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Everyone dreams of financial freedom, and real estate has long been considered one way to get there — but is it still a dependable wealth-building route to take in the year 2023?
As with most forms of investing, there are many complexities and few ways to guarantee a sure thing. In short, experts say — yes — real estate is generally still a very smart investment indeed.
“I’m a huge advocate of real estate investing,” says Kimberly Pappalardo, a top real estate agent in Raleigh, North Carolina. “It’s how I started out a long time ago. My husband and I saw an albeit risky opportunity turn into something more solid than we could have even ever imagined.” In her opinion, “By far, real estate is the best way to accomplish long-term wealth and financial freedom.”
But you need to know if it’s a good investment for you before plunking down your hard-earned money. And you need to know what types of opportunities can work for you based on your own budget and goals. To help you break down your options and weigh the pros and cons of each, here’s a primer packed with pro tips for each type of real estate investment out there.
Why invest in real estate?
“I’ve always thought real estate is a good investment and it’s a time-proven fact,” says Rick Ruiz, a top real estate agent in Las Vegas, Nevada. “The biggest reason why is because it’s very inflation friendly.”
Think about it: How often have you received notice that your rent is decreasing? In most cases, rents tend to either remain stable or, more commonly, rise over time. As a property owner, the initial amount you paid, whether in cash or through a loan, stays the same — offering stability amidst fluctuating economic conditions.
Ruiz also points out the advantages of having a fixed mortgage rate. He explains, “Your payment and your costs are for the most part fixed. Over time, two things are going to happen: rent will increase, and if you use a mortgage, your balance of what you owe your bank is going to decrease.”
Expert tip for planning parents
Ruiz says he has some clients with babies and small children who are placing a higher priority on setting up their children with property investments over education savings accounts.
“What I’ve seen them do, because of the very high cost of real estate in today’s world, is instead of creating a college fund, a lot of them are investing in the property that they plan on having paid off by the time the kids reach adulthood because they’re more concerned with what housing will cost their child when they reach adulthood than what education will cost them.”
Types of real estate investments
From owning your own home to navigating the fast-paced fix-and-flip market, the real estate sector offers an array of investment opportunities. Each type has its unique advantages, challenges, and potential returns, catering to different investor preferences and risk tolerances.
Some people think of homeownership as more of a way to put down roots and grow a family — and not as an actual investment in real estate. But it is!
“Homeownership is one of the best investments you can make into yourself,” Pappalardo says. “You’re saving money and you’re investing into your future. You’re developing that wealth and that equity over time and long term, so you’re creating this virtual savings account as you’re paying down your mortgage. And then when you go to sell the property or eventually pay it off, you’re in a much better financial position. Purchasing a home is definitely the American dream — and part of that is investing in yourself as an investment in real estate.”
However, navigating the path to homeownership can be challenging, especially when you have to come up with a down payment of up to 20%. And, unless you’re paying all cash, you’ll need to secure a mortgage, which could be an obstacle due to persistent higher rates.
2. Buy-and-hold property
There are many pros to buying a property outside your primary residence with the purpose of renting it out, either short-term or long-term. First, when you rent, you collect an additional monthly revenue stream. And then when you’re ready to sell, you have likely built equity and have the chance to pocket earnings on that end, as well.
Your local market may also simply have too high a barrier to entry to purchase a home for your primary residence, so buying a place in a less-expensive area with the intention of renting is a way to get into the market.
But remember, if you’re purchasing real estate as an investment, you’re going to need to factor in a slew of additional costs — including utilities, maintenance, repairs, insurance, and taxes — even if you’re not living in the home.
You can defray some of the hands-on sweat equity here if you get a property manager to help handle the needs of your rental property. Of course, that costs money, too — usually a percentage of the total rental take.
3. Long-term rentals
If this is a long-term rental, “it’s very important to buy in an area where you’re not going to deal with a lot of default in rental payments or evictions or frequent turnover,” says Ruiz. “Turnover of a rental property is actually more expensive than vacancy because with vacancy, it’s just the property sitting empty. When you turn the property over, you’re usually going to have a gap period, which could be a few weeks to get it painted and prepared for the next tenant and to get it marketed.”
While there are potential cons of investing in long-term rentals, if you can do it, you might find the payoff enormously rewarding.
