Investing in Real Estate and Property

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Real estate is sometimes referred to as an “alternative investment” compared to more traditional vehicles such as stocks, bonds, and mutual funds. However, investing in real estate is becoming increasingly mainstream for several reasons:

  • The rapid increase in housing prices has prompted people to buy real estate for its appreciation potential.
  • New technologies and online platforms are making investing in real estate more accessible.
  • Innovative financing options and novel home ownership models have prompted people to think outside the box when it comes to investing in real estate.

These trends make investing in real estate a more viable option for people who previously believed it was only for investors with extra time and money. But it also means that there is more information to gather, more tools to learn about, and more investors getting into the game. This is intimidating for some but exhilarating for others. If you are in the second category, investing in real estate may be for you. This guide will help you survey the landscape of real estate investing and show you how to get started with your own real estate investments.

What is Real Estate Investing?

At its core, investing in real estate means buying properties and either holding them or reselling them, with the goal of making a good return on the investment. Investors make money in two ways: selling the property for more than they paid for it and earning rental income.

In practice, investing in real estate comes in many different forms, from owning and managing large apartment buildings to buying shares in a real estate investment trust. New opportunities for investing in real estate are always emerging, opening the area up to more potential investors.

Is Real Estate Investing Risky?

All investments entail risk, but the level of risk varies from one type of investment to the next. Even within a particular asset class, such as corporate bonds, which are generally considered low risk, there is variability. For example, bonds are riskier if they are issued by a company that might fold before the bonds come due. In contrast, bonds issued by a stable company with a long track record of success are generally considered very low risk.

While riskier assets also have a greater potential for profit, investing in them could result in insubstantial losses. Some investors are willing to accept this risk, while others prefer safer investments, exchanging the possibility of outstanding profits for the certainty that their investment will retain its value.

The same principle applies to investing in real estate. There are riskier investments, such as speculative housing developments, in which investors purchase one or more homes before they have been built, counting on them to sell for a higher price when they are ready for occupancy. Less risky options include investments where the risk is spread out over several people, such as real estate partnerships and real estate mortgage investment corporations.

When you plan on investing in real estate, think about your risk tolerance: what are your investment goals, what is your timeline for seeing a return on your investment, and how much can you afford to lose? That will help you decide what types of properties or funds to invest in.

What Are the Advantages of Investing in Real Estate?

Some of the advantages of investing in real estate are specific to the type of property or ownership structure, but here are the key advantages of investing in real estate:

Real estate tends to perform differently from the stock market. This does not mean that as one goes up, the other goes down; rather, it means they move independently of each other. This is the true key to spreading risk over different types of investments.

  • Leverage Utilization

When investing in real estate, you only have to pay a portion of the cost upfront. You borrow to pay for the rest, paying off the loan or mortgage over time. Because the property can be used as collateral, it gives the investor a great deal more borrowing power.

  • Building Equity

One of the key advantages of investing in real estate is that it allows you to grow your wealth by building equity in your real estate holdings. With every mortgage payment you make, your equity in the property grows. Initially, your mortgage payments will largely go towards interest, but as time goes by, a greater and greater portion of your payments goes toward the principal. Be sure to take advantage of opportunities to make principal-only payments, as this immediately increases your equity in the property.

Rental properties such as apartment buildings and commercial space generate income that you can rely on every month. You can use this revenue to pay the mortgage on the property, which in turn builds up your equity.

  • Tax Breaks

Investing in real estate opens you up to many tax breaks and incentives, such as deductions for the costs of owning and managing a property. These tax breaks can change over time and will vary by the type of property and the jurisdiction.

  • Capital Appreciation

Historically, property values have tended to rise over time. While there are no guarantees, investors who do their due diligence can usually expect to sell properties for more than what they paid for them.

  • Hedge Against Inflation

As long as you are able to increase the rents on your income properties in line with inflation, your effective buying power remains the same.

What Are the Disadvantages of Investing in Real Estate?

Like all investments, real estate exposes the investor to risk. Here are the key disadvantages of investing in real estate compared to other types of investments:

  • Lack of Liquidity

Unlike many other types of investments, real estate is illiquid, meaning that it is more difficult to sell. If you suddenly need capital, it will be more complicated than if your investments were in, for example, stocks or a high-interest savings account.

  • Interest Rate Hikes

If you borrow money for your real estate investment, your carrying costs will be higher if interest rates rise.

  • Economic Instability

When the economy is flourishing, home purchases and property values rise, which is advantageous for investors who are flipping houses or selling their holdings. Investors with rental properties will also be able to raise their rents. At the same time, many renters will buy homes, increasing the vacancy rate. During economic downturns, property values drop, which is only advantageous for people investing in real estate. Landlords may not be able to charge as much for rent, and vacancy rates may rise as people leave the area to look for work.

