Investing in real estate is a great option to improve your financial situation. In fact, according to the great businessman Andrew Carnegie, 90% of millionaires build their wealth by investing in real estate.
From house hacking to property flipping, there are different ways to make your money grow by investing in real estate. Sure, it may seem a little overwhelming, so if you want to start investing in real estate but are not sure about the first steps to take, keep reading as we will cover some of the basic principles, pros, cons, and alternatives.
‘Real’ estate?
Have you ever wondered why real estate is called ‘real’? Well, first we need to clearly understand what we are talking about so let’s break it down to get a better vision:
- Estate: This involves all the material possessions a person owns, such as cash, investments, property, etc.
- Real: This word is used to describe things that are not imagined, supposed, or artificial, but are actual, physical, or genuine.
Therefore, by combining these two terms we can assume that ‘real estate’ refers to physical property. This phrase has been used to describe property that is fixed to the land, just like buildings, houses, etc.
In contrast, other possessions like cash and stock investments are assets that are not fixed to the land and in some way even intangible.
Investing in real estate
Now, with that in mind, we can infer that investing in real estate means buying a physical property that is fixed to the land to get a monetary profit from it. There are several ways to go on about that but these are the most popular:
Buying and selling
The most obvious way of earning money by investing in real estate, buying a property so you can make a profit by selling it at a higher price. Real estate properties are a perfect kind of asset to put this into practice as you can take advantage of capital gains when the property you bought becomes more valuable over time.
A trend that has become more popular in this investment model is house flipping. To flip a property you look for one that may not be in its best shape but is relatively cheaper so you can make some arrangements and sell it for a higher price that covers all these expenses and leaves you with a profit.
Renting
Another way of earning money after investing in real estate is to buy a property to rent it to someone else. For example, it is more and more frequent, especially for millennials, to invest in real estate to use their properties as Airbnb rental spaces. The best part of doing this is that you will have a steady source of income that keeps coming month after month completely passively.
REITs
There’s a way to invest in real estate without having to buy physical property. Real Estate Investment Trusts, or REITs, are companies that own and manage real estate to let individual small investors make gains from income-generating properties without having to buy them. By purchasing shares of REITs, you can invest in real estate for just a small fraction of what you would pay for a down payment on a property.
Quick tip: Keep in mind that buying a place for you to live in is NOT an investment as people may think (make sure to know the difference between investments and expenses).
Principles of real estate investing
No matter the strategy your looking to apply, to be successful at investing in real estate you’ll always need the following:
- A clear goal: If you’re clear on what you want to accomplish, the way to get there will be a lot easier. Are you looking for a steady income source? Just the capital gains of one sale?
- Choose your market: Analyze your options to choose the one that fits your goals the best. While you do this, think about the neighborhood, weather, public spaces around, transportation, and so on. Remember every real estate investor’s motto: Location, location, location!
- Look for help: If you’re not savvy enough about investing in real estate, it is a must to look for an expert in the field. The most trustworthy option is to look for a real estate agent to guide you through the process.
- Keep control: It is recommended to invest with your means, otherwise, you would be just a partner (unless that’s what you want).
- Take advantage of your options: Consider all the options you have to get your capital. The first option would be to use your own money, but if you don’t have enough cash, you can look for a loan. That is called leveraged investing, which is in fact also used for stock investments.
Pros and cons of investing in real estate
As everything in life, investing in real estate also has its bright and dark sides. Make sure to take a look at this pros and cons before making up your mind about buying or not into real estate.
Pros
- Increase your patrimony: Investing in real estate can increase your net worth as you own more possessions. This even gets you a better chance of getting a bank loan!
- You can improve your property: By investing in a physical asset, you can modify it however you like. By improving your property, its value may also increase.
- Make a passive income: If you rent your property, you’ll have a fixed income every month (ideally). By making up your monthly budget, you can count on some extra money for your bills.
Cons
- Getting into debt: Real estate properties usually come as liabilities because of the mortgage that is usually necessary to buy them. This means getting debt and no one wants to get more debt.
- Difficult to diversify: Investing in real estate has a high price (except if you opt for REITs). This is why it is not that easy to buy two properties in different places to diversify your investments.
- Low liquidity: If you need cash right away, it may be hard to sell your property quickly. The average time for a house to sell is between three and six months.
- It’s relatively more expensive: This one may be kind of obvious, but acquiring and owning a property involves expenses such as maintenance, taxes, and in some cases, commissions.
- It’s not that easy: Besides the financial difficulties, managing real estate properties of your own can become complicated when you’re forced to face property damages, difficult tenants, and fluctuations in the real estate market.
How to get started
If you feel like you’re ready to buy your first property, there’s a common process you’ll need to follow that goes all the way from getting your down payment done and getting the right mortgage, to close on your purchase and set it for rent or sale. Consider getting help from professional real estate agents, as they are likely to get the best deals for you and assist you along the whole process.
However, it is important to keep in mind that, due to its high cost, investing in real estate is not easily accessible for everyone. There are several key factors for success, so before putting all your money into a tiny apartment in the most inhospitable zone of town just for the sake of buying your first property, make sure to consider other alternatives.
If you want to stick to real state but don’t have the money available or just don’t want to go through that whole process of acquiring and managing properties, make sure to look more into REITs. You can easily invest in publicly traded REITs through REIT ETFs in the FlexInvest platform. With as little as €5, you can take part of companies that already own and professionally manage real estate so you can reap the benefits in form of dividends. Awesome, right?
On the other hand, if you feel that real estate is not for you after all, you can look for other options like stock investing. Make sure to take a look at our comparison between investing in stocks and real estate and see what is the best fit for you.
Also, keep exploring the rest of our articles to find more investing recommendations. We suggest you start with this guide on how to invest in stocks. Good luck!
