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How to start investing in real estate - image of a toy house on a lawn

Instead of working for your money, wouldn't it be great if your money worked for you?

It can when you start investing.

From precious metals to mutual funds, high-yield savings accounts to treasury securities, there are lots of potential options. Whichever you choose, one overarching rule is key: Invest in what appreciates - it can build net worth.

This is one of the main reasons why a number of financial experts consider buying real estate to be a smart decision. The numbers don't lie. For instance, in July - the most recent month for which complete data is available - the median existing-home price in the U.S. was $269,300, according to the National Association of Realtors. Not only was this total up more than 4% from the previous year, but it represented the 89th consecutive month of year-over-year growth.

Whether it's something done on the side or a potential career pursuit, the amount of time and money you devote to investing in real estate is up to you.

Before we get into the specifics, it's helpful to understand the types of real estate investments that are available. As you might imagine, investment property options are endless.

House icon with the word 'sale' inside it

Homeownership
This is perhaps the most basic launch point for entering the real estate market and something that nearly two-thirds of Americans can stake claim to, according to the most recent figures available from the Census Bureau.

Financial experts often suggest that before buying investment properties, you should start out small by paying off your home. If nothing else, doing so provides a certain sense of comfort, control and security for your family, knowing they will always have a place to call home.

However, should you decide to sell - perhaps when the kids move out or upon retirement - you should be able to make back what you spent; the dollar amount can vary considerably depending on market conditions and supply and demand.

House icon with an upward arrow inside

Rental properties
To rent or to buy? Whether freshly out of college or in between jobs, renting is a living option that millions of people choose because it makes the most sense for them financially. This fact is one of the main reasons why many real estate investors choose rental properties. Instead of renting property for themselves to live in, they purchase the investment property to rent out to other individuals or families.

There are several different roles rental property owners can assume. Perhaps the most basic is landlord.

Renters pay the monthly rate and in return receive shelter. But a landlord's role typically goes above and beyond providing tenants with a place to stay. They often also take care of the ongoing maintenance and repair needs that may develop, such as a leaky faucet, broken window or clogged drain. They may also pay for certain utilities as part of the rental agreement with the landlord. In short, the amount of time rental investment property owners devote to this type of real estate can be considerable and may not be the best choice for those looking for a short-term investment vehicle.

High rise building icon with an upward arrow pointing to a dollar sign

Office buildings
Much like a homeowner or renter, businesses need a place to reside and they often find them in office buildings. Commercial real estate is geared toward entrepreneurs or general companies that rent out space for business purposes. Office buildings are typically found in major metropolitan areas, but they can also be located in suburban or rural communities.

Similar to residential landlords, office building property owners are charged with addressing various maintenance and incidentals that companies may run into from time to time, whether they're relatively simple or complicated and costly.

Because office units tend to be larger than residential apartment units, the rental prices are generally higher. And with more space typically comes more responsibility. Furthermore, if you own an office in a high-rise development where other businesses are located, you may be required to abide by certain policies dictated by the state or whomever owns the building itself.

Two house icons with arrows moving between them

House flipping

If you ever watch the DIY Channel or HGTV, then you probably have a good idea of what house flipping is all about. These types of investment properties may be in a state of disrepair when they're first purchased. The buyer commits to renovating the place and then "flips" it to another buyer who may want to use it to live in or as a vacation property. The goal of house flipping is to turn a profit by creating more value than what was spent on the initial purchase and renovations.

Home flipping is quite popular nowadays. According to the most recent figures available from ATTOM Data Solutions, an estimated 59,876 single-family units and condominiums were flipped between April and June. That's an increase of 12.4% from the first quarter. On a percentage basis, this means that of all the homes sold during this period in the U.S., close to 6% were flips.

Those who rehabbed them wound up making a profit, grossing an average $62,700, ATTOM Data Solutions found.

That said, it's important to understand that those who flip houses don't always make money. The cost of renovation may be more than originally estimated or market fluctuations may cause the price of the house to drop below what was spent to buy it in its original form. Financial experts as a result may not point to house flipping as a vehicle for investing in real estate.  

Icon of a group of people watching a presentation of a house with a dollar sign

REITs
Short for real estate investment trusts, REITs are structured arrangements, wherein a company or companies pool their money to buy properties and then sell off some of their assets as shares. Similar to mutual funds, investors who buy in typically receive a portion of the money that REITs earn, the amount of which typically depends on their stake or how many shares they purchase.

Investment advisors questioned about how to start investing in real estate may point to REITs as a good launching point, because it enables people to work with those who are already in the real estate market.  Additionally REITs may come tax free, provided the income earned goes to shareholders as dividends, as noted by Bankrate.com.

As with virtually all investments, there are some risks with REITs. Their value may decline depending on economic and real estate market forces. Additionally, you may not have authority to make further investment decisions with the property, especially if it is privately held (as opposed to publicly traded). 