  • Unexpected Expenses

When investing in real estate, you may be hit with expenses you did not plan for. We are all familiar with the scenario of a house flipper discovering something during demolition that requires a significant additional investment. Some other examples of unexpected expenses are tenant damage, pest infestations, and natural disasters that are not covered by your insurance.

  • Property Management Challenges

If you plan to invest in a rental property, you must be prepared to perform maintenance, do repairs and deal with tenant concerns and complaints, as well as advertise for and vet new tenants. This can be time-consuming and overwhelming for beginners. On the plus side, there are plenty of property managers you can hire to handle these tasks for you.

What Are the Main Ways to Make Money by Investing in Real Estate?

There are four broad groups of strategies for making money when investing in real estate: buying and holding property for capital appreciation, purchasing rental properties for steady income, flipping properties, and buying into joint investments. There is an overlap between these strategies, and it is important not to think of them as mutually exclusive. For example, you might invest in an office building in an up-and-coming area for both the rental income and the appreciation potential.

  • Buying and Holding Real Estate

Investing in real estate by purchasing and holding it for later resale is a common real estate investment strategy. It can include properties such as:

    • A home to live in: You will build up equity in that home over time, and the home will likely be more valuable a few years down the road. Greater equity also gives you greater borrowing power, which can allow you to invest in other properties or reinvest in your own home by making improvements.
    • Vacant land: Investing in real estate by purchasing vacant land is risky because you will be counting on that land becoming more valuable. However, with careful research about the property and the surrounding area, you can reduce that risk. Look for land in areas that may be developed in the future or land that is likely to become scarce, such as waterfront property, industrial land near transportation hubs, and coastal land that is erosion-resistant.
    • Properties in transitional neighbourhoods and emerging areas: Areas that are undergoing gentrification are prime opportunities to snap up a property at a bargain price and resell it when the neighbourhood becomes more popular.
    • Eco-friendly and sustainable properties: As the push toward greener living ramps up, properties that are already outfitted with such features as solar panels, geothermal heating, and on-demand hot water will be highly sought after.
    • Properties near planned transportation terminals: If there are new public transit lines under development, nearby property values are likely to rise for both residential and commercial real estate.
    • Mixed-use developments: Developments with a mix of residences, commercial space, and community hubs can quickly become hives of activity that attract potential homebuyers and businesses. As they become popular places to live, work and shop, property values are likely to rise.

  • Buying Properties to Generate Cash Flow

Investing in real estate for cash flow mainly involves buying spaces you can rent out or lease. Assuming you keep your vacancy rates low, these properties can give you a steady flow of income:

    • Space in your own home, including separate suites and individual rooms. This strategy reduces your mortgage without much work on your part other than finding and screening tenants.
    • A residential rental property, either a single unit such as a house or condo or a multi-unit building.
    • A commercial rental property which can be anything from a small retail store to an entire mall. Check the applicable zoning regulations to see what types of businesses you will be able to rent it out to.
    • Industrial-use buildings or complexes.
    • Coworking spaces: The cash flow from these spaces may not be as predictable as a rental unit, but as the trend toward freelancing and contract work continues, you can reasonably expect these sites to be profitable.
    • Vacation properties: These can range from cottages in the country to condominiums in the city center. Be sure to check with the municipality for local laws and regulations related to short-term rentals, as they sometimes change.
    • Mobile home parks: Income from these properties comes from lot leases. Tenants bring their own mobile homes to the site and pay to use the land as well as facilities on the site. The better the amenities, the more you can charge, so save room in your budget for improvements. Putting time and effort into these upgrades should also be thought of as a form of investing in real estate.
    • Agricultural land: Rural land can be leased out for farming or grazing rights. Depending on local regulations, investors can also consider building vacation cabins on these properties or using them as campsites for a fee.
    • Student housing: Locations near university and college campuses are always in demand. The units can be used for other purposes, such as short-term rentals during the summer months.
    • Seniors’ housing: Housing for seniors will be in higher demand as the population ages. These buildings need to be staffed and are usually subject to regulatory oversight, so an inexperienced investor should research the requirements before purchasing this type of property.
    • Self-Storage Units: Storage facilities tend to be in high demand in areas filled with apartment buildings and condominiums. Buying one that is already in operation ensures that you will have rental income right away.

  • Flipping Properties

Flipping properties is a challenging but stimulating way of investing in real estate. Most people are familiar with the real estate flipping model due to the popular television programs in which people purchase a home, renovate it if needed, and resell it for a higher price.

This type of real estate investment can be very lucrative, but there is a great deal of risk involved. Investors can also wind-up losing money if they are ill-prepared, choose the wrong property, or make poor decisions when they are renovating. Partnering with a contractor or other home building professional can minimize the risk, especially if the contractor has a financial stake in the project.

