In general, real estate is a good investment option. It offers passive income and long-term returns, which is why most investors would generally put real estate investing on top of their list.
If you are thinking about dipping your toes into it, you may wonder how to start or what options are available to you. We’ve laid out 3 different ways of investing in real estate, for you to start your journey as a property magnate.
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Method 1: Buying Your Own Home
Many believe that homeownership is an excellent long-term investment. For some, it’s a lifetime goal, one huge tick on their bucket list. But while it may be the best thing that can happen to you, there is plenty to consider before buying a home for those who don’t want to have ownership in their residence.
Like anything else, you will be investing a significant amount of money, time, and effort. You’ll be in for a financial, physical, and even an emotional ride as you build your own property. So, it’s relatively sensible to learn about the benefits and risks of buying your own home.
We’ve laid it down here for you.
Despite the cyclical highs and lows, appreciation in the housing market is still considered one of the best you can find. From 2014 to 2020, median house prices in the US rose to 16%, from $298,000 to $346,800. That tells you a lot about appreciation with six years in the making.
It’s the land that appreciates, not the house. If anything, your home can be dilapidated after years of wear, and it can be taken down to be built with a new one. So, location is a significant consideration if you buy a house and look at it as a long-term investment. Ideally, you’d want somewhere with a reputably good community complete with amenities such as schools, churches, malls, or parks. So, in essence, you get to have ROI on top of having a place to live.
Other than appreciation, tax benefits come second when it comes to the advantages of homeownership. You can deduct taxes you incur when owning a home from the taxes you pay the government in a year. These are your mortgage and property taxes. On the other hand, you may be entitled to a tax exemption on capital gains if you’re selling your home. Be sure to look upon what are the terms and conditions to qualify for this.
Increases Your Net Worth
There is an ongoing argument on whether renting is better than homeownership and vice versa. No matter what may be said, when you pay for rent, you give your money to your landlord. The truth is you’ll never see that money again, and it will benefit someone else instead of you.
When you pay for your own home, however, you’re not just paying for the mortgage. Your home is now included in your balance sheet, and you’re actually building your net worth.
You Have Liberty With Space
Knowing that you own the space you’re living in gives you a sense of authority over what you want to do with your space. You can remodel, redecorate, and revamp as often as you like and on your own terms, something that you can’t have control over if you’re renting.
Appreciation is not cast in stone. Like any other market, the housing market can either go up or down, and this was the case in the 2008 housing crisis when homeowners saw the prices of their properties sink.
Aside from that, factors such as economic policies or political climates also pose a significant threat.
Costs (mortgage, upfront costs, maintenance costs)
When you buy a home, there’s more than what meets the eye. Aside from the transaction fees, you’ll also have to prepare for upfront closing fees, including the appraisal fee, application fee, attorney fees, property taxes, mortgage insurance, and many others. From these fees alone, most would say that it would take years for a homeowner to break even.
Aside from that is the inevitable possibility of repair, one would have to take on maintenance costs.
How to Buy A House
Buying your own house starts with deciding on how much you are willing to spend. It also depends on if you are shopping as an investment, or as a forever home. Taking a look at the pros and cons of house ownership, you also have to determine whether or not you’re ready to buy one and take the responsibilities that come with it.
Find the right real estate agent that can properly guide you on how to go about down payment fees, mortgage pre-approvals, and throughout your whole house hunting.
Method 2: Buying Shares in Companies with Real Estate (i.e., REIT)
Buying your own property requires massive capital, but you don’t necessarily have to sell millions of dollars to be a property owner. By investing in REITs, or Real Estate Investment Trusts, you get to have exposure in the real estate market and earn dividends from it without having to buy or manage properties yourself.
REITs are essentially a company that owns and manages real estate properties, which pools in capital from different investors to invest in developments and operations in real estate.
Learn more about the pros and cons when investing in REITs.
REITs allow you to invest in real estate in smaller chunks and take out huge capital when you invest directly in real estate. REITs make it possible for anyone to participate in the real estate market, not just the big names.