Icon of a person with three houses

House hacking
Here's a term you may not be too familiar with, though it is pretty straightforward. It basically means that you live in one of the investment properties you buy, typically multi-family units (e.g. apartments, condominiums, etc.). However, instead of the traditional arrangement, where you pay off the cost of living there, your tenants do it for you.

This may be a sound investment strategy for those who are looking to invest on a short-term basis or are skilled in house flipping. As noted by Auction.com, the benefits of house hacking include improving cash flow and building your investment portfolio, meaning that it can be a smart area to get your feet wet.

Icon of a small shop

Retail
Online shopping has revolutionized how Americans buy products and services. With just a few keystrokes and button clicks, goods are shipped straight to consumers' doors. However, brick-and-mortar shopping remains the most common form, which is why retail remains a popular real estate investment. From convenience stores to outdoor strip malls to big-box department facilities, there are over 1 million retail establishments in the U.S. at the present time, according to the National Retail Federation. And of the 50 top-selling online retailers, close to 100% of them have brick-and-mortar locations.

Much like apartment unit or office building landlords, they also serve in retail property capacities and are charged with the same maintenance-related responsibilities, although the nature or frequency of these tasks may be different. For example, because retail locations host potentially tens of thousands of people in a given week - and millions in a year - repair issues may be more common than at an office building that sees the same number of people from week to week.

Another difference may be in how retail property investment owners are compensated by the companies renting them out. As The Balance noted, in addition to a base rent, they may also be paid on a percentage-of-sales basis, as the retailer may have the added advantage of the property being highly visible or in a busy part of the city or town. In some cases, greater customer traffic may lead to better sales compared to a location that's hidden or out of view. 

Believe it or not, that's just the beginning when real estate investment opportunities, as warehouses, mixed-use, industrial and vacation properties are a few others. So when you're considering how to start investing in real estate, your first task is determining which one to choose. No one can answer that question but you, although you may want to talk with a trusted financial advisor for further guidance.

 

Here are some additional pointers for how to start investing in real estate and what's important to keep in mind:

Infographic on how to start investing. Each point can be found below.Get a handle on your finances
As previously stated, every investment contains some level of risk. The key is to reduce as much of it as possible so surprises aren't too jarring.

The best way to ensure that is by smart money management. According to data compiled by The Wall Street Journal, consumer debt reached over $4 trillion in 2019, which doesn't include mortgages. There's nothing necessarily wrong with having debt, but before investing in something as big as real estate, you should  know how you'll pay debt off. Whether that's by refinancing interest rates, saving more or increasing cash flow by working a second job, being financially stable is key to smart real estate investing.

Self-reflect
Reflect on why you want to invest in real estate to begin with. Is it to generate some additional cash flow as a second job? Is it to raise money to help put your soon-to-be high school graduate through college? Or is this something that you see yourself doing for the long term because you've always had an interest in it? Whatever it is, be as specific as possible about what you'd like to get out of buying real estate. It can help you determine how much time and money you'd like to put in.

Start out small
A common mistake that many people make upon entering the real estate market is biting off more than they can chew. This is a potentially highly lucrative investment when you get it right, so it can be really exciting to begin big. It's best, however, to take it slow by first paying off your house. Once you've done that, talk to friends, co-workers or loved ones who have real estate investments. You're almost guaranteed to find that they too started out slowly by first buying a share in a REIT or a single apartment unit. As you build income and experience, you can then decide if you want to take things a bit further.

Read, read and read some more
There are hundreds and hundreds of resources on real estate investing, so many that you may have a hard time deciding which ones to choose. In this case, the more you read, the better off and more informed you're likely to be. If you're not sure where to begin, consider speaking with a real estate agent or a real estate investor. They should be able to list off some books that were helpful for them.

Do your homework

Although this may sound similar to the tip about reading as much as you can, doing your research is slightly different. Real estate is a highly fluid medium. What may be the norm in one geographical region may be different in another, particularly with prices. As mentioned earlier, the goal in real estate investing is to place your money in properties that appreciate. This may be a function of where you live. In July 2019, for example, the median price for an existing home in the Northeast was $305,800 - well above the national median, according to NAR data. In the Midwest during the same month, the price was $226,300.

The price difference is partially attributable to the amount of people that live in these respective parts of the country as well as availability of houses to sell. Regardless of where you live, do your research into price trends for single-family or multi-family units, which you should be able to find at websites like the National Association of Realtors or the National Association of Home Builders. It can give you some added confidence and understanding of the direction of prices and in what types of houses (e.g. condominiums, townhouses, single-family, multi-family, etc.).

Run the numbers
In addition to the purchase price of the property itself, there are other costs, such as property taxes, homeowners insurance, mortgage insurance (if you're putting less than 20% down as a down payment) and maintenance-related expenses, which can be unpredictable. Make out a list of the costs involved. Then, pair it with what you'd earn monthly from tenants' monthly rent payments. If the profit outweighs your costs, you're golden.

When you do it right and you come prepared, investing in real estate may be the smartest move you'll ever make. And it can be quite rewarding to boot. If you feel like you're ready to get started, then jump on in - the water's fine.