How To Start Investing In Real Estate
A modern day guide to becoming a real estate investor.
Investing in real estate can prove to be a safer alternative to traditional stock market investing. It can also be an opportunity to diversify your investment portfolio.
Real estate investments provide various long term benefits. They can also prove to be more stable and consistent when compared to the volatile stock market. If your investment experience is limited to a mutual fund, bonds, or the stock market then this article will help you understand the scope of real estate investments as well as its short term and long term benefits.
Who can invest in real estate?
When it comes to investments, there is a common assumption that floats around. Being a real estate investor is only possible if one owns properties under his name or if one belongs to a certain high-income level group. The SEC has strict guidelines on accredited vs non-accredited investors in place. These guidelines act as barriers to entry into the realm of real estate investment.
However, there are various opportunities that allow individuals to start investing in real estate even if they don’t own property or have a large financial reserve. All you have to do is choose the type of investment to go for.
How to invest in real estate without owning property?
Investors shouldn’t shy away from investing in real estate just because they don’t own property themselves. It’s actually quite possible to invest in real estate without buying a property. Your investment strategy in such a case should rely on certain investment vehicles that bypass the need for ownership of tangible assets. Let’s explore these options:
Real estate investment trusts (REITs)
REITs or real estate investment trusts are companies that acquire and manage multiple income-generating commercial properties. Individuals who can’t directly invest in real estate properties can invest in REITs. Based on the mutual funds model, REITs can provide individuals high dividends that make them a very lucrative investment option for many.
REITs are the perfect entry into real estate investing for those just starting out. However, REITs can also prove to be quite complex and varied. It’s generally sensible to invest in publicly-traded REITs like a stock via a brokerage firm rather than going for non-traded REITs that are harder to value since they aren’t sold easily.
Real estate mutual funds
Real estate mutual funds are another way to start your investment journey in real estate. This model doesn’t require you to own a property. While it sounds similar to REITs, a real estate mutual fund is quite different as it is a collection of investments that are overseen by an investment manager. Unlike REITs which are actual companies, investing in mutual funds is basically investing in the securities of a company on which returns are realized through appreciation.
With this system in place, investing in REMFs can give individuals, flexibility in terms of their financial goals and scope of investment. However, at the same time, REMFs are prone to market risks due to the volatile nature of a mutual fund. Since the investment is an indirect one, external factors like the market and interest rates play a major role in achieving financial success.
REIT exchange-traded fund(ETF)
A REIT ETF(exchange-traded fund) is another indirect form of investment where individuals invest in REITs instead of directly putting their money on a property. This method offers less risk than investing directly in REITs or a property. However, the returns from ETF investments are lesser compared to other types of investments.
Online crowdfunding platforms
Ever since the JOBS Act was passed in 2012 by the U.S Congress it transformed investing. Prior to this act, regulations set by the SEC restricted private investment opportunities to have public access. Only the wealthiest and most well-connected had access to institutional-grade real estate investment opportunities. This was done to prevent rookie investors from risk as well as reduce fraudulent practices.
The JOBS act opened up the investment horizon for a lot of individuals who previously did not have access to opportunities in real estate investments. With the emergence of crowdfunding platforms, the ability to network and connect with investors and find investment opportunities expanded.
The Act also allowed crowdfunding platforms to expand their offerings to non-accredited investors as well through the sale of equities in REITs. Overall, the investment landscape became more inclusive and adaptive and the previously elitist approach to real estate investing changed significantly.
Crowdfunding platforms are a wonderful place for investors to connect directly with project managers and sponsors who are looking for investments in high-value projects. Popular platforms like Fundrise and Crowdstreet offer a chance to invest in real estate, however, the platforms either function as intermediaries in your investor journey or have high entry points, making it an exclusive platform for select investors.
The MAST platform provides a direct experience where investors and sponsors can connect and form strategic partnerships. Being primarily a platform, it does not act as a middleman in users’ investment journey and simply enables them to find investment opportunities tailored to their needs.
How to directly invest in real estate
“Ninety percent of all millionaires become so through owning real estate.”
Andrew Carnegie
Owning a property or having the means to acquire a real estate asset is one of the best ways to start your investment journey. Real estate investments that are directly made to acquire or develop an existing property have the potential to bring in passive income through cash flow as well as long term appreciation of the property itself.
There are many ways to directly start investing in real estate. Let’s look at some of the examples.
Residential real estate investment
Jason Hartman bought his first investment property at the age of 20. Despite being a newcomer at the time, and starting with very little, he realized the importance of investing in real estate. Over the years, Jason bought various kinds of properties as he penetrated the real estate market and went on to become a part of the top 1% realtors in the United States and a millionaire.
Jason’s journey is difficult but not unrealistic and if one has the right mentality and temperament, they too can follow the same route to success with a little bit of hard work.
As someone who is just starting their real estate investment journey, one might think that it’s not feasible to buy a home. However, getting your hands on a residential property and then renting the place to generate rental income can help you with the costs that would be required for upkeep.
Moreover, owning a residential property can be beneficial if you choose to reside in it while renting out parts of it. Not only will it help you save on living costs but will also provide a passive income in the form of consistent cash flow. This kind of investment strategy is commonly known as house hacking, a term coined by BiggerPockets.
Fix-and-flip properties
This investment strategy is for more experienced investors who have relatively larger financial reserves as well as time on their hands. Remember, time is of more essence than money with this process. A fix-and-flip strategy requires an investor to buy an underpriced property for a short term, accurately estimate the cost of repair work that is required for it, and then sell it later at an opportune time.
The strategy sounds simple but it’s really not because there are a lot of processes involved in the background when it comes to a fix-and-flip model. An investor not only needs to estimate repair costs for the property but also has to oversee and assess the condition of the neighborhood in which it is located. There’s a bigger risk involved in a house flipping project since external factors like economic growth potential of the area, proximity to major parts of the city, crime and accident rates, and market trends play a major role in deciding the profitability of the property.
All this assessment requires a lot of time and experience. Partnering up with an expert realtor or an experienced investor can help you with all the due diligence requirements and at the same time enhance your own experience with real estate projects.
Commercial real estate investment
Investing in commercial real estate is another strategy that is quite popular among real estate investors. However, this strategy comes at a major cost since investing in commercial real estate requires an investor to have sizable pockets. Should you choose to invest in a commercial property like an office building, make sure to assess the market condition and vet the companies or businesses that are renting the office spaces in the building.
Investing in commercial real estate is definitely heavier on the pocket since it essentially means more expenses on repairs and property management. But at the same time, it also offers greater and steadier long-term income and higher appreciation compared to a residential property.
The Takeaway
So far we have discussed various ways to start investing in real estate. But the ultimate question is which process is best for you. Is buying a rental property and slowly making your way among the big leagues of commercial real estate investment the ultimate strategy? Your investment potential as well as the time and resources you put in will certainly play a crucial role but what matters the most is how important financial freedom is to you.
No one invests in real estate just for the sake of it. Everyone has an exit plan and an outcome that they wish to achieve. It could be amassing multiple properties under your name or increasing your net-worth or both. So talk to industry experts, real estate agents, real estate developers, and people who are as passionate and ambitious as you and understand the different types of real estate investments and which one is the best for carving out your success story!
