Ever thought about dipping your toes in the real estate investing waters? If it’s right for you, writer Elizabeth Elstien shares some strategies to get you started.
Ever thought about dipping your toes in the real estate investing waters?
Research suggests that as many as 55 percent to 85 percent of millennials are in favor of buying real estate as an investment. If you’re already on track for retirement savings and have an established emergency fund, you may be considering real estate investing as a potential goal.
There are two primary ways to get your feet wet as a property novice. The first is buying a home or condo that you’d plan on renting all or part of to a tenant. This would require a down payment and the responsibility of being a landlord. The second is purchasing shares of a company who invests in commercial real estate. In this case, you’d act as an investor and share in the performance of their investments.
Residential Property Investing
Purchasing a property such as a multifamily home can be a profitable investment, but keep in mind you’ll need to provide a down payment up front along with closing costs. If the property is purchased as your primary residence—meaning you live most of the year in one unit of the property—you qualify for a residential mortgage just as if you were buying a house or condo for your family. This means you may be eligible for FHA or VA loans with lower down payment amounts. You can even get down payment assistance if you qualify in your locale.
Purchase through a real estate agent who is knowledgeable in area rents. Alternately, pay a property manager to view a few potential properties with you and provide insight into ease of renting units, items to be addressed for rental safety and livability and range of unit rental price(s) to make an informed purchase. Avoid making contract or monetary commitments on the property with your agent until you have all the information about the property.
Realistic rental rates for the unit(s) you plan on renting to others is important in your decision. After all, you need an accurate estimate to know if the rent(s) will pay all or a portion of your mortgage after expenses are deducted. These include utilities, maintenance/repairs, insurance, property taxes, management, advertising, and more. If you choose to manage the property yourself, you will save money on management fees, which can be around 10% of rents plus any surcharges for maintenance or repair work.
Commercial properties are harder to get into as a beginner due to tighter loan and insurance requirements, as well as the high amount of capital needed. A Real Estate Investment Trust (REIT) provides a way for the average person to claim a stake in commercial property ownership.
REITs can hold an office building, industrial warehouse, data facilities, retail shopping mall, apartment complex, resort, hotel or self-storage facility. They typically have one property type in their portfolio, but some have multiple types.
Think of a Real Estate Investment Trust as a property manager. This property manager may own several buildings that lease out commercial space to its tenants. Buying a share in the trust is like owning a piece of that property manager’s real estate portfolio, and as an investor you’d be participating in the performance of that commercial real estate investment.
Although you’d be purchasing shares of the Real Estate Investment Trust as an investment, you wouldn’t need to provide the down payment or closing costs that would be required to purchase your own commercial real estate or residential property investment. That’s why purchasing shares REITs typically provides a simpler way for consumers to get into commercial property ownership.
REITs may be available as investment options in pension plans, 401(k) plans, IRAs or in non-retirement investment accounts. You may already own a Real Estate Investment Trust as part of your own employer’s 401(k) retirement plan. The tax laws on Real Estate Investment Trusts are complicated though, so it’s important to consider how any investment can impact your personal tax situation.
Is Real Estate Investing Right For Me?
Purchasing real estate as an investment strategy can be worthwhile, but it doesn’t come without risk. Just like in the stock market, there’s always a chance your investment can lose value. So make sure along with your technical research of a piece of property or REIT, you spend some time considering your financial goals, your time horizon, and your risk tolerance before making any decisions. And make sure to discuss with your financial planner and/or accountant to determine if you are financially prepared to dabble in real estate investing.
Using her 14 years experience as a Realtor®, Elizabeth R. Elstien is a real estate writer, editor, educator, and consultant. Follow her Real Estate News & Views blog at eElstien.com.
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While Society of Grownups hopes the information is useful, it’s only intended to provide general education. It’s not legal, tax, or investment advice, and may not apply or be useful to your specific financial situation. If you need recommendations geared to your personal financial situation, schedule time with a financial planner.