Real estate can have numerous benefits for investors. Carefully selected properties can provide considerable returns, regular cash flow, diversification and various tax benefits. But like any investment, real estate investing has its risks.
Let’s look at some of the reasons you might want to invest in real estate, your options and what to consider as you look to get started.
People invest in real estate for all sorts of reasons, but many find it appealing for these reasons:
Real estate has low correlation with stocks and bonds, which can help diversify a portfolio. If you diversify within real estate itself, there are several ways to gain exposure to the market.
Real estate is a popular tangible asset among investors because it consistently increases in value over time and outperforms many other investments.
Real estate is a flexible investment that offers not only many ways to invest your money but also flexibility in what you can do with your property. You can:
Like any investment, real estate has its upsides and drawbacks.
There are five main ways to invest in real estate, each with its benefits and drawbacks.
Rental properties allow you to build equity while earning an additional income. While the majority of rent payments will likely go toward property expenses, any amount left over is profit. This is a passive income source that requires relatively little effort.
Owning a rental property also positions you to benefit from property value appreciation and various tax benefits. While rental income is taxable, expenses you incur on your rental property can be deducted from your rental income. These expenses may include mortgage interest, property tax, depreciation and repairs.
Banking platform for landlords
Get started by connecting your existing bank account or by opening a Baselane banking account.
A REIT is a company that owns or operates income-producing commercial real estate, such as office buildings, apartment complexes and shopping malls. REITs allow investors to earn income produced from commercial real estate without having to actually go out and buy commercial real estate.
Since many of these trade on the market like stocks, specifically public REITs, this keeps the buy-in cost similar to buying stocks.
Investors can benefit from long-term capital appreciation, and REITs are required to distribute at least 90% of their taxable income to shareholders to maintain their status as a REIT.
Real estate investing platforms are generally crowdfunding platforms that allow investors to pool their money together to fund real estate projects. These can include REITs, multifamily units and individual commercial properties.
Real estate investing platforms have taken off in recent years as they have made real estate investing much more accessible to the public. Many offer low investment minimums and simple fee structures and the ability to easily invest in real estate projects throughout the country. Note that some platforms are only available to accredited investors. But nonaccredited investors still have several options.
If you’re not ready to commit to buying a full-fledged rental property, you might consider renting part of your home. There are a few ways to do this. You could rent out a room through a site like Airbnb, though this would likely be on a short-term basis and wouldn’t necessarily provide a steady source of income as tenants move in and out. You could also offer a finished basement as a rental unit, which would provide more separation and make it easier to secure a long-term tenant. If you have a detached guest house, even better.
Investors who flip houses have no intention of holding onto them. Flippers buy properties, fix them up and quickly resell them for a profit. Since it takes time to renovate, list and sell a property, “quickly” can mean anywhere from a few months to a year. But an ideal flip is a property in a good location that has the potential to increase in value after renovations.
While flipping houses has the potential to deliver fast, strong returns, there are plenty of unique risks. Namely, the property turns out to be less easily repairable than you thought and you end up dumping more money into it than you had planned. Or the market shifts and you’re stuck paying for a property you had no intention of holding on to.
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Real estate investing is a great way to diversify your investments and potentially create extra income. Invest in real estate passively through REITs or crowdfunding platforms — or invest actively by owning physical properties.
But investing in real estate has unique risks you should clearly understand before you jump in. Spend some time researching the different ways to invest in real estate and see which approach is best for you.
What is a REIT and should you invest in one?
Looking to invest on ArborCrowd? Here’s what to know before you apply.
This platform connects investors with house-flipping investment opportunities with low minimums and no platform fees.
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Invest in large-scale real estate through this crowdfunding platform.
Invest in real estate with as little as $5,000.
A marketplace to buy and sell rental properties.
This real estate investment platform can bring solid returns, though there’s concern over loan defaults.
A real estate investment platform accessible to anyone.