Publicly listed REIT shares are readily traded in most stock exchanges.
Stable Yields and Dividends
Historical performance of REITs shows a steady income stream despite varying market conditions. Asset appreciation and inflation in terms of lease agreements can factor in on the growth of REIT earning and investors benefit from it through dividends.
Sensitive to Interest Rates
As interest rates go higher, investors turn to safer investment instruments such as bonds and treasuries, which are government-guaranteed. Based on historical performance, times when rates rise prove to not be a good time for REITs
Long Term Investment Risks
REITs benefit from time, thus it’s a long term investment, and there are risks that come along with it. A lot can happen in a span of years and market conditions flip in a heartbeat, so in effect, appreciation is not always guaranteed.
Wrong REIT Choice and Property REITs
While most would point out that REITs add diversification in your portfolio, it’s worth knowing that REITs focus on single properties. The type of property is exposed to risks in their own terms. Take malls and hotels, for example, in this time when most properties are closed or not in full occupancy due to the ongoing travel restrictions brought about by the pandemic.
How to Invest in REITs
No matter the pros and cons of REITs, the choice is really up to your investment appetite. However, if you’re interested, you can invest in REITs in many ways. You can purchase publicly traded REIT stock in stock exchanges.
Another way is to buy REIT mutual funds or exchange-traded funds. Some pension funds, 401(k), and savings plans also have REIT allocations as part of the portfolio. If you are living in Sweden, you could make use of the tax efficient ISK account.
Method 3: Utilizing Fractional Real Estate Investing
Another way to invest in real estate is through fractional investment. In this set-up, investors pool in funds together to purchase a property, so they also share ownership. Based on their individual investments, the income and expenses that come with the property are also divided among the group.
Fractionally owned properties add up to your portfolio and expand your opportunities to own a property aside from the traditional route.
Like REITs, you get to be exposed to the real estate market without the bulge of an entire capital if you’re the only one buying a property. You also get to share the costs associated with it, including maintenance and upkeep, so you don’t have to bear the heavy burden alone.
There is potential over the long term, especially if it’s a rental property. Coupled with good location and management, proceeds from your rental income are divided among investors.
Sharing one property among a number of people can be a tough setup when it comes to reselling a property because it’s not just your votes that count.
Maintenance and Management Fees
Like homeownership, you are one of the owners of the property therefore you share a responsibility in it’s upkeep and maintenance. Whatever is the cost that comes in keeping the property up is sure to include you as a part-owner.
Less Flexibility and Freedom
Since multiple people are involved, you’d normally have to get a consensus of almost everybody to execute actions like reselling or revamping. When it comes to freedom with the space, there is a limitation on your end.
Platforms for Fractional Investing
Reinvest24 is an alternative platform for one to invest in real estate. The company looks for projects with good potential and makes it available for investment in various investors, like you. You get to be one of the multiple investors to fund a certain project, thoroughly reviewed by the company in due diligence, and earn interest/yield, and principal pay-outs plus interest.
With more than 8 years of experience in project development, real estate investment, property sales and maintenance, Reinvest24 has almost a decade of professional experience in the field.
As a real estate crowd-funding and group buying platform, Bulk Estate lets you invest in new developments or re-developments of real estate properties. They also manage group buying deals like apartment bulk deals that are lower than the market price. All available investment listed in Bulk estate undergo a strict evaluation process before they are being offered for investors. For more information about Bulk state, check out their website.
Investing in real estate is both a satisfying and challenging endeavour. The rewards are high, and historically, it’s more stable than other investments. However, it doesn’t mean that it doesn’t come with its own risks. As it is with any investment, educate yourself first before fully diving in.
I have actually been investing with Reinvest24 for a couple of years now. I have written a review of the platform, which tracks my monthly returns.
This was just one of many investing ideas that we have for you. If you want to find out other ways to invest, check out our list of additional investment ideas.