As the stock market loses ground and interest rates rise, many investors are looking for ways to diversify their portfolios. Real estate has historically been a wise investment. Whether it’s personal real estate, rental properties, or buying and flipping properties, real estate investment can be financially lucrative.
Here are four paths to a solid financial future through real estate investing.
1. Ditch the rental and purchase your own home
If you’re still shelling out money to a landlord every month, it’s time to stop throwing away your hard-earned cash. In most markets, you can own a home with lower monthly payments than renting. Renters can easily shell out $500,000 over the course of a lifetime, and still end up with nothing. But if you purchase a home, you’ll be paying monthly payments towards ownership instead.
Homeownership also pays off should you decide to sell before your home is paid off. Homes in America have appreciated on average 5% per year since the 1940s. That means that if you purchase a house for $200,000 today, it could be worth over $415,000 in just 15 years.
Of course, home ownership is not a guaranteed money-making machine (need we mention the recent recession and housing crisis?). Still, long-term appreciation trends indicate your house will be worth more in the future. And that’s a risk worth taking.
Not sure if you’ll qualify for a home loan? You might be surprised at the available options. Check out our blog about home financing for more information.
2. Buy a rental and become a landlord
Purchasing single-family properties or multi-family properties can be complicated, but for those who can see the big picture, it’s a great real estate investment option.
What you’ll need up front: A large down-payment, money set aside in case of long-term vacancies, some DIY abilities or access to a good contractor, and a whole bunch of patience.
Rental properties pay in three ways:
- First, depending on your purchase price, your local housing market, and renovation or repair costs, you can make several hundred dollars or more every month per unit (tenant’s rent – your mortgage payment = monthly gain).
- Secondly, you’re gaining equity every month, but someone else is paying the bill. Your renter should be paying enough to cover your mortgage payment and then some, and over the years, your home will be gaining equity and appreciating in value.
- Finally, many rental income-associated costs are tax-deductible, meaning you’ll be saving money when it’s time to pay Uncle Sam his portion. However, rental properties come with some problematic downsides as well: tenants who don’t pay, damage that requires extensive repair, and middle of the night service calls, just to name a few. However, if you’re willing to take the bad with the good, rental properties might be a viable long-term investment option.
3. Fix and flip
Don’t have the patience to purchase a rental property, deal with tenants, and watch your investment grow slowly over time? Are you savvy with a saw, handy with a hammer, and proficient with a paintbrush? If so, consider purchasing a “fix and flip” for short-term returns.
What is a fix and flip? In short, investors purchase a home (sometimes via auction, sometimes sight unseen) in need of repairs for less than the market value. Then, investors pay to make necessary improvements. Finally, the house is placed back on the market, hopefully selling for a significant profit (selling price – cost of repairs – purchase price and additional expenses = profit).
While fix and flips offer the potential for a quick profit, it’s also a gamble. Perhaps you’re purchasing an “as-is” property, for example, which could contain unforeseen expenses that will chip away at your bottom line. Or maybe the market is weak in your area, and the house doesn’t sell quickly, meaning you’re shelling out money for mortgage payments you didn’t intend to make.
For the handy investor, fix and flips can be a wise investment, but they are not for everyone. Tread carefully.
4. Real Estate Investment Trust (REIT)
If you’re looking to break into commercial or multi-family real estate, but don’t have the capital to put down up front, real estate investment trusts (REITs) might be the way to go.
The basics of REITs. Congress established REITs in the 1960s to allow multiple investors to pool funds and jointly purchase commercial properties, apartment buildings, medical facilities, business parks, and more, then split the proceeds over time.
REITs operate similarly to mutual funds and other stock portfolios. While there is an opportunity to make long-term gains, you also risk losing money. However, if you’re looking for a way to diversify your investment portfolio, consult a broker and learn if REITs are right for you.
Now is the time to invest in real estate. History shows that owning property is a good investment. Talk to your financial advisor, real estate broker, or accounting professional to learn more.
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