Best Real Estate Investments
If you’re interested in entering the real estate market, it’s important to know your options. There are more short-term and long-term real estate investment opportunities today in the United States than ever before, and if you play your cards right you can make a lot of money while maintaining healthy cash flow.
What is a Real Estate Investment?
A real estate investment is any property or real estate fund that you purchase to generate a profit. Real estate can involve either residential, industrial, or commercial properties.
Residential Real Estate
Residential real estate describes any investment involving a place where people live. This may include a single-family home, a multi-family home, a condo, or an apartment complex.
Most people who are new to real estate investing go into real residential real estate investing because it’s generally easier to access and less of a risk than buying commercial property. A mortgage payment is generally much more affordable compared to other options.
Commercial Real Estate
As the name suggests, commercial real estate investing involves buying and selling business property. For example, commercial real estate may involve retail stores, office buildings, and medical complexes.
4 Best Real Estate Investment Types
Here is a breakdown of some of the top options to consider if you’re looking into entering the real estate market as part of your investment strategy.
A rental property is a type of residential real estate investment that you purchase with the intention of renting on a short-term or long-term basis. The right property can be a great investment, enabling you to passively generate rental income over time.
One of the most profitable ways to invest in rental properties is to purchase apartments or condos in areas with heavy tourism, like ski or beach towns.
Short-term rentals can be highly profitable — especially during times of peak demand like the holidays or summer months when most vacancies are full. In addition, you don’t have to deal with the hassle of long-term tenants who can be difficult or demanding about upgrades or repairs or are slow with payments.
Of course, the main trade-off is that you have to constantly keep the place rented, which can take a great deal of time and effort. This is why most people choose to outsource this process to a property management company (more on this below), even if it takes a bite out of their income stream.
If you’re looking for more stable income, you may want to consider investing in a long-term rental property like a multi-family house or an apartment.
A long-term rental can require less day-to-day planning, as you won’t have to constantly keep the place rented. However, it can still require a tremendous amount of work and it can also be costly.
Long-term rentals are better suited for areas that are heavily populated, but not necessarily tourist-friendly.
Tips for Buying a Rental Property
Before you buy a rental property, you’ll need to determine the type of investment you want to make. Think about your investing goals, including how much time you want to devote to the process and whether a short-term or long-term rental makes the most sense for your needs.
Here are some things to consider during the purchasing process.
1. Hire a Real Savvy Real Estate Agent
Be very selective about the real estate agent that you partner with. The real estate agent is going to help you navigate the bulk of the purchasing process, including financial arrangements, inspections, and other odds and ends. It pays to find a real estate agent who not only knows the local market inside and out but also has the connections and the business acumen to set you up for success.
Remember: Your real estate agent is going to work for you. As such, you should treat that person as an employee. Interview different agents until you find one that you want to partner with.
2. Get Pre-Qualified Early
Once you find an agent, that person is going to want you to get pre-qualified for a mortgage as soon as possible. While you don’t have to get pre-qualified to put an offer on a property, it’s a good idea to go through the process even though it can be a pain.
The reason why you want to get pre-qualified for a mortgage is that it’s going to increase your chances of the seller taking your offer seriously. This can help in a competitive market where multiple people are competing to put an offer down. Going through the pre-qualification process can show a bank you’re actually planning to buy a home.
3. Location, Location, Location
Location means everything in commercial and residential real estate — especially if you’re looking to buy a short-term rental in a vacation town.
In some cases, it’s more profitable to buy a property that’s less nice but close to amenities, like beaches, bars, and restaurants, than a higher-end place on the outskirts of town or in a remote area. Just imagine you are going on vacation with your family. Most people want to be in areas within walking distance of local attractions.
You may have to pay a little bit more for premium locations. But it’s almost certainly going to yield stronger returns.
4. Look at Rental Trends
Do your due diligence and analyze rental data from the surrounding area before you spring for a property. You’ll want to see what other places in the area are renting for and what those trends look like over time.
For example, you may find a steal on a place in a great location where nearby rents have been increasing for several months or years. Or, you might see that rents are very cheap but are starting to pick up — indicating that now is a great time to buy low in anticipation that you can jack up the price at a strategic time and make a strong profit.
If you think this strategy is unethical or wrong, you may want to rethink your motives for investing in a rental property. This is a business investment and you need to treat it as such if you want to make money. You have to be firm as a landlord or you won’t last long in real estate. It’s that simple.
5. Hire a Professional Property Management Company
Managing a rental property can be a full-time job. It requires finding renters, cleaning up after them, performing monthly maintenance, and a myriad of other tasks. It’s much easier to partner with a property management company that provides end-to-end care.
Rental management companies can be expensive. But unless you’re willing to make a full-time commitment you’ll need one to keep the place in order. In most cases, it can be worth every penny — especially if you are dealing with heavy turnover.
Not all investors choose to rent the properties they purchase. The alternative is to buy an investment property, fix it up, and flip it for profit.
Here’s what you need to flip houses like a professional.
An Eye for Value
The trick to getting the upper hand when flipping a property is to have an eye for properties that are undervalued and in good locations. Keep your eye out for properties that you can buy at a great price due to poor condition or foreclosure and pounce on an opportunity when you can.
