EDU Articles

When looking for investment options, there are many choices for where to put your money. Stocks, bonds, exchange-traded funds, mutual funds, and real estate are all good investments no matter what level of experience you have; forex or cryptocurrency may be too volatile for beginning investors. Which option you choose will depend on how involved you want to be in your investment, how much money you have to start investing, and how much risk you are comfortable taking on.

Buying and owning real estate is an investment strategy that can be both satisfying and lucrative. Unlike stock and bond investors, prospective real estate owners can use leverage to buy a property by paying a portion of the total cost upfront, then paying off the balance, plus interest, over time.

What makes a good real estate investment? A good investment has a high chance of success, or return on your investment. If your investment involves a high level of risk, that risk should be balanced out by a high possible reward. Even if you choose investments with a high probability of success, though, that isn't a guarantee. You shouldn't put money into real estate—or any other investment—if you cannot afford to lose that money.

Though a traditional mortgage generally requires a 20% to 25% down payment, in some cases, a 5% down payment is all it takes to purchase an entire property. This ability to control the asset the moment papers are signed emboldens both real estate flippers and landlords, who can, in turn, take out second mortgages on their homes in order to make down payments on additional properties. Here are five key ways investors can make money on real estate.

1. Rental Properties Owning rental properties can be a great opportunity for individuals who have do-it-yourself (DIY) renovation skills and the patience to manage tenants. However, this strategy does require substantial capital to finance upfront maintenance costs and to cover vacant months.

Pros

• Provides regular income and properties can appreciate
• Maximizes capital through leverage
• Many tax-deductible associated expenses

Cons

• Managing tenants can be tedious
• Potentially damage property from tenants
• Reduced income from potential vacancies

According to U.S. Census Bureau data, the sales prices of new homes (a rough indicator for real estate values) consistently increased in value from the 1960s to 2007, before dipping during the financial crisis. Subsequently, sales prices resumed their ascent, even surpassing pre-crisis levels. The long-term effects of the coronavirus pandemic on real estate values remain to be seen.

2. Real Estate Investment Groups (REIGs) Real estate investment groups (REIGs) are ideal for people who want to own rental real estate without the hassles of running it. Investing in REIGs requires a capital cushion and access to financing.

REIGs are like small mutual funds that invest in rental properties. In a typical real estate investment group, a company buys or builds a set of apartment blocks or condos, then allows investors to purchase them through the company, thereby joining the group.

Pros

• More hands-off than owning rentals
• Provides income and appreciation

Cons

• Vacancy risks
• Fees similar to those associated with mutual funds
• Susceptible to unscrupulous managers

3. House Flipping House flipping is for people with significant experience in real estate valuation, marketing, and renovation. House flipping requires capital and the ability to do, or oversee, repairs as needed.

Pros

• Ties up capital for a shorter time period
• Can offer quick returns

Cons

• Requires a deeper market knowledge
• Hot markets cooling unexpectedly

4. Real Estate Investment Trusts (REITs) A real estate investment trust (REIT) is best for investors who want portfolio exposure to real estate without a traditional real estate transaction.

Pros

• Essentially dividend-paying stocks
• Core holdings tend to be long-term, cash-producing leases

Cons

• Leverage associated with traditional rental real estate does not apply

5. Online Real Estate Platforms Real estate investing platforms are for those who want to join others in investing in a bigger commercial or residential deal. The investment is made via online real estate platforms, which are also known as real estate crowdfunding. This still requires investing capital, although less than what's required to purchase properties outright.

Pros

• Can invest in single projects or portfolio of projects
• Geographic diversification

Cons

• Tend to be illiquid with lockup periods
• Management fees

Real estate offers a diverse range of investment opportunities suited to different preferences and risk tolerances. Whether you prefer a hands-on approach with rental properties, a more passive role in real estate investment groups or REITs, or the excitement of house flipping, there's a strategy for you. However, it's crucial to conduct thorough research, understand the market dynamics, and assess your financial capacity before diving into the world of real estate investment.

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