Thinking about where to put your money? There are lots of choices, like stocks, bonds, and real estate. But if you're just starting your investment journey, options like forex or cryptocurrency might be too risky. The option you pick depends on how much you want to be involved, how much money you have, and how comfortable you are with taking risks.
Real estate is a relatively easy way to invest. It means you can buy a place by paying some money upfront and then finishing the payment, including the interest, over time. Unlike other investments, real estate lets you use this trick called "leverage."
Now, what makes a real estate investment good? It's when you have a good chance of increasing your money. But here's the thing: if it's a bit risky, the chance of making more money should be worth it. Even if something seems like a sure bet, there's no guarantee. Always remember, only put in money you can afford to lose, whether it's in real estate or something else. In this guide, we'll explore the basics of investing in simple terms, so you can make smart choices and grow your money.
Does rental property investment align with your financial goals?
Thinking about making money by being owners of houses when prices are high might sound good, but it's not always quick and easy. Renting out houses can bring more work and unexpected problems. It's important to be ready for delays and challenges in real estate investing.
However, before delving into rental properties, it is important to conduct thorough financial preparation. Brian Walsh, a certified financial planner at SoFi, advises Forbes readers to assess their financial standing beforehand, emphasizing that success takes time.
Chris Dolan, a certified financial planner, warns about the risks and challenges of being a landlord, which could range from rental price fluctuations to selecting reliable tenants. He emphasizes the emotional aspect, asking if you're prepared to handle situations like eviction, crucial for the success of your investment. Treating your investment property like a business is essential; otherwise, it may not thrive, notes Dolan.
A few types of properties beginners can invest in, courtesy of Investopedia
Rental properties: Investing in rental properties means stepping into the shoes of a landlord, and juggling responsibilities from mortgage payments to tenant issues. While rental income is a key revenue source, the challenge lies in setting the right rent to attract tenants without sacrificing earnings. Property appreciation offers potential profits upon selling, but the volatile real estate market, exemplified by a 38% increase from February 2020 to March 2022, introduces uncertainty.
Flipping houses: Flipping houses involves buying properties with the intent to sell quickly for a profit. Whether through repairs or riding a rising market, success hinges on selling at a profit. Flipping can be lucrative, but inadequate funds for long-term mortgages pose a risk, potentially hindering the ability to turn a profit upon sale.
Real estate investment trusts: Real Estate Investment Trusts (REITs) function like stocks, traded on major exchanges. They offer a path to invest in income-producing properties, boasting liquidity and tax advantages by distributing 90% of profits to shareholders. Real Estate Investment Groups (REIGs) resemble small mutual funds, enabling ownership of rental properties without the complexities of being a landlord. Real Estate Limited Partnerships (RELPs) involve investors financing real estate projects, gaining periodic distributions and a share of ownership.
Real estate mutual funds: Real Estate Mutual Funds primarily invest in REITs, providing diversified exposure to real estate. Real estate's allure lies in enhancing portfolio risk-and-return profiles, low volatility compared to equities and bonds, and the potential for hedging against inflation. Leverage, a unique tool in real estate investment, allows control of a property by paying a fraction upfront, offering flexibility for flippers and landlords. Adding real estate to a portfolio can be achieved by direct property purchase, investing in REITs, or buying funds focusing on real estate.
A platform that assists with real estate investment is Arrived, which operates through Regulation A+ offerings. The regulation allows the organization to raise capital from non-accredited investors, thereby opening the door to a broader audience compared to traditional real estate investment vehicles.
Let's explore the advantages when it comes to investing in real estate.
Engaging in commercial real estate investment offers a range of attractive benefits:
1. Steady Income: When you own a commercial property, businesses pay you rent every month. This means you get a steady flow of money.
2. Value Increase: With time, the value of your property can go up. If the area around your property improves, it becomes even more valuable, giving you a profit when you decide to sell.
3. Diversification: Adding commercial real estate to your investments is like having different types of candies in your bag. It helps spread the risk, and you might get more rewards.
4. Tax Benefits: Owning commercial property can also save you some money on taxes. You can deduct things like mortgage interest and property taxes, which can lower the total amount you owe in taxes.
Let's explore some disadvantages, courtesy of Investopedia.
1. Real estate isn't easy to sell quickly. It might take months, and, especially in emergencies, you might not get the best price.
2. Taxes and insurance costs can go up, affecting your profits, even if your mortgage stays the same.
3. Dealing with difficult tenants can be a hassle, from late payments to property damage, but clear rules and security deposits can help.
4. If the neighborhood declines, it can affect your property's value and rental income, so it's important to stay informed.
5. Changes to tax rules may reduce the benefits of owning a property, impacting how much money you make.
6. Being a landlord isn't for everyone; it requires managing rent increases and property care, which can lead to conflicts.
7. Upkeep means fixing things in your property. Some people can do it themselves, but others may need to hire professionals.
8. Pay attention to interest rates when buying property. Fixed-rate mortgages are good, but rates for investment properties can be higher.
9. Mortgage rates for investment properties are usually higher than for regular homes, affecting how much money you make.
An opportunity for financial gain
Real estate investment goes beyond financial gains, offering vital diversification and protection. Its low correlation with major assets like stocks means real estate often performs well when other markets decline, reducing overall portfolio volatility. Direct real estate investments, supported by physical assets, provide a robust hedge against market fluctuations. Even indirect forms, like REITs, mandate profit distributions as dividends, ensuring investor protection. In conclusion, real estate stands as a valuable asset for both financial growth and strategic risk management in a well-rounded investment portfolio. However, conducting your own research is always advisable.
