Whether your retirement account needs a few additions or you have some extra cash on hand you’d like to invest, real estate investing might be a good option for you. As with any investment, it requires some due diligence on your part.
Jumping into a real estate investment without knowing anything about it can be extremely costly. This article will help you get on the right track to start adding real estate to your portfolio.
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REAL ESTATE INVESTING METHODS
The most important thing that potential real estate investors need to figure out is their risk profile. Investing in real estate comes with risks, and they are quite a bit different than those of regular stock and bond investing.
Real estate investing can be separated into two different categories which are based on the goals the investor wants to reach. The first category is cash flow. This is the one that most investors will find to be attainable not only from an initial investment standpoint but also from one of risk. Cashflow investments include assets such as rental properties and some REITs where you are holding onto an asset and paying it off while still receiving cash on a monthly or annual basis.
While this category of real estate investment sometimes requires enormous up-front capital and risk, there are some companies that offer cash flow assets that can be invested into with only $1,000 and a few clicks.
The second category is capital appreciation. Investors looking for capital appreciation are hoping to purchase an asset, upgrade it or renovate it, and resell it at a higher price. The risks in this method can sometimes be a bit lower, but it very much depends on choosing a piece of real estate that is in the right marketplace.
Let’s get into the types of real estate assets you can invest in next.
· REITs: This stands for “Real Estate Investment Trust,” and these are companies that are bound by several relatively strict requirements about what they do and how they provide value to investors. In a nutshell, these companies are required to invest almost entirely in real estate assets and pay a huge majority of revenues back to shareholders. These can be individual, publicly-traded stocks listed on the stock market or they can be private groups.
· Online Crowdfunding: These companies only recently reached the market and within no time became very popular. Crowd funded real estate companies, such as Fundrise and Crowdstreet, offer investors access to either REITs, non-public real estate listings, or both. For the real estate listing, investors can pick one or several and, provided they meet certain requirements and can meet the minimum investment, they can invest as a sort of limited partner in a project.
· Rental Properties: Perhaps the one that most people think of, this can be a single family home or a portfolio of several homes for the purpose of monthly cash flow that exceeds the expenses required to hold the properties.
· Property Flipping: This method is in the capital appreciation category and requires perhaps the most risk and the most physical work to do it effectively and repeatedly. Investors buy properties in good neighborhoods that are below the neighborhood average home price, upgrade and renovate them, then sell at a higher price above the cost of the home and the upgrades.
· Upgrade Your Home: Perhaps the most overlooked type of real estate investing is simply upgrading your own home. It can certainly be expensive up front, but if you have the cash, you should certainly consider adding value to your own home.
HOW MUCH MONEY TO INVEST IN REAL ESTATE?
The range of minimum investment requirements is very wide. Investors can buy publicly traded REIT stocks for as little as $40, or they can become an investor in a large multi-business office building for millions of dollars as a minimum. There is everything in between, and most people looking to add real estate to their portfolio can do so for $1,000 to $5,000.
Real estate investing can be complicated, but once you understand your risk tolerance and the amount of money you have to invest, real estate investing can add a valuable slice of diversification to your portfolio. Real estate can be risky, but you can invest for a little bit of cashflow for a long period of time to add significant compounding interest investments. Either way, you should never invest too much of your investable funds in any one asset and conduct a bit of research before you invest so you don’t jump in blindly to an investment you don’t fully understand.