Investing in real estate has made many people extraordinarily wealthy. However, it has also financially ruined people who weren’t suited for it and those who didn’t do their research. We’ve discussed the pros and cons of buying a property to live in as it compares to renting. I’ve never gone over the ins and outs of real estate though. It’s a turbulent field, and it’s important to figure out if real estate investing is right for you before you decide to dive in.
There is a lot more to it than some of the other common types of investing, like index funds and ETFs. Without further ado, let’s dive into the details and see if it’s right for you.
The Perks Of Real Estate Investing
- First up, there is the obvious perk of being able to make money. Real estate has had some pretty amazing short-term gains in the past, and because of the use of leverage, you can make an incredible return on your investments.
- Second, real estate investing has a lot of potential tax breaks. You’ll need to research the details and stay on top of it, but that can make real estate even more lucrative.
- There are tons of options when it comes to how you invest in real estate. It isn’t a cookie cutter ordeal, so you can approach it however you feel is best.
- Real estate is a real, physical asset. For some, that may not be a perk or a downside at all – it’s just a neutral fact. For many, it being a physical asset makes it easier to understand and manage.
The Harsh Realities Of Real Estate Investing
- Most real estate investing is not passive income at all. You will likely have to do a lot of work to manage properties. In some cases, it may be as much work as a full-time business.
- Historically, over the long run index funds and ETFs tend to perform better one paper. With that said, if you know what you’re doing you can certainly make a lot with real estate and outstrip the “experts” who like to day trade stocks.
- Your money will be tied up. Real estate is one of the harder assets to liquify when you need to, so that is another consideration to make based on your financial goals.
- Usually, real estate requires a lot more knowledge to do successfully than other investments strategies – like diversified ETF holdings. This isn’t the end of the world, but it’s probably the biggest reason why people who get into real estate may end up failing.
- Because you’re usually holding onto a real, physical asset, there may be a lot of maintenance involved. Lawns have to be maintained, AC has to be kept working, and the house can’t fall into disarray.
- You will require a lot more money to get started in real estate. Down payments are a thing, and they can require a hefty amount of upfront cash.
The Real Estate Investing Options
Now it’s time to discuss the details of the different real estate investing options. There are tons out there, and I can’t cover them all in one article, but I’ll do my best to go over all of the major topics.
Single Family Homes
First up is your standard single family homes. Think of a standard house designed for one family to live in – that’s all it is. These are a simple and straightforward rental property you can get into. Some people find that they have a hard time making enough of a profit on them, but it all comes down to the deal you get when you buy the property. Get a bad deal then, and you’ll struggle for years. Do your work, get a good deal, and you’ll be fine.
One common tactic I see is for a family to buy a house, live in it for 3-5 years, move to another, and rent out the previous property. After you’ve been doing that for 15+ years, you can start to build a healthy rental property portfolio!
Multifamily Homes
Multifamily homes are quite similar to single family housing. This will usually be something like an apartment building or a condo. Nothing groundbreaking, and not completely different from a single family house. Think of this as just a single family house, but on a bigger scale. More money will be required to get your feet wet. Depending on what you go for, you may also have to take care of more things than you would for a single family house. For example, apartment complexes may have amenities or offer services (like spraying for bugs routinely).
Business Spaces
Office building or storefronts can be other lucrative options. They can often get really expensive to get into, but I’ve also heard the money is great in turn. It’s up to you how you want to get into real estate, but this may be better for a person with a lot of money to invest or with a background in real estate already.
Flipping
So far, everything I’ve mentioned has been renting. Well, you can always just flip the property! Buy the house, make adjustments and renovations, and then sell it for profit. With this, you’ll really need to know what you’re doing. You’ll need to get a good deal when you buy, know how to do renovations (or have a good contractor), and know what renovations the market cares about. You can make a lot of money with this, but it requires a lot of knowledge, time, and effort.
As an example, I know a carpenter who makes a killing off this. He saved up a lot of money over several years, then invested it into flipping. He only does it part-time, but he tends to make $40,000-60,000 every six months from it. The only caveats he has mentioned to me is that a lot of money is tied up during that period, and the crunch time can be rough.
BRRRR
The BRRRR method mixes a lot of what we have discussed already. It stands for Buy, Rehab, Rent, Refinance, and Repeat. This can be another lucrative one to get into, but it’s for experienced investors in my opinion. I’d wait until you have experience in other real estate investing opportunities, unless you can find a mentor who will help you along the way.
REITs
REITs are more like an index fund or ETF – that produces dividends. They can be a great asset, but the downside is they can be heavier on the taxes. To avoid that, you can always use retirement investment accounts to your advantage so that you can avoid some of that.
Which Option Is Best?
Honestly, no option is the single best one. Flipping sounds great, but it’s incredibly risky if you don’t know what you’re doing. Investing in office buildings also sounds good, but that’s a lot of cash to have in just one asset. In other words, they all have pros and cons. Do your research on which ones sound like they’d suit you, and go from there. Real estate investing isn’t for everyone, but it never hurts to research it and understand it – whether you decide to dive in or not.
Conclusion
Hopefully this gave you enough information about real estate investing to get started. For those with more experience in real estate, please let us know your thoughts and tips in the comments! For more content like this, and a free budgeting template and financial goals worksheet, be sure to sign up for the Bitter to Richer newsletter.
