Today’s rental market is growing rapidly. Investing in real estate is now more lucrative than ever. Intelligent investors purchasing rental properties always take advantage of the best opportunities. Investing in property like apartment buildings can be one of the best ways to diversify your portfolio grow your rental income stream. It is a solid way to boost your cash flow, take advantage of tax benefits, and grow your long-term wealth.
Being a successful real estate investor is not easy. There’s a huge learning curve and the room for error is great. You also need two of the most valuable resources to get started – time and money. In this post, we are going to cover how to properly build wealth through real estate investments.
Know Your Goals Before Getting Started
The biggest advice for new investors is to know your goals when investing in property. Everyone wants to make money, but you need to dig deeper than that. Real estate can provide you and your family with a tax-free source of passive income, a safer investment portfolio, and a beautiful property. Depending on your goals, you’re going to have to decide your approach to real estate investing.
There are two kinds of real estate investments:
Passive Real Estate Investments
Passive real estate investments don’t require any direct management from the investor, and it’s not hard to learn how to become a successful passive real estate investor. In this kind of investment, you’re simply investing your capital, not your time. The passive approach is great for those who want to diversify their portfolio without getting directly involved in the business, and often is a great retirement plan.
Two popular passive real estate investments are:
- Investments in real estate development companies via stock options.
- Buying real estate investment trusts (REITs).
The majority of passive investments in the industry consist of you pooling capital with a group of investors and purchasing real estate assets. The advantage of passive investing is that it doesn’t require a large amount of money to get started.
Active Real Estate Investments
If you’re looking for something more action-oriented, active real estate investments are the way to go. Active real estate investments require the investor to get hands-on and manage their property. They can be exciting, but they come with a set of challenges. To successfully maintain your property is hard work, especially if you plan to rent it out.
Two popular active real estate investments are:
- Purchasing a residential property such as a house or condo.
- Purchasing a commercial property such as an office building or shopping mall.
As the name suggests, active real estate investments require work from the investor. Many investors hire a property manager to handle things such as managing tenants, repairs, and other aspects of the property. Active home investments can be more profitable than passive ones, but they require more time and money to get started.
Many investors also flip houses. In this type of investment strategy, you must find properties whose home prices are below market value by doing your due diligence, fixing the property up, formulating an exit strategy, and selling the property with a real estate broker. Typically, home flippers take the capital gains they earn and reinvest into another dilapidated home to increase their bottom line.
Residential vs. Commercial Real Estate Investing
When people own housing, it’s quite a broad term. Real estate, by definition, is just property that has land or buildings. This could be a house, parking lot, apartment complex, shopping mall, or even an industrial park. For the purpose of simplicity, we’re going to talk about the most common property types, which include:
Residential Real Estate
Residential real estate consists of properties of up to four units. This can be a house, small apartment complex, duplex, condo, or townhouse. Right off the bat, residential real estate is much easier (and cheaper) to acquire. Securing a loan for purchasing residential property requires a smaller down payment compared to commercial property.
Also, residential properties have a large network of buyers and renters. If you’ve got the capital, you can purchase a residential property and start securing income from it quickly. That’s because your market is individuals and families, who are always in need of a home. Since many businesses operate a vast majority of their companies online, it may be tough to find tenants for commercial properties.
Residential real estate can be lucrative, but also comes with its own challenges. Be sure to do your own research on your local residential housing market before deciding to invest.
Commercial Real Estate
People will tell you that commercial real estate is where the money is, and they aren’t wrong. Though these investments tend to be riskier, they often have a higher payout. Commercial lots are much larger than residential, and they can house more tenants. They also attract more sophisticated tenants (business owners) who pay higher rental fees.
You can also implement longer lease durations for your tenants. Residential contracts tend to be 12 months, whereas you can lease your commercial property for up to 10 years. That means if you find a reliable tenant, you can secure a decade of passive income.
Commercial real estate is not something to be taken lightly. If you’re a beginner, it’s not recommended to jump into the game without experience. You should consider working with a multifamily real estate investment company to help guide you through the process.
Millions of people are profiting from real estate investment every year. There’s no doubt that if you do your research, you can also start benefiting. Just make sure not to get into an investment without thoroughly understanding the commitment it takes to succeed in this business.