How to Invest in Real Estate: Everything You Need to Know

How to Invest in Real Estate: Everything You Need to Know
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Point Editorial

You've probably heard real estate makes for an excellent investment opportunity. You might even have heard stories of people who've made windfall profits from a once-in-a-lifetime real estate deal. 

But if you've just started investing and haven't had time to build your credit score, it can sometimes seem like real estate is out of reach to you.

This article will teach you the basics and give you tips on how to get started with as little as $500. 

What is real estate investing?

In simple terms, investing in real estate means buying property to earn income. Real estate can include land or anything permanently attached to it, like buildings or natural resources. 

Real estate comes in five main categories: residential, commercial, industrial, raw land, and special use. Income from real estate investment most often comes from the appreciation in value that's realized when the property is sold. But other forms of income include rent, inflation, options, and royalties.

Many ways of investing in real estate exist. You can invest directly by purchasing a home or rental property or indirectly through a real estate investment trust (REIT). 

What you should know before investing 

Before diving into the real estate market, there are a few tips you should keep in mind.

Save up 

Real estate investment can cost a lot of money, so it's a good idea to put aside some savings for your down payment or partnership share before getting started. In many cases, you'll also want to have extra cash flow for maintenance, repairs, or other unexpected costs. 

Do your research 

Spend some time looking into local property prices to get a sense of what the real estate market is like. Talking to real estate agents can be a good way of learning the market's general direction. It can also be a good idea to talk to locals to know how long they've lived in the area and why they chose it over other areas.

Calculate your ROI

Your return on investment (ROI) is the ratio of how much your investment pays you over your costs, including your down payment, mortgage payments, property taxes, maintenance costs, and emergency fund. 

For rental properties, you should aim for an ROI of about 10%. The first few years might start slow, so don't worry if you don't hit those numbers right away.

Be practical

Real estate investment is all about the numbers. Try to avoid letting your emotions cloud your choices. Just because you feel a personal connection to a particular investment property doesn't mean it's a wise investment. Separating your decision-making process from feelings and biases will help you make better investments.

Play it safe 

In real estate, it's usually best to start small, keep your expenses low, and not invest any money you can't afford to lose. An important lesson from the 2008 subprime mortgage crisis is that even if a bank approves you for a mortgage, it isn't always a wise idea to accept the offer.

Why should you invest in real estate?

There are many reasons why real estate investment can be a good idea. Here are a few of the main advantages:

Leverage

Many people who invest in real estate use leverage to make their purchase, which means they pay only a portion of the total cost of the property and borrow money to cover the balance in the hopes that their returns will exceed the cost of their loan. 

Leverage lets you access potentially high earnings with relatively little upfront costs.

Diversification

Adding real estate to your investment portfolio helps increase your diversity and protects you from market fluctuations. 

That's because the real estate market is less volatile than the stock market and has a low correlation with other asset classes, meaning that even if your other investments drop in value, your real estate holdings will often continue to grow.

Long-term returns

Compounded annual returns make real estate an excellent investment for long-term goals, like retirement. And the earlier you start, the more it pays off.

What investment is best for you according to your price point

You might be surprised to find out that you don't need a big down payment to start investing in real estate. You can start with as little as a few hundred dollars.

Here are a few approaches you can take to investing in real estate with $500, $5,000, and $50,000:  

Investing in real estate with $500

If you want a way to invest in real estate with little money and without buying actual property, you might want to consider real estate investment trusts (REITs).

REITs are passive investments that function a bit like mutual funds and ETFs. By pooling together multiple real estate investments and selling shares to individual investors, REITs make it possible for beginners to earn short-term dividends from real estate investments without having to own or manage the property.

Investing in real estate with $5,000

Since 2012, non-accredited investors have been allowed to participate in real estate crowdfunding, meaning they can essentially become a shareholder in a property without owning it outright. 

With $5,000, you can purchase securities in an online real estate crowdfunding platform like Sharestates and start earning dividends from various real estate projects like residential house flipping, ground-up construction, multifamily homes, office buildings, or mixed-use rental properties. 

Depending on the type of project, you'll earn returns in the form of a lump payout once the deal is completed or an annualized return.

Investing in real estate with $50,000

With $50,000, you can put a 20% down payment on a property worth up to $200,000, provided you qualify for a mortgage. That means you can save on private mortgage insurance (PMI) and become the sole proprietor of a home or rental property.

FAQs about real estate investing

Is real estate still a good investment?

Real estate has almost always appreciated in value throughout history, making it one of the most reliable investment strategies. That said, you should always do your due diligence when considering real estate investments.  

Which type of real estate investment is best for me?

Which property type you choose to invest in depends on many factors, such as your risk tolerance, desired return on investment, and how much time and money you have to invest.

For example, rental properties offer higher returns but require a significant upfront investment and active management. On the other hand, REITs are less hassle and cost less upfront but offer modest returns and are more vulnerable to market volatility.

The bottom line

Whether you want to purchase REIT shares, buy your own home, or invest in a property to generate rental income, real estate offers many options for you to get solid returns on your investment. 

Adding real estate to your investment portfolio can help diversify your holdings and start you on the path to building your net worth.

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