  • Wholesaling Real Estate

Real estate wholesaling is a unique way of investing in real estate because it does not involve any capital outlay. In real estate wholesaling, the investor (or wholesaler, in this case) finds properties that have a good chance of selling for a discounted price. Some examples are houses that are in poor repair or homes that must be sold quickly. The wholesaler makes a formal agreement with the owner to sell the purchase rights to a buyer for a guaranteed minimum price. The wholesaler then finds a buyer and negotiates a price with them. The wholesaler keeps the difference between the guaranteed minimum and the actual purchase price.

Wholesaling is ideal for investors who do not want the commitment involved in flipping properties or who do not have a great deal to invest. The only cash outlay in wholesaling is advertising and the cost of any repairs that the house needs to make it marketable. Investors with a strong and diverse professional network tend to be much more successful at wholesaling, as contacts play a big role in finding properties and locating interested buyers.

  • Joint Investments

Investing in real estate often requires a large capital outlay. This is not for everyone, so some investors choose a joint investment opportunity. The opportunities include:

  • Co-ownership: This type of arrangement can take many forms. Investors can do something as simple as buying a property with another person. A house that can be divided into separate suites is the most common co-ownership model. Still, you can also consider buying a small apartment building together or jointly investing in a vacation property. For these purchases, you will want to have a formal legal agreement in place in the event of disputes.
  • Real estate investment groups (REIGs): Under this model, you join a group of other investors, pooling your funds, expertise, connections, and time to invest in properties. These groups are private and not subject to regulatory oversight. Each group determines its own structure, goals, and investment strategies. The group itself is responsible for property management and all other ownership tasks.
  • Real estate investment trusts (REITs): Similar to REIGs, these trusts allow investors to share in the purchasing power of a group. However, REITs are professionally managed, with investment experts doing the analysis and making decisions about which properties to buy and sell. The REIT also handles all the property management tasks. REITs are sold on stock exchanges just like stocks, making them both liquid and accessible to the ordinary investor.
  • Crowdfunding real estate platforms: This is one of the newest models for investing in real estate. Falling somewhere between REIGs and REITs, these online platforms allow investors to invest in real estate projects collectively. The platforms identify and vet real estate investment opportunities, and investors decide which specific projects they want to contribute funds to. Investors commit to the projects for the full period of the development, but there are secondary markets on which investors can sell their investment if they need to.

What Do Real Estate Investors Need to Learn Before Getting Started?

Successfully investing in real estate depends largely on preparation and research. Here are the most important things you will need to learn:

  • Types of real estate investments, the pros and cons of each one, and which are most suited to your temperament, risk tolerance, capital availability, and other commitments.
  • Financing options including mortgages, loans, lines of credit, seller financing, private lenders, lease-to-own agreements, and equity partnerships.
  • Ownership structures such as sole ownership, partnerships, limited liability companies, trusts, and real estate investment cooperatives.
  • Investment strategies such as buying and holding, flipping, and wholesaling.
  • Tax implications of the different types of investments, including such topics as capital gains, deductions, and tax incentives.
  • Market research for the real estate market overall, as well as specific markets you are interested in.
  • Evaluating properties for their investment potential and developing a list of selection criteria.
  • Financial Analysis to keep track of key metrics such as return on investment and cash flow projections.
  • Property management and landlord-tenant regulations.
  • Networking, relationship building, and mentorship.
  • Ethical considerations in real estate investing.

What is the Best Way to Get Started Investing in Real Estate?

Some investors dive right in by buying their first property purchase as soon as they hear about the advantages of investing in real estate. This approach may not be for everyone, and for many investors, it is advisable to learn the basics and start to build their professional network before making their first purchase.

Keyspire can help you launch your new adventure by giving you all the tools you need to start investing in real estate with confidence. Every year, 50,000 investment enthusiasts participate in our events. We are proud to have built a diverse community of over 100,000 engaged investors who give each other the energy and motivation to achieve financial freedom by investing in real estate.

Ready to dip your toe in? Sample our wares by taking our exclusive free Masterclass, where you’ll learn the five things that successful real estate investors always do. The Masterclass will give you key insights you need to decide if investing in real estate is right for you.

Following that, our interactive 3-day or 2-day accelerated Bootcamp will take you to the next level. You will add to your knowledge base, get opportunities to apply what you have learned and get to know other investors who are on the same path.

Once you have gotten your feet wet, come to our action-packed 3-day Investor Summit, filled with informative seminars, workshops, and social events. You will connect with inspiring colleagues, get tips from insights from investors who have achieved financial freedom through their investments, and build valuable and meaningful relationships along the way. Reserve a spot for this energizing premium event!

Our goal is to help you succeed by giving you information, resources, and networking opportunities. At Keyspire, we are not about competition; we are about coaching, training, and building a community that benefits all our members. Your future awaits—join us by signing up for one of our fun and informative events today!

 

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