Another key to flipping houses is to have impeccable timing. Make sure the house is below market value and that the housing market in the area is doing well.
You should also talk to a mortgage lender about getting pre-qualified for flipping loans. Lenders can offer special loans that you can use to maximize your investment when flipping a house.
Flipping a house can take a lot of work — especially if the property is in bad condition and in need of structural or cosmetic repairs.
Before you purchase a fixer-upper, make sure you have either the skills to complete the required repairs or a network of trusted and affordable contractors that you can rely on to get the house into proper shape before it goes on the market.
Crowdfunding is a strategy that involves connecting investors to real estate opportunities in a way that is cost-effective and less risky.
One of the leading real estate crowdfunding platforms is Fundrise, a site that gives investors the opportunity to buy equity in large-scale commercial opportunities without having to part with millions of dollars. Other sites to consider include Fundraise and Diversifyfund.
Like all investments, crowdfunding is still risky. It’s important to be selective about the opportunities you choose to fund in order to avoid losing your money. However, it can also be very lucrative if you develop a strategy and stick to it.
Real Estate Investment Trusts (REITs)
A real estate investment trust provides direct access to lucrative real estate opportunities that you would otherwise not be able to access on your own. A REIT is like a mutual fund, as it involves pooling funds from multiple investors to purchase securities.
When you leverage a REIT, you can profit from real estate without having to worry about renters or being a landlord and having to make repairs or upgrades. It’s a much easier approach, and a more affordable one. Plus, you’ll also receive dividends periodically.
Tips for Real Estate Investors
There are many pitfalls to avoid when investing in real estate. Here are some things that new investors should keep in mind before getting started in the market.
Your House is Not a Real Estate Investment
Just because you own a house doesn’t mean you’re a real estate investor. While you technically own real estate, that is your place to live. It’s not an investment.
That’s because the equity — or ownership stake — you build as you pay your mortgage doesn’t earn interest or even impact the overall value of the house. And on top of that, it’s very difficult to sell a house — even when the market is favorable. It takes time and a lot of work.
That said, owning a house can put you in a great position financially. For example, you can use the house as collateral when shopping for a second mortgage, and you can also rent out rooms on sites like Airbnb to make extra money.
Expect to Pay More Than a Down Payment
If you’re saving up for an investment property, a down payment is just part of what you can expect to pay in upfront costs.
In addition, you’ll also have to pay the real estate agent and lender in the form of closing costs (which can be upwards of 2% to 5% of the total price of the home), as well as mortgage insurance, appraisal fees, pre-approval fees, attorney fees, and so on.
You can sometimes choose to roll closing costs and other fees into a mortgage and pay them down over time. Or, if you have the cash on hand, you may want to pay them off immediately to save money.
It’s also a good idea to have extra money on hand to pay for any initial upgrades that you want to make (like installing new floors or windows) or purchasing new appliances. There are also moving and relocation costs to consider.
Generally speaking, a wise investor should save an extra $10,000 to $20,000 to cover fees and other expenses in addition to their down payment to avoid falling into debt or having to take out an expensive loan on a residential property.
Frequently Asked Questions
What is passive income?
Passive income refers to an investment that brings in regular income with little to no effort or maintenance. A rental property can be considered passive income if you have a steady stream of renters and a property management company doing all the work for you.
Oftentimes, investors purchase rental properties thinking it’s going to be a source of passive income when it actually turns into active income because it requires more effort. This is why it pays to work with a management company.
Can I find real estate opportunities on LinkedIn?
LinkedIn is a great place to connect with others and potentially find real estate opportunities. For example, you may find a group of investors who are interested in pooling their money together to buy a commercial property or providing funding.
Just remember to thoroughly vet anyone before you go into business with them. Like any networking website, LinkedIn is full of scams and dishonest people. In general, it’s better to go into business with people you can trust. So don’t be afraid to ask for references when connecting with someone online for real estate opportunities.
In addition to LinkedIn, there are a bunch of other great real estate investing apps you can check out.
Is using Airbnb a good idea?
Airbnb is a great option for people who own rental properties. The site gives a remarkable amount of control and flexibility over setting rules and choosing your own pricing. Of course, Airbnb takes a cut of whatever you bring in. But it can be a great way to connect with people who are looking for lodging nonetheless.
Plus, you’ll have visibility into the people you are dealing with. It’s generally much safer than using a site like Craigslist.
What is Investment Diversification?
It’s a good idea to spread your investments around and diversify your holdings. Diversification is all about investing in a variety of different securities like stocks, index funds, and properties. It can maximize your earning potential and reduce risk.
The Bottom Line
Real estate is something every investor should explore at some point. It’s one of the best ways to bring in money and improve your net worth. And thanks to instruments like REITs, you don’t even have to be rich to get started as a real estate investor.
Research your options and avoid going in on an investment before you are 100% confident in its ability to produce a return. Remember that, with real estate, it’s all about making money. Be savvy about the investments you make, and you will be in a strong position to succeed.
Who knows? Play your cards right, and you might eventually become a hot-shot real estate developer with a portfolio that is the envy of your peers.
Here’s to making smart real estate investment decisions!