Published by The Motley Fool | October 17, 2024
No matter what type of investor you are, there's bound to be a type of real estate investment that will fit your needs
Real estate can be a valuable addition to an investment portfolio. Not only is each piece of real estate unique, they’re not making any more of it. Real estate is a great way to enhance your investment, no matter what type of real estate investing you pursue.
There is a huge range of options for real estate investors, whether you want to be a very hands-on investor or a completely hands-off one.
What to know about investing in real estate
Investing in real estate is the pinnacle of investment achievements in the eyes of many new investors. Unlike stocks and bonds, real estate can be touched and stood upon, regardless of market conditions. When the market tanks, you still have a piece of the planet that’s not going anywhere. For plenty of investors, this is a sort of comfort they can’t find in other types of investments that may seem more ethereal — even if they’re secured by very real companies.
Unfortunately, a lot of people have the flawed belief that real estate can only increase in value, which is not true. If a property falls into disrepair or an area is no longer popular, you could see smaller returns or even a collapse of your property’s value. Unlike stocks, you have to maintain real estate — whether you do it yourself or hire someone — and you have to pay other expenses, such as taxes and insurance, even if you’re not making a profit.
Although real estate does tend to retain some kind of value even in the worst of times, it’s hardly a sure thing. Like any kind of investment, it’s important to understand your real estate market, your competition, your potential clients, and your property’s potential for income. Most real estate investing isn’t very sexy, but it can serve as a balance to riskier stocks and other investments such as cryptocurrencies.
Today’s real estate investors also have the added challenge of trying to work within an increasing interest environment. Although the federal funds rate does not directly dictate the cost of real estate loans, it determines what banks pay to borrow money, and is felt acutely by borrowers. With real estate values up and interest rates on the rise, it can be more difficult (but not impossible) to make a profit with real estate in the near-term.
Seven ways to start investing in real estate
Although many people think of buying a small rental property when they think about real estate investing, there are actually a lot of different ways to get into the real estate market. Each comes with risks and rewards, and many are unique investment experiences.
1. Land speculation
Land speculation happens when you purchase a piece of land with the intention of reselling it, either whole or in parts. In some areas of the country, you can own land but sell the water rights or the mineral rights to other entities such as mining operations or oil and gas companies.
Although land speculation is often a short-term form of real estate investing, a savvy investor who understands the needs of the industry they’re courting — oil and gas miners, farmers, homebuilders, or commercial developers — can make a tidy profit by choosing the right land parcel at the right price at the right time.
Land speculation is pretty straightforward but can be risky. You’ll need to understand exactly what benefits your land holds for its particular market, its current value, and its potential. You’ll also need to hire experts to document all of this.
Because land speculation is generally about being a middleman between land sellers and land developers, there is a fair amount of risk involved, especially if the interest in property in your area starts to wane. Remember that mall they kept saying was going to go in 20 years ago and is still an empty patch of grass?
2. Property flipping
By now, everyone knows about property flipping. But what you see on television isn’t the whole picture of what’s involved in successfully purchasing a residential property, fixing it up, and selling it to someone who will love it. You’ll need substantial capital to cover labor and supplies, as well as a construction crew or subcontractors you can trust. You also will likely be subjected to multiple inspections, all of which you must pass before being allowed to market your property.
Construction loans are possible, but they are often difficult to obtain as a first-time flipper due to experience requirements and other bank-imposed terms. However, in the current real estate market, a flip that’s priced accordingly and will appraise for the asking price may not sit very long at all. Be prepared to make additional repairs that the buyer’s inspector finds. No house is perfect, no matter how many people have been working on it.
In a worst-case scenario, your flip house can be converted into a rental property. This isn’t ideal, of course, and it will take a lot longer to recover your investment, but it can be a solution if the property can’t find a buyer. Sometimes, the market turns after you’ve started a project, and the only option you have is to keep going forward. Always have an exit strategy when getting into property flips.
3. Short-term rentals
Short-term rentals are a great way to make a little extra money with spare houses or accessory dwelling units (ADUs) already on your property. When you rent short-term rental units out by the night or the week, you can be very choosy about who gets the keys. You can also potentially see more significant returns than you would with a regular residential lease.
Take care that the neighborhood that houses your short-term rental property allows for that kind of transaction since many homeowners associations and towns are on the warpath against short-term rental landlords, and others have banned them outright. You also need to be right on top of your customer service game since guest reviews can determine your rental’s popularity.