“I bought our first rental property years ago, and it cash flowed $50 a month after all of my operating expenses were paid,” says Pappalardo. “Now, that’s not a whole lot of money, but it helped pay down my graduate school loans, so essentially over time, my tenant put me through graduate school.”
She adds that long-term rentals are also a good way to help boost retirement income later in life. “As rents increase and your mortgage gets paid down, your passive income grows over time,” she notes.
4. Short-term rentals
You might consider your property’s short-term rental potential — such as on the Airbnb market. Among the major pros: This can be a highly lucrative way to go, even much more so than long-term renting.
Consider the example of a Seattle property, as cited in The Balance: In that city, the average apartment rents for about $2,200 monthly, for a potential gross income of $26,400 annually. However, on the Airbnb market, the average daily rate for a rental in Seattle is about $150, which makes the possible gross income more than $40,500 if you rent it 270 nights in a year.
Of course, there are cons to this approach as well. Tenants of a long-term rental often pay many of their own upkeep expenses and utilities, but with Airbnbs, the renters expect you to handle all of that for them. And to be marketable, the property must be in tip-top shape. That means high-end furnishings, even some basic kitchen utensils and supplies, and other expenses.
You’ll also need to have patience, as success in this market can be seasonal and gradual — building over time as reviews accrue and word-of-mouth publicity spreads.
TV shows make flipping houses look easy and fun. If you manage to buy low — and that’s the most important piece here — you can generate a profit quickly. Make your strategic improvements and get that house back on the market as soon as possible, so you can pocket the profits fast.
But of course, there’s no guarantee you’ll make money. In fact, you could actually lose money if your renovations take longer than you expected, or you discover hidden costs, or if the market bottoms out before you’re able to turn the property around.
6. Real estate investment trusts (REITs) and online marketplaces
Real estate investment trusts (REITS) are companies that own or finance real estate. Most trade on major stock exchanges, and the strategy can offer a lot of pros to investors.
This is a way to get into real estate investing without having to actually buy or manage a home. You can simply buy into a REIT as a stockholder — as 150 million Americans do through their 401(k)s and other investment funds — and ideally watch that income grow. REITs can offer great returns and help you diversify your portfolio.
In addition to traditional REITs, there are some newer options on the market that might also appeal to investors. Consider Roofstock, the first online marketplace made just for investing in single-family homes. Another similar option is Fundrise, for which you only need about $500 to get into the game.
While there may be a lower barrier to entry here than purchasing real estate in the traditional sense, it’s also less hands-on. And while that can mean less stress, it can also deprive an investor of the chance to feel close to their investment, and to put in that sweat equity. It can still be a great investment, but it’s much less tangible for people who want to be involved with their real estate investments on a physical level.
The bottom line: Is real estate investing a good idea?
Like anything else, real estate investing comes with its potential stresses and financial risks. Consider that you might need to be prepared to hold onto your property for a long time to weather market highs and lows. And unless you’re investing in a REIT, you also might need a significant sum of money upfront to invest in real estate.
But experts still agree that getting into the real estate game is a smart path for wealth building through whichever investing option feels right for you.
“I’ve seen nothing but success in real estate investment during my 21 years doing this because if you are properly equipped to invest in real estate and understand that it’s a long-term investment platform, you’re going to do well,” assures Ruiz. “It’s the best way that I’ve ever seen people with limited means build a fortune. I don’t know of any other investment platform where a bank is willing to lend you the majority of the purchase.”
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Real estate investing FAQ
Real estate can be a great investment with the potential for both passive income and capital appreciation. Unlike stocks and bonds, real estate offers tangible assets and potential tax benefits. However, like any investment, it’s important to research and consider the risks and returns specific to your local market and investment strategy.
The initial capital required can vary widely based on the type of property, location, and financing method. While some investors buy properties outright, many start with a down payment on a mortgage. There are also real estate investment trusts (REITs) that allow individuals to invest with a smaller initial sum.
Active investing typically involves direct property ownership, where the investor is responsible for property management tasks such as finding tenants and handling maintenance. Passive investing allows investors to put their money into real estate ventures without handling day-to-day operations, often through vehicles like REITs or real estate syndications.
“The way to calculate your return on your investment is by calculating what’s called a capitalization rate, which is the velocity of which you recoup the capital that you’ve invested,” says Ruiz. It’s also important to consider factors like property condition, local market trends, potential for appreciation, and ongoing expenses. Consulting with real estate professionals or financial advisors can provide valuable insights.