In this ever-changing financial landscape, many investors are turning to real estate properties. While the returns on real estate vary, these investments have proven to be consistent over time. If you’re considering buying real estate investment properties, we’ve got the information to get you started.
Why You Should Invest in Real Estate
Real estate can be a lucrative investment strategy, specifically over the long-term. Real estate is a relatively stable investment, typically gaining about 3-5% in value every year.
While each state is different, many parts of the country have seen steady growth without large fluctuations during market corrections.
Every investment portfolio should include at least one real estate property.
How to Buy Real Estate Investment Properties
You can invest in real estate in three ways:
- Purchase a primary residence, then turn it into a rental property once you move.
- Invest specifically in a rental property.
- Buy a property, renovate it quickly, and re-sell for a profit (also known as “flipping”).
Each method has its advantages and disadvantages. Let’s take a look at all of them.
The Primary Residence Rental Property
This is perhaps the most cost-effective and most popular way to build a rental property portfolio. When you buy a home as your primary residence, your down payment will be lower, and you’ll get a better interest rate.
The catch? You must live in the home for at least two years to avoid tax penalties.
When you’re ready to move, keep the property and turn it into a rental. You might not make profit monthly, but your renters will be paying off this asset while your home continues to gain in value.
By the time you retire, you’ll have thousands in equity, possibly even a paid-off mortgage. You can sell the home and use the capital to purchase something new, or you can use the monthly rent payment as income in your post-employment years.
If managing a rental property makes you nervous, consider hiring a management company. Typically, you’ll pay about 10% of the rent to the management company, but it’s a small price to pay for peace of mind. The management company handles applications, background checks, repairs, and payments. Meanwhile, you can sit back and watch the rent payments hit your bank account.
The Designated Rental Property
Another strategy is to purchase a home solely for use as a rental property, renting it out from day one. This strategy typically requires a larger down payment (as much as 25%), and you’ll likely have a higher interest rate, but rentals are an excellent addition to your real estate portfolio.
The trick to making money on a rental property is to find a reasonably-priced home that will increase in value over time. As mentioned above, most real estate gains about 3-5% in value each year depending on the market, so even though you’re only making a few hundred dollars every month, you’re building wealth in the long run.
When it’s time to retire, you can either continue to rent the property and enjoy a stable monthly income, or you can sell the asset and use the capital for something else.
The Fix and Flip
If you want a more immediate return on your investment, consider rehabbing, also known as “fix and flips.” These investors buy a neglected property for the best possible price, make smart fixes that will add the most value, then resell the renovated property for a profit.
While HGTV makes it look like anyone can do a fix and flip, be cautious: renovations are not for the faint of heart. However, if you’re handy and financially-savvy, this could be a real estate strategy that works well for you.
Getting Started in Real Estate Investing
To learn more about real estate investing, contact your local Realtor. There should be a real estate agent in your area who specializes in investment properties. You can also contact your local lender to learn more about real estate investments.