The recent turbulence in the financial markets has you wondering if there are other ways to invest. It is possible to invest in low-risk assets that will give you steady, consistent returns over the long term.
There is no doubt that stocks are an excellent long-term investment.
One way to broaden your investment base is by holding at least some of your equity portfolio in real estate. A steady stream of income can be provided by real estate investments. The returns are similar to the stock market. It is possible to build wealth by investing in real estate.
The obvious question is how to invest in real estate. One way to get started is to research the different types of real estate investments and decide which one works best for you. It is possible to do it without getting your hands dirty. Whether you have a budget or not, there is an option that works for you.
Why Invest in Real Estate?
The typical investor should hold most of their portfolio in equities. The portion of a portfolio allocated to equities should be tailored to an individual’s risk tolerance and financial goals. While those are generally considered to be stocks, real estate also qualifies as an equity investment. Real estate is similar to stocks in that it represents ownership in the underlying investments. Real estate is an attractive option for investors because it can provide a steady stream of income and tax benefits.
Real estate diversifies your allocations and is important in any portfolio. Real estate investments can help to reduce the overall risk of your portfolio, while still allowing you to take advantage of potential gains. Real estate can be added to your equity portfolio, giving you long-term capital appreciation from a different direction. Real estate has a lower correlation to the stock market than stocks so it can provide portfolio diversification and help to reduce overall portfolio volatility.
It is worth a deeper discussion. There are many complex issues surrounding this topic, and further exploration is needed. Financial assets are stocks. By buying and selling stocks, investors can benefit from the company’s profits or losses. They are tied to the financial markets. It’s important to understand how they work in order to make sound decisions with your investments. The rest of the pack goes down when there is turbulence in the financial markets. It is important to understand the risks associated with investing in volatile markets.
Real estate is a more slow- moving investment. Real estate can be an excellent source of passive income, with rental properties providing a steady stream of earnings over time. Even when stocks and other financial assets are not performing well, it may still perform well because of its longer cycles. Investing in real estate can be a good way to increase your portfolio’s diversity, as its performance is not tied to the stock market. Even though the financial markets aren’t cooperating, you can still earn positive returns on your equity portfolio.
Advantages of Investing in Real Estate
Real estate has two big advantages over stocks: leverage and depreciation.
You can control a much larger investment with a small amount of capital. It is a great investment strategy for people with limited resources. You can own a $250,000 property with a $50,000 capital contribution. It’s a great way to increase your return on investment.
A 25% return on your $50,000 invested capital can be achieved with a 5% annual capital appreciation rate.
You can use 80% or more of a real estate investment to make such returns. Real estate investing has the potential for high returns. Real estate leverage on stocks is limited to a 50% margin. While investors can only borrow up to 50% of the purchase price of a real estate investment, they may be able to leverage up to double the purchase price when investing in stocks.
Depreciation is an advantage of real estate. Depreciation is what’s known in accounting circles as a “paper expense.” It does not result in an out-of-pocket cost because it is deductible for tax purposes. While you may be able to save money in the long run, you may not feel the immediate benefit. Your actual income from real estate will be reduced for tax purposes but you won’t see a reduction in your net income. It is important to know the tax implications of real estate investments so that you can plan and budget for them.
With all the advantages of investing in real estate, let’s look at the best ways to participate. You can make an informed decision on how to maximize your investment if you do your research.
Ways to Invest in Real Estate
Here are 5 great ways to invest in real estate:
- Home Ownership
- Real Estate Investment Trusts (REITs)
- Real Estate Crowdfunding Platforms
- Buying Rental Property
- Fix and Flip Properties
Owning Your Own Home
Some people think that owning your own home is more about having an investment than it is about having a place to live. It is clear that investing in a home can be both a personal and financial asset. Both is probably the best answer. It is important to consider the situation when making a decision on which approach to use. That is a big part of the advantage. It is an opportunity to take advantage of the many benefits of being a homeowner. Shelter and a sense of permanence can be provided by your home. You should invest in your home for both short- and long-term benefits.
