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If there's one question we hear all the time from new investors, it's this one: "Is real estate a good investment?" These investors want to know if it's really possible to make money in real estate or if they should just stick to playing the stock market. We've done our best to answer this question below. Read each section to get a better idea of whether real estate investing is the right choice for growing your portfolio.
What are the different ways to invest in real estate?
Before we get into the specific benefits of investing in real estate, it's important to clarify that there's more to real estate investing than just becoming a landlord and collecting rental income. In practice, there are six different ways you can add real estate assets to your portfolio:
- Buy-and-hold strategy: This is the classic real estate investing strategy where you buy an investment property, find a tenant, and collect regular rental income.
- Short-term rental strategy: A short-term rental strategy is similar to a buy-and-hold strategy, except that rather than finding a long-term tenant, you only rent out your investment property for a short time. Often, investors will use platforms like Airbnb or VBRO to market their properties.
- Fix-and-flip strategy: Also known as "flipping houses," a fix-and-flip strategy involves buying a residential property that's undervalued for the market, fixing it up, and then selling it for profit.
- Real estate wholesaling strategy: A wholesaling strategy also involves buying a property that's undervalued for the real estate market. But in this case, rather than fixing it up first, you turn around and sell it very quickly to an end buyer at a higher margin.
- Real estate investment trusts (REITs): If you like playing the stock market, you might be interested in investing in a real estate investment trust. REITs are publicly traded companies that either own and operate or finance real estate. Investors can buy shares of these companies and receive dividends in return. Alternatively, you could also invest in a real estate investment fund like a mutual fund, or a real estate ETF.
- Crowdfunding: Similarly to REIT investing, crowdfunding is a good way to generate passive income. In this case, an experienced real estate professional will usually identify a good investment opportunity but won't have the income to fund it. Instead, they use a platform to pool funds from interested investors, who will then receive a share of any profits in exchange for their capital.
What are the pros and cons of investing in real estate?
Like any major investment, before you get started investing in real estate, it's important to consider the pros and cons. We've listed a few of them for you below so you have a better idea of what to expect if you decide investing in the housing market is right for you.
To start, if you decide to add real estate to your investment portfolio, there are multiple ways you can see a profit. As mentioned above, if your goal is to generate regular cash flow, you can go with a buy-and-hold strategy. In that case, you'd also have the opportunity to benefit from long-term appreciation. Meanwhile, if you'd prefer a lump-sum payout, you could go with a fix-and-flip strategy or a wholesaling strategy. However, if your goal is to add more passive income, you could choose REIT investing or crowdfunding.
Additionally, there's a tax benefit to real estate investing. For example, you could use depreciation to significantly lower the tax rates on any long-term profits, or you could use a 1031 exchange to defer any capital gains from selling your rental property. While you need to talk to a tax professional to make sure you can take advantage of all the tax benefits available to you, it's important to know they exist.
Lastly, real estate lets you build equity, which you can eventually use as leverage to expand your investment portfolio. For instance, a real estate investor often will open a HELOC on one of their investment properties to fund the down payment for a new purchase.
The biggest downside is that the initial investment for investing in real estate is usually larger than it might be for another investment option, particularly if you want to do either a buy-and-hold strategy or a fix-and-flip strategy. Put simply, when you're getting a mortgage to cover the purchase price, you need to be prepared to pay for the down payment and closing costs, as well as have sufficient cash reserves in the bank.
Also, many forms of real estate investing are a lot of work. While crowdfunding and REIT investing both allow you to generate passive income, other forms of real estate investing require a lot of effort. With a fix-and-flip strategy, for example, you'll have to put a lot of sweat equity into improving the home before you can raise the property value enough to sell it for a profit.
What is the long-term growth rate of real estate investments?
In truth, it's hard to make an apples-to-apples comparison when you're looking at different asset classes. In this instance, equities tend to appreciate much faster than real estate. However, they don't offer the same opportunities for leveraging, so it's hard to get an accurate read on which investment option is ultimately more valuable.
Despite that, in a paper entitled "The Rate of Return on Everything 1870-2015," researchers from the Federal Reserve Bank of San Francisco looked at the average rate of return for each major asset class in 16 global economies. Their research dates back all the way to 1870. However, for the purposes of keeping the data manageable, we decided to just look at the rates of returns in the United States from 1980 to 2015.
Here is what they found:
- Bills: 1.71
- Bonds: 5.71
- Equities: 9.09
- Real estate: 5.66
With those figures in mind, remember that diversification is important. An experienced real estate investor will likely have an equity vehicle like REITs or a real estate mutual fund in their portfolio alongside any rental property.
How to get started as an investor
Lastly, if you think investing in the housing market might be right for you, we've given you some tips on how you can get your real estate Investments off the ground. Take a look at them so you can start building your portfolio as soon as possible.
Define your investing goals and strategy
Before you get started doing any type of real estate investing, it's important to clarify your investing goals, because those goals will eventually help you solidify which investing strategy is right for you. For example, if you're looking for positive cash flow, a buy-and-hold strategy that allows for regular monthly rental payments might be a good choice. But if you're looking for liquidity, go for a REIT instead.
Do your research
Once you've picked an investing strategy, the next step is to do your research. While Millionacres offers tons of info on real estate investing basics, it's also important to network with any investors you know in the business. After all, you never know when a little bit of networking might come in handy.
Build your team
The vast majority of real estate investing doesn't happen in a vacuum. You'll need a team by your side to help you achieve your goals. For example, with buy-and-hold investing, you'll need a real estate agent and a lender, at a minimum. Meanwhile, with wholesaling, you'll need a lender who specializes in transactional funding. Finally, using a fix-and-flip strategy, you'll likely need to search out a qualified contractor.
The bottom line
At Millionacres, we certainly believe real estate is a good investment. That said, like any investment, there's risk to adding real estate assets to your portfolio. With that in mind, use this as your guide in deciding whether you're prepared to take that risk. If you are, this advice should help you figure out the next steps to take in order to get started building your real estate empire.
11% of the mega-wealthy swear by this investment…
The richest in the world have made their fortunes in many ways, but there is one common thread for many of them: They made real estate a core part of their investment strategy. Of all the ways the ultra-rich made their fortunes, real estate outpaced every other method 3 to 1.
If you, too, want to invest like the wealthiest in the world, we have a complete guide on what you need to take your first steps. Take the first step toward building real wealth by getting your free copy today. Simply click here to receive your free guide.