In today’s increasingly volatile investment markets, many investors have expanded beyond traditional stocks, bonds and mutual funds to include more secure, lucrative alternative investments like real estate in their financial portfolios.
“Real estate investing can help diversify your existing investment portfolio and be an additional income stream”, wrote NerdWallet. “And many of the best real estate investments don’t require showing up at a tenant’s every beck and call”.
Still, it can be tough for new investors to know where to start, so here are seven real estate investing tips to help beginners get started on the right path to making money with investment properties, while avoiding some common mistakes.
1. Understand the Costs of Owning Real Estate (What is Your Budget?)
Everyone knows real estate investing can be highly lucrative, offering a way to save money for retirement that is not shrouded in stock market volatility… But what about the costs associated with owning investment properties? The truth is, there is no “one size fits all” answer or approach to figuring this out, save for a bit of good old-fashioned research and planning, with a clear vision of the investment’s true potential and how much you really have available to spend. Whether you already have cash on hand or need to take out a loan, real estate investing can be well worth the effort and initial expenditure, but it’s also important to realize there’s typically much more to the story than simply buying property and collecting money. As for the real cost of owning real estate, here are a few things to keep in mind:
- Basic maintenance costs, like trash collection, air filters, light bulbs, grounds keeping and cleaning.
- Yearly upkeep, including winterizing, surface and HVAC system maintenance.
- Property upgrades, such as renovations when a tenant moves out, new roofing and other exterior improvements.
- Utilities, etc., including property management fees, taxes and other regular service charges.
2. Should You Buy Property Using an IRA?
While you are weighing the various costs and other essential basic features of the best real estate investment for your situation, it’s also important to decide whether you want to invest using money in your IRA, 401k, or other retirement account? Most retirement plans - including traditional and SEP IRAs, 401ks and TSPs (among others) will permit you to roll funds penalty-free into a Self-Directed or Roth IRA, where you can use the money to invest in real estate and collect tax-deferred or tax-free income for retirement. Real estate held in an IRA account must be used solely for investment purposes, and all maintenance costs must be paid for by the IRA, so make sure you fully understand the rules before making a purchase, but when done correctly this is definitely one smart way to build wealth.
3. Select a Property Type
Once you have decided exactly how much you can spend and whether or not you want to buy real estate using money in your IRA, it’s important to decide exactly what type of property you want to invest in. For example, you could opt for commercial or residential rental properties, you could rent out an entire home or apartment, use your property as an Airbnb or rent it out through another vacation home rental service. If you aren’t really into the idea of maintaining residential property as a landlord, the commercial option may be a better fit, or you could avoid renters entirely and purchase a property that’s ideal for a quick flip, which can also provide a faster return (if you know how to manage the renovations, of course). If none of these options sound particularly appealing, you can also opt to invest in a real estate investment trust (REIT) or a private real estate investment fund. Both of these options are almost entirely hands-off, but still allow shareholders to participate in the world’s hottest real estate markets.
4. Buy Shares in a Real Estate Fund or REIT
The reality is, some investors will never be ready to buy and own investment properties directly. But everyone still needs to diversify and find income producing investments in order to enjoy a secure retirement, gain adequate protection from stock market volatility and obtain a reliable hedge against inflation… Which is where private real estate investment funds and REITs come in. Designed to provide many of the benefits of real estate investing without the inevitable headaches of direct ownership, investment vehicles like private real estate funds and REITs allow shareholders to benefit from the upside of the world’s strongest property markets without actually getting involved in the buying, selling or managing of properties.
5. Know the Area or Sector
Whether you decide to buy investment property outright, or opt to invest passively through a private real estate fund or REIT, it’s imperative to understand the area(s) and/or sectors where you plan to invest. For example, if you are buying an income producing vacation home in a foreign country, you should get to know the region and understand what the area has to offer before you ever think of signing on the dotted line. Fortunately, most due diligence can be done remotely nowadays, especially if you enlist the help of experienced realtors who understand the world of real estate investing and come highly recommended. Take your time, get familiar with the area where you plan to invest, be deliberate about each step and don’t make a move unless you feel excited about it.
6. Understanding Appreciation
In real estate investing, appreciation occurs when a property’s value increases due to a change in regional, national and/or global real estate markets. This can happen if land in the vicinity becomes scarce, if a major shopping center is built close by, or if you make upgrades to a property that make it more attractive to potential buyers, but appreciation often happens “naturally,” as long as you keep up with basic maintenance on the property. Still, a property’s rate of appreciation can be difficult to predict, making it a riskier aspect of real estate investing than properties that also provide cash flow income.
7. Importance of Cash Flow Income
Finally, whether you decide to directly purchase a rental property directly, or prefer to keep a few degrees of separation by investing in REITs or private real estate funds, cash flow is always the real name of the game. Consistent cash flow can be generated from a wide variety of different real estate investments, including hotel funds and other development-related REITs, vacation homes and apartment building rentals, as well as storage units, office buildings and a wide variety of other retail establishments. Regardless, make sure the plan for ROI (cash flow) is clear before you invest - real estate investments should provide secure, ongoing income for you to invest in a retirement you will enjoy.
Do you have questions about real estate investing? Post them in the comments!