In fact, the family homestead offers two ways to earn long-term returns:
- Capital appreciation is a steady rise in the value of the property. This appreciation in the value of the property can lead to a lucrative return on investment for investors. The value of a home can double in less than 25 years with an average annual rate of 3%. 15 years is how long it will take at 5%. You can have a secure financial future if you invest regularly and save diligently. It will double in ten years. The rate of return is attractive to investors.
- The mortgage balance is paid down. Significant savings can be achieved by paying down your mortgage balance. Your outstanding mortgage balance is gradually decreasing each and every year, even if you think a 30-year mortgage will last for what seems like forever. You will build equity in your home if you stay on a 30-year mortgage. You will have 100% equity in your home at the end of 30 years. It’s great to know that your hard work has paid off.
The leverage advantage is enjoyed by real estate. Real estate can give significant returns in the long-term. You can buy an owner-occupied home with a down payment of as little as 5%, and sometimes even less, all the way down to zero. Special programs that offer down payment assistance and other incentives can help you pay for your new home. You will earn a 100% return on your equity each year if your home is appreciated at 5% per year. Investing in real estate can help you grow your wealth over time.
The returns are obvious over the long term. It’s an investment that will pay dividends for a long time.
Let’s say you purchase a $300,000 home with a 5% down payment. After 30 years, the house will be fully paid for, and at 5% appreciation, it will quadruple in value. The investment will pay off in the long run.
Your initial investment in the home will be worth more than one million dollars. You can reap the rewards of a successful return with the right strategy and dedication.
How to Screw Up a Perfectly Solid Long-term Real Estate Investment
There is an important caveat here. Results may vary depending on the individual. If you are committed to paying off your mortgage, the above example will work. If you take home equity lines of credit and refinancing your home to get cash out every few years, your debt will grow over time. The equity build up will be offset by that. This approach will ensure that taxes are paid on a current basis.
If you get carried away with stripping out the equity, the windfall at the end of 30 years will be greatly reduced. It’s important to remember that the equity in your home is an investment, and should be treated as such.
Real Estate Investment Trusts (REITs)
mutual funds hold commercial real estate. Real estate investment trusts allow investors to benefit from the potential for real estate appreciation. A single trust can hold a lot of properties. It makes it easier to manage multiple properties at once. Investments can include office buildings, retail shopping centers, large apartment complexes, warehouse space, and many other types of income generating properties. Residential single-family homes can also be included in investments.
One of the major advantages of REITs is that they can provide both steady income and long-term capital appreciation. It is possible for investors to gain exposure to different asset classes with the help of REITs. Rents collected on the properties in excess of operating expenses are returned to investors in the form of dividends. If the rental income and operating expenses remain balanced, investors can count on a consistent stream of income from their real estate investments. The law requires REITs to give at least 90% of their profits to investors in the form of dividends. Because they are more liquid than other real estate investments, REITs are attractive to income-seeking investors. It will at least partially escape taxation since some of that income is reduced by depreciation expense.
Capital appreciation distributions can be made if properties in the trust are sold at higher prices. Capital gains distributions are important for investors in trust funds. The benefit of lower long-term capital gains tax rates is due to the fact that most properties are sold in more than one year. The lower capital gains tax rates can be used by investors to maximize their return on investment.
There is an excellent long-term investment performance by REITs. They out-earned stocks over a recent 38-year time frame, returning 12.87% versus 11.64% for stocks from 1978 to 2016. A substantial difference can be made over 20 or 30 years if the difference is only 1.23%.
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Real Estate Crowdfunding Platforms
Real estate crowdfunding has been around for the past ten years. It is possible for investors to invest in real estate projects with a lower cost than traditional investments. It is part of the P2P investment model that is becoming more popular each year. Real estate sponsors come to the platforms to offer their deals, while investors fund them through investments. Real estate sponsors give investors the chance to invest in exclusive real estate deals that have been carefully selected.
The most unique feature of real estate platforms is that they allow you to invest in a single property or multiple properties. You can invest as little or as much money as you want, without having to commit to a large sum at once. If you are an investor, you can either hold fractional shares in individual properties or fund the entire investment.
