When looking for investment options, there are many choices for where to put your money. Stocks, bonds, exchange-traded funds, mutual funds, and real estate are all good investments no matter what level of experience you have; forex or cryptocurrency may be too volatile for beginning investors. Which option you choose will depend on how involved you want to be in your investment, how much money you have to start investing, and how much risk you are comfortable taking on.
Buying and owning real estate is an investment strategy that can be both satisfying and lucrative. Unlike stock and bond investors, prospective real estate owners can use leverage to buy a property by paying a portion of the total cost upfront, then paying off the balance, plus interest, over time.
What makes a good real estate investment? A good investment has a high chance of success, or return on your investment. If your investment involves a high level of risk, that risk should be balanced out by a high possible reward. Even if you choose investments with a high probability of success, though, that isn’t a guarantee. You shouldn’t put money into real estate—or any other investment—if you cannot afford to lose that money.
Though a traditional mortgage generally requires a 20% to 25% down payment, in some cases, a 5% down payment is all it takes to purchase an entire property. This ability to control the asset the moment papers are signed emboldens both real estate flippers and landlords, who can, in turn, take out second mortgages on their homes in order to make down payments on additional properties. Here are five key ways investors can make money on real estate.
KEY TAKEAWAYS
- Aspiring real estate owners can buy a property by using leverage, paying a portion of its total cost upfront, and paying off the balance over time.
- One of the primary ways in which investors can make money in real estate is to become the landlord of a rental property.
- People who are flippers, buying up undervalued real estate, fixing it up, and selling it, can also earn income.
- Real estate investment groups are a more hands-off way to make money in real estate.
- Real estate investment trusts (REITs) are basically dividend-paying stocks.
1. Rental Properties
Owning rental properties can be a great opportunity for individuals who have do-it-yourself (DIY) renovation skills and the patience to manage tenants. Properties can be local, or there may be good out-of-state opportunities. This investing strategy does require substantial capital to finance upfront maintenance costs and to cover periods when the property is empty or when tenants do not pay their rent.
- Provides regular income and properties can appreciate
- Maximizes capital through leverage
- Many tax-deductible associated expenses
- Managing tenants can be tedious
- Potentially damage property from tenants
- Reduced income from potential vacancies
According to U.S. Census Bureau data, the sales prices of new homes (a rough indicator for real estate values) consistently increased in value from the 1960s to 2007, before dipping during the financial crisis.1 Subsequently, sales prices resumed their ascent, even surpassing pre-crisis levels.2
Federal Reserve Bank of St. Louis. “Average Sales Price for New Houses Sold in the United States.”
3 The long-term effects of the coronavirus pandemic on real estate values remain to be seen.
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