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 2020?
As with most forms of investing, there are many complexities and few ways to guarantee a sure thing. (Sorry… if only!)
In short, experts say — yes — real estate is generally still a very smart investment indeed.
“I’m a huge advocate of real estate investing — 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,” says North Carolina-based top-selling agent Kimberly Pappalardo. 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 simply, 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 now.
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.”
Cons include a potentially high barrier to entry — down payments up to 20%, though not every buyer in every market needs to save that full amount. And unless you’re paying all cash, you’re going to need to qualify for a mortgage, which could be an obstacle if your credit score needs improving.
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.
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
Now, if this is a long-term rental, what if you end up with a nightmare tenant who trashes your home? Or what if a tenant’s lease ends and you struggle to rent the property in between, leaving a big income gap? These are potential cons of such investing.
But 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
Or, 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 $2,000 monthly, for a potential gross income of $24,000 annually. However, on the Airbnb market, the average daily rate for a rental in Seattle is about $150, which makes the possible gross more than $40,000 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 might also need to have patience — even nerves of steel — as success in this market can be seasonal and also gradual, building over time as reviews accrue and word-of-mouth publicity spreads.
Watch five minutes of HGTV and you’d be forgiven for wanting to run out and immediately invest all of your money in fix-and-flip real estate. It looks so easy — what could go wrong, right?
Well, there are many pros to this approach. 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 stat, pocketing fast profits.
But of course, there’s no guarantee you’ll make money — in fact, you could certainly lose money. This can happen especially if your renovations take longer than you thought, or you discover hidden costs — or certainly if the bottom drops out of the market before you’re able to turn it around.
6. Real estate investment trusts (REITs) and online marketplaces
Real estate investment trusts, or REITs, are companies that own or finance real estate. Most of these 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 87 million Americans do through their 401(k)s and other investment funds — and ideally watch that income grow. These can offer great returns and help you diversify your portfolio.
In addition to these traditional REITs, there are some newer options on the market that might 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 need just a $500 account minimum 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 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?
Real estate investing comes with its potential cons — both 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 — another potential con.
But experts still generally agree that getting into the real estate game is a smart path for wealth building if you can swing it — through whichever among the investing options feels right for you.
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