How to Invest in Real Estate | The furry fool (2023)

Investing in real estate is a proven wealth building strategy. Investing in real estate can also help diversify your portfolio and protect it from stock market volatility. Let's take a look at the most popular options for real estate investing, the pros and cons, and how to get started.

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What are my investment options?

Here are the most popular methods of investing in real estate:

Rental properties.
of the REIT.
Real estate investment groups.
Flip houses.
Real estate limited partnerships.
Real estate investment funds.

Let's take a closer look at how these work.

Rental properties

Rental properties are among the most practical options on this list. You buy a piece of residential real estate and rent it out to tenants. Many rental properties are rented for a period of 12 months. In addition, short-term rentals through companies such as e.gAirbnb(ABNB -1,22%) are becoming more and more popular.

As the owner of the house, you are the owner. You are responsible for maintenance, cleaning between tenants, repairs and paying property taxes. Depending on your lease terms, you may be in the process of replacing appliances and paying for utilities.

You make money from rental properties from rental income you receive from tenants and price increases if you sell the property for more than you paid.

You can also take advantage of tax deductions. belowpassive activityloss rules, you can deduct up to $25,000 in losses from your rental properties from your ordinary income if you modifyadjusted gross incomeis $100,000 or less. Depreciation (a non-cash expense) and interest (which you pay anyway) can cause the property to show a book loss, even if you're still making money.

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of the REIT

If you don't want to go through the headache of managing a rental property or can't arrange the down payment,real estate investment trusts (REITs)is an easy way to start investing in real estate.

REITs are companies that own and manage rental properties. They can contain any type of commercial real estate, including medical office spaces, shopping centers, warehouses, offices or apartment buildings.

REITs tend to be highdividend paymentsbecause they are required to pay at least 90% of their net income to investors. If the REIT meets this requirement, it will not have to pay corporate income tax.

Additionally, while selling a rental home can take months and lots of paperwork, a REIT has its advantageliquiditysince many trade with onescholarship.

Real estate investment groups

Invest in onereal estate investment group (REIG)is a way to preserve the profit potential of private rental properties while potentially reaping more benefits than a REIT trading at a premiumassessment.

REIGs buy and manage real estate. They sell interests in the property to investors who receive a portion of the rental income.

The operating company receives part of the rent and manages the property. This means that the company is looking for new tenants and is responsible for maintenance. REGIs often withhold a portion of the rent to pay off debt and meet other obligations if certain units are vacant.

Flip houses

Flip housesit is the most practical, challenging and dangerous of these options, but it can also be the most profitable. The two most common ways to flip houses are to buy, fix and sell, or buy, rehab, rent, refinance and repeat (BRRRR method). In either case, it's important to limit your initial investment with a low down payment and keep renovation costs low.

Let's say you manage to buy a house for $250,000 with 20% down, or $50,000. You do another $50,000 in renovations and then list the house for $400,000. You use the $400,000 to pay off the $200,000 loan and then have a $100,000 profit on a $100,000 investment. It's a great return if you can get it.

The problem is that most of the time you can't. Home purchases can turn from a seller's market to a buyer's market in an instant, which can affect your sale price. Meanwhile, it may sound simple to keep renovation costs to a minimum, but it can be nearly impossible if you don't have direct construction experience. Inflation and delays can spiral out of control.

When flipping houses, do extensive due diligence. Also, be sure to build a big cushion in case something doesn't go according to plan (which it usually does).

Real estate funds

Real estate funds invest in REITs and real estate operating companies (REOCs). REOCs are like REITs, but they don't have to pay dividends, so they grow much faster.

Propertyinvestment fundsofexchange-traded funds (ETFs)are the easiest ways to invest in real estate. You let a manager or even an index pick the best real estate investments while you collect dividends.

Even if you are an investor who only invests in stocks, you can consider using real estate funds to make moneydiversificationwhile maintaining the liquidity profile you are used to. Investors are very high qualityREIT ETFchoices.

Why should you invest in real estate?

Here are some pros and cons of real estate investing:

Advantages	disadvantages
When you invest in physical real estate, you can control your investment. You can also have a completely passive investment that you don't have to manage if you hire a property manager.	During a Great Recession type event, prices can crash and destroy your entire portfolio.
It can be a source of steady monthly income payments.	With the leverage required, even small price drops can wipe out your entire investment.
It can reduce your overall volatility through diversification and lower price movements in general.	If you choose to flip houses or own personal rental properties, it can become a career in itself and take up a lot of your free time.
It can lead to long-term wealth through the use of leverage.	Initial costs can make initial investments difficult. You need to save enough for the down payment and to cover cash shortfalls if there are vacancies.

How to get started in real estate

If you choose to invest in real estate, follow these five steps to get started:

Save money:Real estate has one of the most expensive barriers to entryasset classes. Before you get started, you'll want to pay off your high-interest debt and have substantial savings.
Choose strategy:Any of the strategies listed above can be successful. If you choose to buy REITs or funds, you can research your options online to get started. If you want to buy physical real estate, you need to choose a market.
Gather a team:You may want to work with an agent when you start out. Big brokers will send you off-book opportunities that aren't already listed. Eventually, you may need someone to manage your estate and an accountant to handle the finances. If you become successful, you eventually need investors.
Do agreement analysis:Whether you invest in housing orCommercial properties, you should do enough research on any investment. For example, with rental properties, you need to analyze the future rent payments and expenses you may be responsible for and predict your likely sale price.
Close the deal:The final step is to make your first investment. Close your property or make the purchase in your brokerage account.

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Start investing in real estate today

Investing in real estate can seem daunting at first. Not everyone has the time or ability to flip houses or have a tenant. The good news is that there are options available for every level of investor, each targeting different goals, skill levels and time constraints. This enables anyone to get started today and unlock the wealth-creating potential of real estate investing.

Matthew DiLallohas Airbnb listings. The Motley Fool has places and recommends Airbnb. The Motley Fool has onedisclosure policy.