It’s like the wild West of P2P investing. It’s important to do your due diligence before committing funds because it can be a risky proposition. This type of investing is considered riskier because you are investing in individual properties and commercial properties. It is important to research the market before committing to an investment. Many platforms require you to be an accredited investor to participate. Before investors can participate in these types of investments, they need to be accredited. You need an annual income of at least $200,000 and a net worth of at least $1 million to live in your primary residence. A high-net-worth investment account requires a certain amount of money.
Some real estate platforms don’t require you to be an accredited investor. Non-accredited investors can participate in real estate crowdfunding platforms, but they are limited in how much they can invest. For as little as $500 per investment, you can invest in some. You can maximize your investment return with the right financial advice.
If you prefer individual real estate investments, real estate crowdfunding is an excellent way to invest. Crowdfunding can give you access to exclusive real estate opportunities that might not be available to individual investors. This type of investing is not liquid. Since the investments are not traded on public exchanges, you will usually need to hold your investment for a few years before earning your full return or even getting your capital back. Before committing to a private equity fund, you should read the fine print and understand the terms of your investment.
Recommended Real Estate Crowdfunding Platforms
Some prominent real estate crowdfunding platforms include:
- Fundrise. You can invest as little as $500 or $1,000. If you invest in a diversified portfolio, you can help protect yourself from market volatility and increase your potential for long-term growth. Anyone can invest without having to be an accredited investor.
- CrowdStreet. You need to be an accredited investor as well as have a larger investment to use this platform. It is important to remember that this investment has a certain level of risk.
- Roofstock. Non-accredited investors are also able to invest on this platform. Residential and commercial real estate is available for investors to choose from. You can invest as little as $5,000 in single- family investment properties. This will allow you to take advantage of the potential for high returns on investment.
Learn More: Read my guide on the Best Real Estate Crowdfunding Platforms.
Buying Rental Property
This is a great way to invest in real estate. A steady source of income can be provided by real estate investing. Rental properties come to mind when we think of real estate investing. Real estate investing can be a great way to build wealth.
You will get the benefit of both long-term capital appreciation and the paydown and payoff of the mortgage on the rental property. Rental property owners can receive passive income from rent payments and potential tax deductions. Tenants will pay the monthly operating expenses through the payment of rent, so it has an even bigger advantage. It’s an attractive investment opportunity for people who want to change their portfolios.
When you first invest in a rental property, it can be difficult, but eventually rising rents will allow you to begin earning a monthly profit on your investment. As rental incomes rise over time, you will likely see your profit margins increase as well. Your cash flow should improve as rents go up. You should be able to save more and invest in your security. Net rental income will take off once the property is paid off. You can potentially grow your wealth even further by investing the money you save into other investments.
There is a depreciation advantage to rental real estate. Rental real estate can provide investors with a steady stream of income and tax savings. You can offset net income with a paper expense. Your tax liability is reduced by the depreciation of property improvements. Your investment tax base is affected by the value of the property. The capital gain on sale will be much larger. The property is likely to fetch a high price when it is sold because it has appreciated in value over the past five years.
That may not be a problem. The project should be easy with the right tools and knowledge. The benefit of lower long-term capital gains tax rates is that rental property is a long-term investment. Capital appreciation can help to increase your return on investment.
Investing in Rental Properties is Not for the Faint of Heart!
I warn you that investing in rental properties requires a strong knowledge base before you start. It is best to build your knowledge slowly so that you can make informed decisions. The learning curve will be even steeper if you are a beginner.
A larger down payment is required for investing in rental properties. Rental properties require ongoing maintenance and upkeep which can be a significant expense. You will also be dealing with tenants. Tenants will reference accurate records of transactions with you. Tenants can skip out in the middle of the night or pay their rent late. To protect against any potential issues, it is important to screen potential tenants carefully and require a security deposit. The risks are even greater if you invest in out-of-state rental properties.
Rental properties are one of the best investments you can make if you have enough capital and some experience in repairing and renovation real estate.
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Fix-and-Flip Properties
Fix-and-flip isn’t new, but it’s turned into the “TV version” of investing in real estate thanks to the many fix-and-flip TV shows. It’s become popular among real estate investors as a way to make quick profits. It looks simple on TV. The real-life version is very different. It can be hard to distinguish reality from fantasy.
