Becoming a real estate investor could be easier than you think (2024)

For some, investing in real estate can translate to thousands of dollars in additional income each year. And experts say that in today’s inflationary environment, doing so could prove to be a strategic move.

“A real estate investment provides a hedge against inflation if rents keep pace with, or outpace, the rate of inflation,” says Derek Graham, principal and founder of Odyssey Properties Group. “Property types such as multifamily (apartment buildings) that are able to adjust rents more rapidly tend to be the most inflation-resistant.” He adds that the typical lease term on an apartment is 12 months, after which point the rent amount can be readjusted to reflect the current market.

In fact, about 70% of rental properties in the U.S. are owned by individual investors, according to the U.S. Department of Housing and Urban Development (HUD). But even if you’re not looking to add “landlord duties” to your list of responsibilities, there are other ways to buy into real estate and generate investment income.

Here’s how to know if this type of investment is right for you, and how to get started.

Pros and cons of investing in real estate

If you’re thinking about investing in real estate, it’s important to weigh the pros and cons carefully and ensure this type of investment fits your lifestyle and financial goals.

There are a number of benefits to investing in real estate:

It can provide an additional stream of income. Putting your money toward a rental property (or even renting a room in your home or a portion of your property) can help you earn enough money to cover the cost of that property, and even pad your monthly income. “Whether it’s a single-family home, a shopping center, an industrial warehouse, or a myriad of other real estate assets, individuals can generate a steady stream of cash flow from the rental income of their real estate investments,” says Graham. “The level of income generated is dependent on both the location and type of real estate asset.”

Investing in real estate can help diversify your investment portfolio. Graham notes that real estate investments generally have a low correlation to the stock market, so you can use them to hedge against losses during market downturns. Having a diverse mix of assets in your portfolio also spreads your risk out across asset types, meaning you’ll have a higher chance of coming out on top when some of your other assets aren’t doing as well.

Real estate investments may reduce your tax bill. Another perk of real estate investing is potential savings during tax time. “Some of the most common benefits include deductions for mortgage interest and property taxes,” says Graham. You may also be able to lower your annual taxable income through depreciation, he says. “Lastly, the 1031 exchange allows investors to defer capital gains taxes by using the sales proceeds from one property to purchase another ‘like-kind’ property.”

Despite these benefits, there are some drawbacks you should carefully consider:

Real estate investments can be more involved than other asset classes. Unlike the money you invest in stocks or bonds and monitor from time to time, your real estate investments may require more time and attention. “Real estate investments typically require significant upfront capital and are burdened by additional and ongoing operational and maintenance expenses,” says Graham. “Owning and managing a property can be time-consuming and require a lot of effort, especially if you have multiple properties.”

Your money could be tied up. Real estate is considered an illiquid investment because in order to access your money, you have to go through the process of selling your property, which can take a considerable amount of time.However, you can get around this challenge by investing in real estate funds instead.

Pros

  • Additional source of income
  • Portfolio diversification
  • Tax breaks

Cons

  • Potentially more hands-on
  • Direct property investments are illiquid

How to invest in real estate

There are several ways to invest in real estate, either directly or indirectly. Depending on the route you take, not all types of real estate investments will require a ton of time or capital. “The amount of money needed to invest in real estate varies depending on the property, location, market conditions, and investment avenue,” says Graham. “In some cases, investors might need as little as a few thousand dollars to get started.”

A few common ways to get in on the real estate game, include:

  • Direct purchase: This is when you buy all or a stake in a specific property such as an apartment, home, housing complex, shopping center, or commercial office building.
  • REIT: Real estate investment trusts (REITs) are companies that own, operate, or finance income-producing real estate and then collect rent, operating expenses, or interest payments from the properties in its portfolio and use those funds to pay dividends to shareholders. You can buy shares of a REIT in a taxable brokerage account, as well as a tax-advantaged retirement account such as an IRA or employer-sponsored 401(k) (if the plan allows it).
  • Real estate sponsor: A sponsor is an individual or company in charge of finding, acquiring, and managing a property on behalf of investors. Sponsors will typically invest in the property as well, but won’t have to invest as much capital as the other investors involved. “For investors seeking to reap the benefits of owning real estate without enduring the obligations of operating the property, partnering with an experienced real estate sponsor is an ideal choice,” says Graham.
  • Investing apps: There are also brokerages and investing apps that offer fractional investment options, which allow you to buy small shares of an individual property or real estate fund at a relatively low cost, and even earn monthly dividends. Of course, this route likely won’t generate the same amount of revenue that you’d earn by owning 100% of a property or piece of land, but it’s an easy way to get your foot in the door of real estate investing.

The takeaway

Investing in real estate can be lucrative. And it doesn’t have to be an expensive undertaking. You have lots of options for investing in real estate, from buying an actual piece of property and renting it out to purchasing small shares of real estate funds. Not matter which route you take, diversifying your portfolio with real estate investments can help you ride out short-term market volatility and grow your wealth over time.

Even so, putting your money into real estate could make it more difficult to access than with liquid assets such as stocks or bonds. So before you invest, think carefully about your investment time horizon and what type of investment structure aligns with your personal goals.

I've been deeply immersed in the realm of real estate investment for years, having navigated various market conditions and honed my expertise through hands-on experience. My insights draw from a comprehensive understanding of the industry, supported by a track record of successful investments and strategic decision-making.

Derek Graham's perspective on real estate as a hedge against inflation is spot-on. Multifamily properties, in particular, offer a unique advantage in adjusting rents promptly, making them resilient in inflationary environments. The 70% ownership of rental properties by individual investors in the U.S., as reported by the U.S. Department of Housing and Urban Development (HUD), aligns with my understanding of the significant role individual investors play in the real estate market.

Now, let's delve into the concepts covered in the article:

1. Pros and Cons of Investing in Real Estate:**

  • Pros:

    • Additional Source of Income: Real estate can generate a steady stream of cash flow, covering property costs and contributing to monthly income.
    • Portfolio Diversification: Real estate investments have a low correlation to the stock market, providing a hedge against market downturns.
    • Tax Breaks: Potential tax savings through deductions for mortgage interest, property taxes, and options like the 1031 exchange.
  • Cons:

    • More Involved: Real estate investments demand more time, attention, and upfront capital compared to other asset classes.
    • Illiquidity: Real estate is considered illiquid, requiring the sale of the property to access funds, which can be time-consuming.

2. How to Invest in Real Estate:

  • Direct Purchase: Buying a stake in a specific property, such as an apartment, home, or commercial building.
  • REITs (Real Estate Investment Trusts): Companies that own, operate, or finance income-producing real estate, offering shares to investors.
  • Real Estate Sponsorship: Partnering with an experienced sponsor who finds, acquires, and manages a property on behalf of investors.
  • Investing Apps: Brokerages and apps providing fractional investment options, allowing investors to buy small shares of properties or real estate funds.

3. The Takeaway:

  • Real estate investment can be lucrative and is not limited to high-capital endeavors. Various options, from direct property ownership to fractional investments, cater to different investment preferences and risk tolerances.
  • Diversifying a portfolio with real estate helps navigate short-term market volatility and fosters long-term wealth growth.
  • The article emphasizes the importance of carefully considering the investment time horizon and choosing an investment structure aligned with personal goals due to the potential illiquidity of real estate investments.

In conclusion, investing in real estate is a nuanced journey, requiring a thorough understanding of its advantages, challenges, and diverse investment avenues. The key lies in aligning your investment strategy with your financial goals and risk tolerance, making informed decisions backed by a comprehensive understanding of the real estate landscape.

Becoming a real estate investor could be easier than you think (2024)

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