7 Ways to Build Wealth Through Real Estate
Investing in real estate is a great way to build wealth. But knowing how or where to start or what works for you as an investor takes some research. Continue reading for a brief survey of options involving homeownership, acquiring additional properties for your portfolio, and investing in other real estate investment options.
One of the first and simplest ways to start investing in real estate is to buy your first home. Homeownership is universally known as a solid way for families to build wealth. With the right purchase, the value of your home appreciates as you pay down the mortgage used to acquire the home. As a result, your equity or investment in the home increases over time. Although common, homeownership is not without risks. Your home could lose value. The property could also need significant repairs or maintenance. These unforeseen expenses combined with maintaining the mortgage, insurance, and taxes on the property could make continued ownership difficult.
2. Hack your house.
House hacking is the practice of buying a property and living in one section of the property while renting the rest of the property to other tenants. This is normally done with multifamily properties with two or three separate units but can also be accomplished by renting out rooms or levels of a single-family house, too. You can ease your way into real estate investing and learn how to run a real estate business while getting the benefit of having your tenants pay some or all the mortgage in your home and increasing your equity in the property. But living in the same property as your tenants may be too close for comfort. You should be prepared to deal with tenant maintenance and rent collection issues.
3. Rental Properties.
Real estate investors who are not interested in living with or near their tenants often consider purchasing residential rental properties as a solid technique for investing in real estate. These long-term rentals are a great tool to build wealth. Approximately 36% of the households in the United States are renters. If you are considering long-term rentals as a way to get into real estate investing consider your purchase budget, location, financing options and operating budget to know exactly what you are getting into. You should also consider the operation of the rental after you have secured the property. You will need to decide who will manage the property, perform the maintenance, and keep the financial records of the business.
4. Short-Term Rentals
Short-term rentals have become increasingly popular with platforms like Airbnb but this investment option has been around for decades. If you have ever rented a cabin or beach house for a vacation these are also considered short-term rentals. With this investment technique, you still acquire a residential property (your primary home or another property) but instead of leasing it to a tenant for their primary residence, you offer the property or a portion of it to a renter who only needs the space for a limited time.
Like long-term rentals, you will have to consider who manages and markets the property and who does the maintenance if you are not using your primary home. Additionally, you may be subject to short-term rental restrictions by your homeowners’ association or local ordinance so do your due diligence before offering your property up for rent.
5. Flip a house.
When an investor buys a house and then sells them for a profit in a short period of time is flipping a house. The time between the purchase and the sale often ranges from a few months to up to a year. Flipping a house can work in two ways. An investor can buy and hold the property without making any repairs or updates and benefits from an increase in rising home values in the area. Or, an investor can buy a property and make repairs and enhancements to increase the value of the home and then sell.
This investment strategy requires planning and coordination of financing, contractors, and real estate professionals. As a strategy, the risk of loss is greater with flipping than with other real estate techniques so do your due diligence before starting your first project.
6. Real Estate Investment Trusts.
A real estate investment trust (REIT) is an option for investors who benefit from the real estate market without a traditional real estate transaction. A REIT is created when a corporation (or trust) uses money from investors to purchase and operate income-generating rental properties. REITs are bought and sold in the stock market like other corporations. However, REITS must pay out 90% of its taxable profits as dividends to its investors in order to maintain its REIT status. As a result, REITs do not pay corporate income tax.
7. Commercial real estate investing.
Commercial real estate (CRE) is traditionally considered any property that is not used for residential purposes like retail stores and office buildings. Investors like CRE opportunities because they usually have greater cash flow because they typically have more than one tenant with longer leases when compared to residential tenants. However, the costs and the investment of your time and cash in CRE transactions are both greater than residential real estate deals. Sales of commercial properties are down but that does not exclude them as a viable real estate investment option. Do your research and talk with your team to determine if this is the right time to get into the CRE market.
8. What if I need help?
If you are considering investing in real estate, you should consider professional help. You could benefit from the help of a licensed and qualified realtor in your area to help you understand the market. Additionally, a banker or mortgage professional can help you understand your financing options based on your current situation. These professionals can help you with your search, understanding current trends in the market, and help finding the right loan products for you and your family.