There are many reasons people get into real estate investing, including to help diversify investment portfolios, generate cash flow and hedge against inflation. Real estate investments can also create passive income and offer tax benefits, such as the ability to deduct mortgage interest, real estate taxes and depreciation. While some real estate investment strategies require hands-on management of the property, other options allow investors to own real estate without becoming a landlord. Below are five potential ways to get started investing in real estate.
1. Buy a Rental Property
One way to start investing in real estate is to buy a rental property. The investor would purchase a commercial or residential rental property and serve as the landlord. This type of investment would require more hands-on work than some other options, but it could generate rental income and tax deduction benefits. Depending on their goals, the investor can either hold their property or flip it:
- Buy and hold real estate – The real estate could be held and rented to generate income with the intent of growing the initial investment through rental income and market appreciation.
- Buy and flip real estate – Investors could purchase lower-priced real estate and put in the work to repair and improve the property. Fixing up the property requires more hands-on work, but it can increase the property’s value in a relatively short time. The improved property could then be sold for a profit or held for rent.
2. Invest in a Real Estate Investment Trust (REIT)
A REIT is a company that owns, operates or finances real estate. Many REITs are publicly traded, like stocks and bonds, so they are highly liquid, pay dividends and require no hands-on management.
3. Convert a Personal Residence to a Rental Property
An investor could convert their own home into a rental property rather than selling the home when ready to move to a new home. The rental income would help cover the mortgage on the property and allow the investor to build equity while not requiring much, if any, additional investment. As an added benefit, the investor could start taking depreciation on the rental property.
4. Invest Through Real Estate Funds
Real estate crowdfunding platforms connect real estate developers with investors to finance real estate projects. Investing through a real estate fund requires capital from the investor to make the investment, and the investments tend to be illiquid. However, pooling funds allow investors the opportunity to purchase larger properties, like commercial properties or multi-tenant residential properties, that might be too expensive for one single investor.
5. Buy a Vacation Rental Property
An investor could purchase a vacation home or condo and rent the property when they are not using it. The investor could enjoy the benefits of owning a vacation home while receiving rental income and taking advantage of the tax deductions. Like with other rental properties, the investor would be responsible for finding renters and maintaining the property unless they use a property management company.
The real estate investment strategy an investor chooses will depend on several factors, including the investor’s financial situation, the desired level of involvement required by the investment and the time-horizon of the investment. Once an investor determines these factors, they can identify the real estate investment option that works best for them.
If you’re considering investing in real estate, the Anders Real Estate Group can help decide the best option for you. Contact an Anders advisor below to learn more.
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