Savvy investing is one of the keys to financial freedom, and real estate investing may be particularly enticing. This investment path can be a high-risk, high-reward model for building real wealth. Or it can be a gentle investment on-ramp for mom-and-pop investors.
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Regardless of which characterization describes you, how can you get into the field? Where do you even start?
You don’t have to buy a metropolitan high rise to break into real estate. By starting slow and setting your sights on a diverse portfolio, you can start generating passive income with a range of assets. Here are some of the most effective ways to begin.
Consider Wholesale Real Estate
Wholesale real estate can be a great starting point for new real estate investors. In this approach, an investor contracts a home with a property seller. The investor then finds a buyer for the home, sells the property at a higher price, and pockets the difference.
Buying and selling wholesale investment properties is an effective investing strategy that you can execute right away. It allows you to learn about the real estate industry while making a profit. Wholesale real estate is also typically lower risk than longer-term investments. You don’t own the property you contract, but you can still benefit financially by pursuing a sale.
Buy a Home
It may seem simple, but owning your own home is a wise first step toward real estate investing. Your home is likely the largest asset you’ll ever own. You can maximize your return on investment by making improvements to it and building equity over time.
Rather than selling a starter home, some homeowners will turn their residence into a rental property. Most mortgage lenders require you to live in your home for one year before taking this step. However, once you can convert the property to a rental unit, you’ll transform a capital asset into an income stream.
Purchase a Rental Property
Rental properties are an accessible way to get started with real estate investing, whether or not you already own your home. When you own and operate a rental property, you can enjoy monthly income as long as the unit is occupied. This increased income can do wonders for your long-term financial goals.
There are a few ways to approach rental property ownership. You can purchase a single-family home or multi-unit building and rent to tenants. Alternatively, some investors may choose to purchase a multi-unit building, live in one unit, and rent out the others. The latter is a popular option for young property owners and first-time investors.
When purchasing, remember that rental properties come with maintenance and administrative responsibilities. Many landlords hire property management companies to handle these tasks for them, but doing so will obviously diminish your net ROI. Furthermore, managing rental contracts and tackling property upkeep at first can provide valuable knowledge about the industry. You’ll know what to look for if you decide to outsource these responsibilities in the future.
Reinvest to Maximize Earnings
Once you buy one rental property, reinvesting will help you build wealth over time. Beginner investors often reinvest by purchasing another rental property or renovating a rental unit to increase its value.
Your best reinvestment strategy will depend on your long-term goals, the state of the rental market, and whether long-term tenants occupy your existing units. However, it’s typically smart to reinvest as soon as possible. This will give you a jump-start on building your investments and maximizing your future earnings.
Buy a Vacation Property
Don’t forget about the short-term rental market when investing in real estate. Vacation properties can be a lucrative choice for investors at all levels, especially in areas with high tourist volume. You don’t need to live in the same area as your rental property, but it may be more convenient to manage if you do.
When searching for a vacation rental property, consider how much work you’re willing to put into it. Remember that you’ll need to make repairs, ensure the property is up to code, buy furniture, and have a maintenance plan. Property owners also need to list the property on websites like Airbnb or VRBO and manage the bookings.
If you’re willing to put time into a vacation rental, you can likely expect an eventual return on investment. Plus, you’ll have a go-to vacation home available when you need your own escape.
Flip a Home
Home flipping is a tried-and-true method of real estate investment. To flip a house, you purchase a distressed or below-market property and fix it up. Then you attempt to sell it for a higher amount than you originally paid.
New investors who are prepared for the commitment and ready to (literally) get their hands dirty can benefit from the flipping market. However, you do need to be aware of potential pitfalls.
Inexperienced investors run the risk of overspending on repairs and cutting into their bottom line. Or the market may change before you can flip the home, forcing you to sell for less than you originally planned. You may also struggle to sell the property at all.
The solution? Beginner investors may benefit from partnering with an experienced house flipper or general contractor. Enter the investment with realistic expectations and a clear goal and enlist a pro to help keep you on track.
Buy Into Real Estate Investment Trusts
Aspiring real estate investors who aren’t ready to buy property can still enter the market by investing in real estate investment trusts (REITs). Similar to mutual funds, REITs are companies that own and operate commercial real estate properties, such as apartment buildings or healthcare facilities. You can purchase REITs shares through a broker.
By investing in REITs, you can earn dividends within the real estate industry without the long-term commitment of property ownership. However, these investments are still subject to fluctuations in the market. A financial advisor can help you identify the best investments for your portfolio so you can make informed long-term investment decisions.
The real estate investment market is vast and ever changing, yet there are opportunities for nearly every investor. Whether you want to own multiple properties or simply diversify your portfolio, consider entering the market. The results can be passive income and long-term gains — both of which will enrich your financial future.