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Investing in Real Estate: The Beginner’s Guide

Christina

June 17, 2022

The past few years have seen an explosion of interest in investing. With the emerging crypto market, renewed interest in stocks and securities, and demand for property ownership, a new generation of real estate investors are stepping into the market en masse.

But when it comes to investing, it can be tough to know where to start. Plus, investing is a serious business as well. As exciting as it can be, you want to ensure that your money is going into a secure, worthwhile venture.

The last thing you want to do is step into a bad investment.

There are many ways to invest your money, each with unique advantages and disadvantages. However, if there’s one area that investors can rely on for steady returns and secure, long-term stability, real estate is the best place you can put your money.

Let’s cover some basics that you’ll need to know as you embark on this new investment venture.

What is Real Estate?

Real estate doesn’t always refer to a house or a building; it can mean a lot more than that.

In short, real estate refers to a type of real property based on land. Real estate can refer to the land concerned, the buildings on said land, the alterations made to the land, and even the raw materials on the property, like lumber, water, and minerals.

There are five primary sectors of real estate.

  1. Residential real estate
  2. Commercial real estate
  3. Industrial real estate
  4. Raw land
  5. Special purpose real estate

Residential Real Estate

The type of real estate you’re probably most familiar with is residential real estate.

Residential real estate refers to properties that are zoned, developed, and built for their livability. These are the houses, multi-family units, condos, apartments, or any space where people can live.

Of all the different real estate sectors, real estate is the most accessible for individual investors. There are a few ways you can get into residential real estate on your own.

A prominent one is leasing residential properties for rent. Owners of residential properties can lease out the home to renters at a price the landlord and lessee agree to in a contract.

The property becomes an income-earning investment by nature of the rent paid—subtract the homeownership expenses like property tax, mortgages, maintenance fees, and so on from the rent paid to assess the income-earning potential of the property.

House flipping is another popular way to invest in residential property. The strategy here is to acquire a property at a low price–usually a fixer-upper–-make repairs on the house, and then sell at a higher price than the price you paid for it.

House flipping usually moves fast, using the property to improve expenses to boost the value and make a quick return on the initial investment property.

Commercial Real Estate

Commercial real estate can refer to many different types of property. These are types of real estate used for business and commerce purposes—customer-facing buildings. Examples of commercial real estate are storefronts, restaurants, office space, and in some cases, apartment buildings.

Like residential real estate, investing in commercial real estate gives investors an income earned through rent paid. Businesses make good tenants as their success is your success. They’re incentivized to make a profit on their business, making them reliable sources of rental income.

However, commercial properties are more expensive than residential properties. This makes them harder for individual investors to get into on their own.

Industrial Real Estate

This sector of real estate also involves business operations. Commercial real estate is generally customer-facing, whereas industrial real estate deals with properties that manufacture, assemble, and perform the behind-the-scenes operations for a business.

Industrial real estate refers to warehouses, factories, garages, and distribution centers. They are larger in scale than their commercial counterparts.

Like commercial real estate, industrial properties don’t have the same accessibility for individual investors as residential properties.

Raw Land

Raw land refers to undeveloped property. These can range from empty lots to land with only raw materials.

The range of raw land properties available for investment is vast. The price you can pay for raw land can vary just as much.

From swaths of timber-rich forests to an empty lot down the street, there are plenty of raw land properties one can acquire for investment opportunities.

Raw land can have high investment potential.

Considering that it is generally undeveloped, this type of property can often be used for many purposes. Depending on the zoning ordinances of the locality, raw land can be developed in numerous ways. This type of real estate could be developed for any of the sectors mentioned so far.

Many acquire raw land for the materials on the property. Timber, mining, and other means of raw material extraction make raw land a unique investment opportunity.

Special Purpose Real Estate

This type of real estate fills in the majority of public use spaces.

Examples of special purpose properties include libraries, parks, churches, temples, schools, government buildings, and cemeteries.

Because they are publicly funded, they don’t have the same kind of investment opportunities that other sectors in real estate have.

How to Get Started Investing In Real Estate

  • Assess your finances
  • Find the right type of investment
  • Consider REITs
  • Look into private equity real estate
  • Try private ownership
  • Consult with real estate professionals

Now that you have a better understanding of the core sectors that make up real estate let’s get into how you can best set yourself up before investing.

Assess Your Finances

Like with any investment, you should take a moment to assess your finances to ensure that you are in a good enough place to set aside some money.

