Investing your money is the best way to prepare for retirement and make sure you have the income you need to be comfortable. While there are many benefits to investing in the stock market, it’s important not to overlook real estate investing as an addition to your portfolio.
At Addition Financial, we often speak to our valued members about real estate investment strategies. It’s not uncommon for people to be unsure where to start, especially if they don’t have enough capital to buy a piece of investment property outright. To help you understand your options, here are six strategies for real estate investing for beginners.
What is real estate investing?
Real estate investing is a type of investing where the asset your money purchases is real property. That’s a distinction that separates real estate investments from stock investments, making real estate its own asset class. Real estate is bundled with certain other investments, including gold, art and cryptocurrency, and is considered an alternative investment. It is one of the most stable assets to invest in.
It’s important to have a variety of asset classes when building your investment portfolio, since doing so helps with diversification and can minimize your risks. There are many different ways to start real estate investing. Some involve purchasing property outright while others involve investing in real estate funds.
One of the biggest advantages of investing in real estate is that it’s a sector that has experienced continual growth in the long term. In terms of year over year growth, real estate experienced an average growth rate of 5.4% from 1992 to 2022. While there have been periods where prices dropped, including the housing crisis of 2007-2008, as a long-term investment real estate is a reliable asset.
How much money do you need to invest in real estate?
One of the questions we are asked most frequently about real estate investing is how much money a beginner real estate investor would need to have to get started. There’s a common misconception that only people who are already wealthy can afford to become real estate investors. The good news for you is that’s not true. Anybody can add real estate to their investment portfolio.
If you’re not looking to buy a rental investment property, you can get started in real estate investing with as little as $1,000 and build from there. We’ll share some of the real estate investment strategies that don’t require a large initial investment in the next section.
6 real estate investing strategies to try
If you’re interested in adding real estate to your portfolio, there are many valid ways to accomplish that goal, each with its advantages. Here are six real estate investing strategies for you to try.
#1: REIT investing
The quickest and easiest way to add real estate investments to your portfolio is by purchasing shares in a Real Estate Investment Trust or REIT. REITs allow beginning investors to take advantage of rising real estate prices without taking out a mortgage.
REITs are a good choice if you want to earn regular income from your portfolio. By law, REITs are required to pay out 90% of their taxable income as dividends. Buying shares in an REIT can provide you with passive income but is not the right strategy if you want to focus on long-term growth, since paying dividends means that REITs don’t have a lot of profits to invest in additional properties.
#2: REIG investing
A Real Estate Investment Group or REIG is another option for beginner investors. REIGs are groups of private investors who pool their money to purchase real estate as an investment. If you choose an REIG with some experienced investors, you can benefit from their advice and expertise.
The potential downside of REIG investing is that REIGs are private and not subject to the same regulation as REITs. They have more opportunity for growth than REITs but there’s also a risk of mismanagement, so it’s important to be careful when choosing an REIG.
#3: Buy and hold
The buy and hold strategy is a real estate investment method that involves purchasing real estate and keeping it as a source of ongoing rental income. This differentiates it from property flipping because the intention is not to sell the property quickly, but to hold it and benefit from the rental income.
In many cases, the buy and hold strategy is used by investors who buy property that needs work. They undertake renovations and repairs, which increases the value of the rental property and the rent that can be charged. People may hold property for any length of time depending on their investment preferences and needs.
#4: Fix and flip
The fix and flip another real estate investment strategy has been popularized by a slew of popular television shows on HGTV and other channels. The idea is to buy properties that are priced low because they require extensive repairs and rehabilitation, fix them and sell them for a profit.
It’s common for people who use a fix and flip strategy to take out a loan that will cover both the purchase price of the real estate property and the cost of rehabbing it. These may be short-term loans, so there are some risks involved if renovations take longer than expected or go over budget. We should note that rehabbing can often be stressful, so keep that in mind before you start flipping properties.
#5: The BRRRR method
The BRRRR method is a real estate investment strategy that breaks down into five steps: Buy, Rehab, Rent, Refinance and Repeat. It combines some of the advantages of the Buy and Hold strategy with the Fix and Flip strategy.
The idea with the BRRRR method is that you buy an investment property in need of renovation, rehab it, and rent it out. After your original loan has seasoned, something that can take between six months and a year, you refinance it, withdrawing cash secured by your equity. You then use the equity to purchase another rental property and repeat the process. With each property you buy, you’ll collect rent, adding to your rental income—and you have the option of selling any property if you want to cash out your investment.
#6: Crowdfunding
You’re probably familiar with crowdfunding as a way to raise money to make products and provide financing for creative projects, but you may not know that it is also a potential way to purchase real estate and reap the benefits of real estate investing. Some of the best-known real estate crowdfunding platforms include Yieldstreet, RealtyMogul and Fundrise.
Crowdfunding has the benefit of allowing investors to have a say in the property they invest in without having to take the lead with property management, and it allows beginning investors to get involved even if they don’t have a lot of seed money to get started.
What are some benefits and risks of investing in real estate?
Before you add real estate investments to your portfolio, here are some of the benefits and risks of real estate investing, starting with the benefits:
- Tax deductions are available to offset many of the expenses associated with owning real estate. For example, you may deduct some of your mortgage interest as a business expense, as well as depreciation and maintenance costs.
- Capital gains tax rates, assuming you hold property for more than a year, may be significantly lower than ordinary rates.
- A 1031 exchange can help you defer payment of capital gains taxes indefinitely. You’ll need to take your capital gains and reinvest them in a like-kind property or a Qualified Opportunity Zone to qualify.
- Inflation protection is built into real estate investments because housing prices tend to increase with inflation, meaning that your investment won’t lose value.
There are a few potential risks to consider as well:
- Lack of liquidity can be an issue in real estate because if you decide to sell a property, it may still take some time to find a buyer who’s willing to pay your price. The one exception to this rule is REIT shares, which are easy to sell.
- Market fluctuations can be a serious issue in real estate and in some cases, may make it difficult or even impossible to sell a property. In a buyers market, with more buyers than sellers, it may be necessary to reduce prices to attract buyers.
- Debt can be a serious issue for some real estate investors. If you buy property with your own money using loans to do so, you’ll be on the hook for loan repayments even if your flipped property doesn’t sell.
- Location risks can come into play if the overall (or even perceived) quality of the location of your property changes for the worse. If there’s an increase in crime rates or a decrease in school quality, you could see a decrease in the value of your property, too.
Keeping these benefits and risks in mind will help you do the best possible job of evaluating properties and other real estate investments. Of course, you should make sure that your portfolio contains a variety of asset classes and that you’re not investing outside of your risk tolerance.
Add real estate investments to your portfolio with help from Addition Financial
Adding real estate to your investment portfolio as a beginner can help you diversify your investments and serve as a hedge against inflation. The 6 real estate investment strategies for beginners that we’ve listed here can help you choose the best investment options for your needs and comfort level.
Do you need a hand choosing real estate investments for your portfolio? Addition Financial is here to help! Click here to learn about our MEMBERS Financial Services and book an appointment with a Financial Professional today.
Posted on Jul 5, 2023
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