, and enable diversification.
- Liquidity: Real estate stocks are more liquid than real estate property. With real estate stocks, you can exchange your investment for cash much more easily than you can with real estate property.
- Entry cost: Real estate stocks don’t require the massive down payment like lenders do with an investment in real estate property. And the fee to enter and exit is typically not as steep as what you’ll pay to a real estate agent.
- Diversification: When you purchase property as a beginner, you’re probably not going to invest in more than one or two types of real estate. But with real estate stocks, you have the option to invest in everything from single-family homes and residential property to commercial real estate ventures.
Real Estate Investment Trusts
Real estate investment trusts, or REITs, are another option for those seeking to get started with real estate investing. REITs are companies that own, finance, and often manage various real estate properties.
Considered by many to be the safer play for new investors when compared to owning real estate property, REITs historically provide a solid long-term payout, and the dividends are typically higher than what you’ll earn with stocks.
REITs have become popular because they enable you to diversify your investment portfolio, mitigate volatility, and generate stable fixed income.
Not sure how to get started investing in REITs? Fortunately, there are several options. You can invest through REIT mutual funds, standalone stocks, and exchange-traded funds (ETFs).
The dividends created by REITs are especially important for investors who are close to retirement.
Taking the First Step with Real Estate Investing
So, which option is right for you?
Now that you see the various ways you can become a real estate investor, you’re ready to move on from “real estate investing for beginners” and dig a little deeper. The best way to do that is to continue researching and asking questions.
Asking good questions is so important when building a solid and diversified investment portfolio. After all, you want your investment to make money for you since cash is ultimately what you’ll need to truly enjoy a worry-free retirement, even during financially turbulent times.
Note: This article originally appeared at Investors Alley.