Becoming a real estate investor is much more feasible than most people think. There’s no question that real estate investing comes with risk, like any investment. But with risk can come reward, and real estate has that in spades.
“Real estate is one of the few investments where your upside is truly unlimited,” says Than Merrill, CEO of San Diego’s FortuneBuilders and CT Homes. “With the right property in the right location, you can make 15% to even 30% on your money.”
“You can make money in hundreds of different ways through investing in real estate, and that keeps it interesting,” says Realtor® Ed Laine, partner and broker atMiller Laine Properties in the Seattle area.
Here are three great ways the average investor can start a real estate portfolio.
Savvy investment No. 1: Rentals
People will always need to rent houses, says Laine, which can provide a steady income for landlords.
“A rental property is an investment that pays itself off over time,” says Laine, adding that he named his first two rentals “Son No. 1’s college account” and “Son No. 2’s college account.”
Owning a property and renting it out allows you to grow your monthly income—or at least make enough to cover your costs.
“I don’t think of it as ‘buy and hold,’ but ‘buy and collect checks,’” Laine says. Of course, he’s partlykidding—anyone who’s been a landlord knows there are times you have to deal with renters who pay their rent late, flooded toilets, and other costly hassles.
Being a landlord can also offer major tax benefits. Most rental property owners can write off the mortgage interest and depreciation and generally don’t pay taxes on the income, Merrill notes. You can also use your rental property to claim deductions, such as repairs and insurance.
Savvy investment No. 2: House flipping
When you’re flipping houses as a real estate investor, on the other hand, it’s anything but “buy and collect.” In fact, this is a real estate investment strategy that requires a lot of work, acknowledges Merrill.
“Rehabbing properties remains one of the most lucrative real estate exit strategies, but it requires an acute attention to detail and a lot of experienceto master,” Merrill says.
To make flipping profitable, carefully consider your property and how much needs to be done. Start withthe purchase price and then figure out how much you’ll need to invest (whether it’s time, money, or both) to get it sparkling and sale-ready.
Collaborate with a trusted contractor to come up with the“after repaired value” and then compare it withthe selling prices of properties in the area. Make sure the comparable properties are in the same school district and have as many similar characteristics as possible, from bedrooms and bathrooms to lot size and garage type.
Don’t forget to factor in closing costs and “carrying costs,” the mortgage and insurance you will be paying until the home sells.
Savvy investment No. 3: Real estate investment trust
Boy, does that sound complicated. But investing in a real estate investment trust, orREIT, could bethe easiest real estate investment of all.A REIT is a way to increase the amount of real estate in your financial portfolio without requiring you to actually buya piece of property. Modeled after mutual funds, REITs allow anyone to purchase stock in large-scale properties.
“I describe mutual funds as a pooled investment which allows a group of co-owners to employ the services of a professional asset manager. A REIT is the same thing, related to real estate,” says Warren Ward, owner of WWA Planning & Investments in Columbus, IN. “The main advantage of owning a mutual fund also applies to a REIT—immediate diversification.”
If you own a rental property or are flipping houses, you are dependent on that market specifically. If you’re not in the right area, your investment could be plunging. By contrast, owning a REIT allows you to diversify geographically and in the types of real estate owned—from residential to commercial.
Ward’s advice if you want to jump into the world of REITs is to stick with widely traded ones.
“Lots of brokers have sold their clients nonpublicly traded REITS, but their pricing is not transparent. That makes them hard to value and very difficult to sell if you need to,” he says.
Another benefit of REITs? You don’t have to collect rent checks or manage subcontractors, and you still own real estate. Maintaininga rental or preparing a house to flip takes a lot of work, says CEO of the Carlton James Group Simon Calton.
“Countless arduous tasks will eat into your time and, if you’re not careful, your capital,” he says.
By contrast, he considers REITs to be an “armchair” investment, as there areno management requirements and no surprise maintenance issues.
“REITs and real estate funds will often yield higher returns and have more security, but cost less and hold less risk for the investor than direct property investment,” he says.