Real estate works best as a long-term investment.

One of the strongest advantages of real estate is that property value consistently increases over time. The average sale price of houses in the United States has risen consistently since the 1960s. Even after the occasional dip during economic recessions, real estate has continually improved.

Real estate is an investment that performs well over an extended period, so for optimal returns, keep your money in the investment for longer.

Depending on the type of real estate investment you make, there may be a high degree of illiquidity in your asset. Liquidity describes the ease with which a given asset can be turned into liquid capital.

Because it can take prolonged periods to close on a property and then receive the payment, you must consider how much money you can part with for that extended timeline.

Lastly, real estate investments can have a high threshold for buying in. Depending on how you want to buy into real estate, it could be that you need to set aside a significant amount of money.

Find the Right Type of Investment For You

When you have a good feeling about the state of your finances, you can get a better understanding of what kind of real estate investment is right for you.

Here are a few types of real estate investments that might be right for you.

Consider REITs

One of the most accessible ways to get into real estate investment is through real estate investment trusts or REITs.

REITs operate like companies that make their earnings by financing or owning a range of income-producing properties across sectors—from residential to commercial to industrial.

This type of investment opportunity was first introduced in the 1960s to give the average American the chance to hold a stake in real estate. They’ve been around for a while and proven to be an effective, accessible way to get into real estate.

The accessibility of REITs lies in the fact that they are publicly traded. Like any other public company on the stock market, you can buy shares of REITs and receive dividends from the accrued income generated by the trust.

Most REITs make money by selling through assets, earning income from rent collected on their properties, or mortgage interest.

Because they deal with real estate, REITs must abide by a strict set of standards to prevent fraudulent activity and ensure they give honest returns to their investors.

Here are the IRS guidelines for REIT:

  • Must be a corporation, trust, or association.
  • Must be managed by one or more trustees or directors.
  • Must have beneficial ownership (a) evidenced by transferable shares or by transferable certificates of beneficial interest, and (b) held by 100 or more persons. (The REIT does not have to meet this requirement until its 2nd tax year.)
  • It would otherwise be taxed as a domestic corporation.
  • Must be neither a financial institution (referred to in section 582(c)(2)) nor a subchapter L insurance company.
  • It cannot be closely held, as defined in section 856(h). (The REIT does not have to meet this requirement until its 2nd tax year.)

REITs have impressive returns. The average annual return on REITs for the past 20 years has been 13.3%, keeping pace if not exceeding the performance of the S&P 500.

Look Into Private Equity Real Estate Funds

Like REITs, private equity real estate funds allow investors to partake in the real estate market without the high expenses and time-consuming costs of individual ownership.

Their difference lies in the fact that these funds are not publicly traded—instead, they rely on selective, individual investors to build a pool of real estate assets.

Due to the fact they are not traded publicly, these kinds of funds are more secure from the external market forces. Correlation measures the effects one asset’s performance has on another. Real estate is a reliable investment because it has a low correlation to the trends driving other markets.

Private equity funds are more selective with their investors.

Most only allow accredited investors who pass a certain wealth threshold to participate in the fund.

But their insular nature makes for higher returns. The average annual return for private equity funds is around 14.2%.

Try Private Ownership

Private ownership is a pricey way to get into real estate but can be quite effective.

This type of investment involves house flipping and residential property leasing from individual investors.

The benefit of private ownership is that the investor is in complete control over their assets; however, it is a very intensive way to get into real estate investment and requires a significant amount of seed capital to boot.

Consult With Real Estate Professionals

If you’re uncertain about how to begin your real estate journey, there is always the option of consulting with real estate investment professionals for guidance.

Christina has been in real estate for over four decades. We’ve fine-tuned a real estate investment strategy that gets results and returns for our investors.

If you’re interested in learning more about the real estate market, check out our educational resources for yourself.

Investing in Real Estate Is Easier Than You Think

If you’re just starting your investment journey, you might be nervous about getting into real estate.

Compared to other investment opportunities, like trading on the stock market, for example, getting into real estate can seem on the surface to be quite a complicated undertaking. That couldn’t be further from the truth.

With this market continuing to grow more lucrative, now is the perfect time to learn the ropes about how to make life-changing investments in real estate.

Sources:

Average Sales Prices of House Sold for the United States | Economic Research

Instructions for Form 1120-REITs (2021) | IRS

REITs vs. Stocks: What Does The Data Say? | The Motley Fool

Is Private Equity Overrated? | New York Times

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