You purchase a property that is in serious disrepair. You have to invest time and money to make it work again. The poor condition allows you to purchase it for less than its fully improved market value. This can be a great opportunity for buyers.
You can buy a $300,000 property for $200,000. You could end up with an incredible deal on a property that would have cost more in a neighborhood with higher home prices. If you can restore the property to the standard of the surrounding community for $40,000, you can sell it for $300,000 and make $60,000 profit. That would be a great return on your investment.
Fix-and-Flip is Anything But Simple
It looks simple on TV, but it is not. First, you have to know your market area, as in “really know your market area.” That means you know the difference between a property that is selling for a discount versus one that is truly overvalued. Understanding the current trends in your market area will allow you to know what kind of properties are likely to be a good investment.
You have to know what is happening with the property. You need to create a budget and timelines for the project so you know how much time and money you have. You will need to be able to do most of the work on your own. You need to be willing to devote time and energy to the project. You will pay a fortune to contractors if you don’t. If you can, it’s better to do the work yourself. You need to know what repairs can be made to a property, and what makes a house a real candidate for condemnation. It’s important to know if a property has potential or not so you can make an informed decision about investing in it. You can lose your life savings if you judge the difference wrong. It is important to understand the risks associated with investing and make sure you are making decisions that are within your financial means.
A lot of capital is required for fix-and-flip. Extra costs that may arise during the renovation process need to be taken into account if you have enough capital to finance the project. Unless you have a commercial loan arrangement with a bank, you will need to pay cash for the properties you purchase. You will need enough liquid assets to cover the purchase price in order to pay cash for the property. It is rare that you will be able to get common mortgage financing on properties that are in need of extensive renovations. If you are willing to invest the time and effort in order to get the home into a good condition, there are other financing options available. You will need additional capital to pay for both the needed renovations and the expenses of maintaining the property until it is sold. It’s important to know the costs associated with flipping a property before making any decisions.
Fix-and-flip deals can be lucrative if you have the money, expertise, and nerves. Before you take on a fix-and-flip deal, you should do your research and be aware of the risks. One of your biggest problems will be finding suitable properties at the right price, as the market has become very crowded. Many markets have handyman specials that are close to full market value. The demand for housing is high and buyers are willing to pay a premium to secure the home of their choice.
What Makes Fix-and-Flip Unique Among Real Estate Investing
Fix-and-flip is more of an occupation and less of an investment than you might think. It’s not like it’s like it’s like it’s like it’s like it’s like it’s like it’s like it’s like it’s like it’s like it’s like it’s like it’s like it It is possible to rise to the level of a full-time occupation. Many people have made a living from it.
Should You Invest in Real Estate?
There are many ways to invest in real estate. It’s important to research and understand the risks associated with each method before you begin investing in real estate. You should commit to at least one investment since it is one of the best long-term investments. It’s important to remember that with any investment, you need to research the product and do your due diligence.
Many people choose to own their own home. It can be both financially rewarding and emotionally fulfilling, and is a major milestone in life. But even if you do, and especially if you don’t, add a To your investment portfolio or IRA. Adding a real estate investment trust or two to your investment portfolio is a great way to reduce risk and realize potential returns. They work the same way as mutual funds and exchange-traded funds, but add commercial real estate to your portfolio. Real estate investment trusts give investors a simple way to increase their exposure to the real estate market.
If you have a higher net worth and would like to get involved in commercial real estate deals, you should investigate the opportunities in real estate crowdfunding. If you want to invest in real estate, you should consult with a financial professional. You can choose which platform you want to use to make your investments. It is possible to make smart investments that will help you achieve your financial goals.
Investing in rental properties can be one of the best real estate investments if you have the capital and know how to deal with tenants. Rental properties give investors a great return on their investment and can offer a steady stream of income.
If you have a large bankroll, lots of hands-on skill, and a willingness to risk losing everything, then fix-and-flip is for you. Before committing to a fix-and-flip venture, you should make sure you understand the local real estate market, research current trends, and have access to reliable contractors. It can be an excellent occupation if you can overcome the hurdles.
