If you’re interested in building wealth, you’ve probably wondered about real estate investing. On the one hand, it seems like a great idea, especially if you live in an area with a booming real estate market. But on the other hand, you may not be ready for the commitment.
As recent as last year, only 15% of Americans were investing in property outside their primary residence, according to a RealtyShares survey. However, while real estate investing is not exactly widespread, most Americans think it’s a good investment.
What holds people back? The costs and skills needed to get started. Only 38% of those surveyed thought they’d actually be able to flip a house start to finish, and more than 80% of millennials wished that real estate investing was easier.
Let’s be honest. Investing in real estate is a big commitment, and it’s important to really understand it before you dive in. I never want you to invest in something you don’t understand—especially real estate. What are the different types of real estate investing? Is it really worth all the effort it takes? Is this type of investing reliable enough to be part of your retirement plan?
Whether or not real estate investing is a smart idea totally depends on you, your financial situation, and your goals for the future. It’s not for everyone, but it can be a great wealth-building tool when it’s done the right way!
Types of Real Estate Investing
Think investing is limited to owning a property and renting it out? Think again. There are actually several different types of real estate investing, and some of them don’t involve renters at all.
Here are the most common ways people invest in real estate and why I do or don’t recommend them.
Simply buying a house means you’re investing in real estate on some level. But there’s a difference between owning your own home and investing in other real estate property. When you own your home, you won’t actively make money or increase your monthly cash flow off of the property.
The fact is, paying off your home is one of the best long-term investments you can make. It’s so important that I recommend you do that before investing in any other type of real estate. Owning your home outright is a huge part of achieving financial peace. As long as you can continue to pay the taxes and insurance on your property, you don’t have to worry about ever losing your home. Eliminating that risk not only gives you peace of mind regardless of the ups and downs of the real estate market, but it also frees up your budget to start saving for other types of investments.
Owning your home outright allows you to have many more financial options—now and down the road.
Owning a property that you rent out is another form of real estate investing.
The benefit to this is that the rental income becomes an additional revenue stream, which can be used for retirement. It could easily add thousands of dollars to your yearly income. Then, if you sell the property, you could also earn a nice profit if it has increased in value. You could rent out anything from a bedroom to a whole house to a commercial property like an apartment building.
I know this sounds great, but listen up: Renting out a property brings its challenges. While you’d think rental income would be consistent month in and month out, there could be seasons someone doesn’t pay rent or you find yourself in between renters. You also have to consider the additional expenses of maintenance, repairs and insurance.
In 2017 alone, over 200,000 single-family homes and condos were flipped! Flipping a house means you purchase it, make updates and improvements, and then sell it—all within a fairly quick amount of time.
When flipping a house, remember that the key is to buy low. In most cases, you can’t expect to make a decent profit unless you’re really getting a great deal on the front end.
House flipping is appealing because it’s a quicker process than renting a property for years. In just months, you could get the house back on the market and (hopefully) turn a nice profit. But just like other investments, there’s a risk you won’t make money on it. You could even lose money.
The downside of house flipping is that updates and renovations have the potential to cost more than you plan, and those costs could eat into your profits. It takes a lot of time and effort, so you need to think about whether or not you want to devote that kind of energy to such a project. And before you jump into house flipping, talk to a real estate agent about the potential in your local market.
Real estate investment trusts (REITs) are a less conventional way to invest in real estate. What’s an REIT? REITs are companies or trusts that own or finance real estate investments, and they sell shares to investors who hope to receive a percentage of the income made off that real estate investment.
I don’t recommend investing in REITs, and here’s why: When you invest in an REIT, you don’t have any control in the decisions made about the property. If you want to get into real estate investing, do it the conventional way and purchase your own property.
If that kind of hands-on investing isn’t for you, that’s okay. Stick with investing in mutual funds, which have been around much longer than REITs. Talk to your financial advisor and choose mutual funds with a long history of above-average returns instead of putting your money in REITs.