The real estate market has been hit hard by rising interest rates. Rising rates make homes less affordable to borrowers, meaning that owners may have to lower their asking prices to move a property, and that’s been the case for much of 2022 and early 2023
Investing in real estate is typically a long-term game, and those thinking of getting involved should think with that mindset when they go into it. And even if rates are high now, it may simply be time to accumulate cash for a down payment while waiting for rates to fall again.
With that in mind, here are four top ways to invest in real estate.
1. Buy your own home
You might not normally think of your first residence as an investment, but many people do. It’s one of the best ways for you to invest in real estate, offering numerous benefits.The first benefit is building equity in your home from your monthly payments, rather than paying rent which always seems to rise year after year.
Advantages
Living in your own property instead of paying rent, home price appreciation, magnified returns through leverage, potential tax breaks for mortgage interest, and fixed long-term payments.
Disadvantages
Ongoing costs of property maintenance, sizable down payment may be required, potential for foreclosure if unable to pay the mortgage.
2. Purchase a rental property and become a landlord
If you’re ready to step up to the next level, you might try your hand with a residential rental property such as a single-family home or a duplex. One of the bigger advantages of this kind of property is that you know the standards of the marketplace and the market may be easier to gauge, as opposed to commercial properties, such as a shopping center.
Advantages
Can start small with residential real estate, hands-on management (for the right type of person), depreciation write-offs allow property to generate tax-free cash flow, price appreciation, magnified returns through leverage, tax write-offs for mortgage interest.
Disadvantages
Hands-on management, need to keep up with mortgage payments regardless of tenants, ongoing costs of property maintenance, larger down payment than for owner-occupied properties, high commissions.
3. Consider flipping houses
House-flipping has become more of a popular avenue to investing in real estate, but it requires a keen eye for value and more operational expertise than becoming a long-term landlord. However, this path may help you realize a quicker profit than being a landlord if you do it right.
The biggest advantage of this approach is that you can turn a profit faster than by managing your own property, but the expertise required is also higher. Typically house-flippers find undervalued properties that need to be cleaned up or even completely renovated.
Advantages
Can start small with residential real estate, hands-on management (for the right kind of person), magnified returns through leverage, potentially quick gains on investment (if you have the skills).
Disadvantages
Hands-on management, need to keep up with mortgage payments even if no income is being generated, upfront costs of property renovation, requires a keen eye for value and the ability to organize and manage a team of professionals.
4. Buy a REIT
REITs have numerous advantages over traditional real estate investing, and may make the process much easier.
However, investing in REITs is not without its own downsides. Like any stock, the price on a REIT can fluctuate as the market gyrates. So if the market declines, REIT prices may go with it. That’s less of a problem for long-term investors who can ride out a dip, but if you need to sell your stock, you may not get what it’s worth at any single point in time.
Advantages
Can start with almost any amount of money, no hands-on management, liquid investments, regular dividends, no broker commissions, the ability to diversify holdings easily, deferred taxes on capital gains if assets are held.
Disadvantages
REIT stocks can fluctuate, REITs maintain a lot of debt, lack of transparency in investments.
Potential investors should ask themselves questions across three broad areas:
- Financial resources: Do you have the resources to invest in a given real estate investment? There are opportunities at every investment level. Do you have the resources to pay a mortgage if a tenant can’t? How much do you depend on your day job to keep the investment going?
- Willingness: Do you have the desire to act as a landlord? Are you willing to work with tenants and understand the rental laws in your area? Or would you prefer to analyze deals or investments such as REITs or those on an online platform? Do you want to meet the demands of running a house-flipping business?
- Knowledge and skills: While many investors can learn on the job, do you have special skills that make you better-suited to one type of investment than another? Can you analyze stocks and construct an attractive portfolio? Can you repair your rental property or fix a flipper and save a bundle on paying professionals?
Bottom line
Investors looking to get into the real estate game have a variety of options for many kinds of budgets. Real estate can be an attractive investment, but investors want to be sure to match their type of investment with their willingness and ability to manage it, including time commitments. If you’re looking to generate income during retirement, real estate investing can be one way to do that.
