Real estate investing: A beginner’s guide

Real estate often stands out as one of the most tangible investment options. Investing in real estate can be something you take on in your personal life or it can be pursued as a career path. Whether you’re hoping to purchase an investment property or just looking to learn about the sector, we’re here to take you through the basics. Let’s explore how real estate investing works, the types of real estate investments available, and some of the pros and cons you may want to consider.

What is real estate investing?

Real estate investing is the purchase of property with the goal of returning profit. This profit can come from the management, rental or sale of the investment property, can be a short or long-term strategy, depending on the avenue you take.

What is real estate development?

Real estate development is the improvement of an investment property to drive up its value and desirability.

Examples of real estate investing

Investing in real estate can be done in several ways: While some people may see opportunity in purchasing rental properties, others may prefer a more passive real estate endeavor, like investing in a real estate investment trust (REIT) or a real estate investment fund. Let’s dig a little deeper into some of the options you may want to consider.

Rental properties

Investing in a rental property could be a good way to bring in some extra cash. If you decide to go this route, your responsibilities include overseeing tenants and taking care of any issues that may arise. One way that some investors lighten this load is by hiring a property manager to assist with these duties. Investing in rental properties can mean investing in a vacation home and renting out, or it can mean becoming the landlord of various properties in a city and renting to numerous tenants. It could also mean purchasing an even bigger piece of real estate, like an office building, and then renting the space out to other businesses.

Overall, there’s a lot of opportunity in the rental space, like additional income or seeing your property value appreciate. And if you invest in a vacation home or an apartment in a city you’re fond of, you may be able to stay there when you’re not renting to a tenant. Rental properties can also come with responsibilities, legal requirements and restrictions.

Real estate investment trusts (REIT) and real estate investment funds

Real estate investment trusts are companies that own, finance or manage real estate that generate profit. REIT companies accept investments from other companies or individuals and invest that capital in real estate. The investors recoup their money via dividends from the real estate investments made by the company, without having to manage the property or do any of the heavy lifting.

Real estate investment funds are like REITs in that they both use capital from investors to invest in real estate. The biggest difference is that REITs must distribute 90 percent of their taxable income to investors to remain an REIT in the eyes of the IRS. Real estate funds, on the other hand, don’t need to do this. They return money to investors through real estate appreciation rather than dividends. Consider speaking with a qualified tax professional for more specific guidance.

House flipping

Another popular real estate investment strategy is house flipping. In simple terms, house flipping is when someone purchases real estate to fix it up and sell it for profit. Buying low and selling high is the idea. House flippers will usually buy a fixer-upper in a popular neighborhood, make substantial home improvements and then attempt to sell for a large profit.

House flipping can be a tricky game. Many people make the mistake of underestimating how much time, resources and skill it takes to flip a house. If you aren’t well prepared for this undertaking, you risk losing a lot of money.

Buying land

Buying land is a real estate investment strategy exclusive to people with a lot of capital or individuals who are looking to invest in an exchange traded fund (ETF). An ETF is an investment that allows you to buy a collection of stocks or other assets in one package. ETFs are traded on stock exchanges, and in the case of buying land. ETFs are a more hands-off way to invest in real estate and may be less of a financial commitment than a traditional real estate investment. As such, they may come with less risk.

Overall, buying land is a limited, high-risk investment but has many opportunities. Here are some common land investments:

• Residential
• Farm and livestock
• Vineyards
• Commercial

Potential risks and benefits of investing in real estate

As with any investment, there are considerations to weigh before committing to investing in real estate. Let’s explore the potential benefits and risks:

Potential benefits

• Cash flow. The potential for cash flow is one of the main reasons people invest in real estate. This is the net profit from your investment after your payments and expenses have been taken care of.
• Ultimate control. Unlike some other types of investments, real estate gives you a substantial amount of control. Especially with the right team of advisors, you’re the CEO who decides what to buy, when and for how much.
• Potential tax advantages. Real estate investors can take advantage of numerous tax breaks and deductions that can save money at tax time. In many cases, you can deduct the reasonable costs of owning, operating and managing a property. A qualified tax professional can provide more tailored information based on your financial situation.
• Diversification. Investing in real estate is one way you can diversify your investments. Because property generally appreciates in value it may be a safe tangible asset that can balance the volatility of other investments.
• 1031 exchange. If you own a rental property and sell it to purchase another, you can roll the entire gain into the next investment rather than pay the capital gains tax on that sale. And unlike the home you live in, there’s no limit on how much of the total gain you can roll over in a 1031 exchange, named after Section 1031 of the Internal Revenue Code. If you buy and sell rental property every 10 years over a 50-year period, you may be able to double your value. For more information, speak to a tax advisor.

Potential risks

• Market risk. Like many investments, real estate is subject to market risks. While they often increase, there are reasons property values could decrease, like economic downturns, natural disasters and other factors.
• Maintenance costs. Owning a property generally means you’re responsible for maintaining and managing it. If your property ends up needing unexpected repairs or suffers substantial damage, the associated costs could affect your profitability.
• Liquidity. If for some reason you need to quickly convert your assets into cash, you may not be able to do so without incurring a loss. Real estate investments aren’t as easy to liquidate as some other investments.
• Tenant risks. Renting out your property involves a fair amount of trust in your tenants. Even with the most stringent background checks, there’s a chance that tenants could skip out on rent or cause damage to the property, which could affect your income and return on investment.

In summary

As you can see, there’s an overwhelming amount of opportunity in real estate investing. Real estate investing can mean buying another home, a rental property or even a farm. It can also mean finding a real estate ETF for your portfolio. Even if you aren’t looking to get involved, it’s a good thing to keep in mind for the future.

Real estate investing FAQs

1. Is investing in real estate worth it?

Whether real estate investing is worth it depends on several factors: the property, interest rates, goals and strategy. If you’re feeling uncertain, it may be a good idea to speak to a real estate expert to figure out if this type of investment is right for you.

2.How do you invest in real estate without buying property?

Real estate investment trust (REIT) and real estate investment funds allow you to invest in real estate without buying property. With these investments, you’re essentially buying a share of a property and receive profits in the form of dividends.

3. Where can I find an investment property?

You can find investment properties with the help of a real estate agent, through online listings, on auction sites, or even by word of mouth or networking events.