For many, building wealth through real estate is an area of interest but, uncharted territory. On one hand, it seems like a fantastic idea, especially if you live in an area with a booming real estate market. But, on the other hand you may not be ready for the commitment. Just because investing in real estate may be an unfamiliar investment opportunity doesn’t mean that it should be avoided. When approached correctly, real estate can present itself as a consistent, profitable and dependable source of generating considerable returns.
Let’s be honest, investing in real estate is intimidating and a massive commitment. Despite the numerous upsides, the primary reason that holds people from investing in real estate is and the cost and lack of an obvious starting point and the cost. Additionally, you never want to dive and invest in something to don’t fully understand – especially real estate. In this article we discuss the basics of real estate investment and the different types/ways you can begin and get your feet wet.
To get started, let’s define what real estate investment is.
What is Real Estate Investing?
Simply defined, real estate investing is the purchase, ownership, lease, or sale of land and any structures on it for the purpose of earning money. Real estate generally breaks down into three categories: residential, commercial, and industrial. It is common for investors to own multiple pieces of real estate, one of which serves as a primary residence while the others are used to generate rental income and profits through price appreciation.
Ways to Invest in Real Estate
There are several different ways in which you can invest in real estate that don’t necessarily involve the buying and subsequent leasing of the same property. Investments in real estate generally breakdown into two categories: active and passive investments. Active real estate investing requires a great deal of personal real estate knowledge and hands-on management. Passive real estate investing offers opportunities to invest in real estate for everyone: those with extensive real estate and financial knowledge and those with limited or no expertise in the industry.
Here are the most common ways people invest in real estate:
- Home Ownership
The simplest form of real estate investment is home ownership. However, there is a difference between owning your own home and investing in other real estate company. When you own a home, you don’t actively make money or increase our monthly cash flow from the property.
The bottom line is, when you pay off your home this is the best long-term investment you can make. This is highly recommended before investing in any other type of real estate. Owning a home is a huge part of achieving financial peace as it also frees up your budget to start saving for other types of investments.
- Rental Properties
Rental property investments act as a source of active income as it requires a hands-on management approach that is long term. Any type of property (residential, commercial, or industrial) can be a rental property. Property owners earn frequent cash flow each month in the form of rental payments from tenants. This will provide a steady, reliable income stream for investors. As a property owner, you could rent out anything from a bedroom, to an entire house or commercial property with an apartment building.
It all sounds great however, renting out property has its own challenges. You’d think that renting out a property means that there is consistent rental income each month. This may not be the case as there could be instances when your tenant is unable to pay. Or, for each month that you do not have a tenant, you miss out on income from your investment.
- House Flipping
House flipping is the most active, hands-on way to invest in real estate. Flipping a house means you purchase it, make updates and improvements, and then sell it—all within a fairly quick amount of time. House flipping is generally a short-term project. The longer an investor has the house without new owners or tenants, the more their expenses start to rack up.
While house flipping sounds exciting, it requires deep financing and extensive real estate knowledge to ensure that the project runs within time and budget constraints. The financial burden and overall success fall solely on the investor. It’s a high-stakes and intense pressure real estate investment but, just like any other, it comes with its own risks.
The downside of house flipping is that updates and renovations have the potential to cost more than you plan. These costs could eat into your profits. It takes a lot of time and effort, so you need to think about whether or not you want to devote that kind of energy to such a project.
Is Real Estate Investing for You?
Real estate has a track record of strong performance however, it does have its pros and cons, and it isn’t for everyone. It offers the potential to earn handsome returns and if managed wisely, it can become a valuable source of cash flow. As with any investment, you must understand and weigh the risks and potential rewards before beginning.
If you’re still wondering whether or not real estate investing has a place in your wealth-building plan, sit down and have a conversation with your financial advisory. Be sure you’re working with an experienced real estate agent to help guide you through each step of every project.
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