Understanding how to invest in real estate opens a world of financial opportunities for you. You can buy a property for long-term gains in appreciation, or you can experiment with house flipping for a faster payday. You can hold a property to collect monthly passive income, or you can develop a property from scratch and immediately sell it. You can even choose to invest in commercial property or explore alternative real estate investments.
But you need to know where to start. And you need to know your options.
In this article, we’ll explain:
- How to start investing in real estate as a beginner, including buying your first home as an investment and buying your first investment property (to either hold for the long-term or flip).
- Advanced methods of investing in real estate, including property development and commercial investing.
- Alternative methods of investing, including REITs, crowdfunding, and real estate syndication.
By the end of this article, you’ll be able to decide which property investment option works best for you in your current stage and which options will best serve you in the future.
How to start investing in real estate as a beginner
If you’re brand new to property investing, you’re likely looking to start the traditional way by purchasing your own home. After that, classic real estate investors typically purchase a second property specifically as an investment.
Let’s take a closer look at these beginner-friendly options.
Buying your first home
Your primary residence is absolutely an investment. Over the long term, you’ll pay down your mortgage debt and watch your equity grow. At some point in the future, you can sell the property for a profit or choose to live free-and-clear in the home once your mortgage is paid off.
You could even “house hack” by renting out a portion of the property to pay part (or all) of your mortgage while you live in the remaining portion.
- There are several benefits of buying your own home as an investment, including:
- Instead of throwing away money on rent each month, you gain equity in a valuable asset.
- You can leverage your equity in the future to fund additional investments.
- Tax breaks.
- It’s typically easier to secure funding for a primary residence, especially a first home. You can take advantage of programs designed for new homeowners and lenders will usually grant loans with lower down payments for primary residences than for investment properties.
There are also a few potential downsides of your home as an investment, like:
- Unless you have a large enough property to “house hack,” you won’t see any monthly income from your investment.
- Your home will require regular maintenance, and you’ll need to budget for unexpected repair and replacement expenses.
- You’re on your own. Once the agent closes the deal, you won’t have expert real estate advice for the ongoing ownership and maintenance of the home.
Buying your first investment property
Once you’ve had your own home for a period of time, you’ll be a confident property owner, and you will have had some time to save enough money to purchase a property specifically as an investment.
There are two traditional routes for this first investment property: buy-and-hold or fix-and-flip.
Buy-and-hold is when you plan to own the building long-term and earn income by renting the property out to tenants.
You can opt for long-term renters (typically signing a lease for one year at a time), or you can do short-term vacation rentals (anywhere from one night to a month at a time).
Short-term rentals can bring in more money, but they also require more active involvement because you’re always getting the unit cleaned and ready for the next guest. Short-term rentals are also only viable in areas that see travelers visit regularly. And they typically come with higher vacancy rates due to the constant turnover.
Long-term rentals may bring in less income, but they are more stable and require less attention than short-term rentals. And long-term rentals can work in any area because residents of that area need long-term accommodations.
The primary benefits of buying and holding include:
- Monthly income.
- Tax breaks.
- Someone else pays down your mortgage to grow your equity.
The key potential downsides of buying and holding are:
- Ongoing maintenance expenses in addition to the substantial upfront investment required from all investment properties.
- Potential issues with renters (failing to pay rent, trashing the home, or creating disturbances in the neighborhood).
- The logistics of finding new renters and getting the property ready before each move-in is often time-consuming and expensive.
Fix-and-flips are when you buy a distressed property with potential, renovate the property, then turn around and sell it. Flipping houses usually takes about 6-12 months.
The main benefits of fixing and flipping include:
- A relatively quick turn around.
- Control over the renovation project.
- High value-add potential.
- The satisfaction of upgrading a tangible property.
And here are some potential downsides to consider:
- Not only do you need to have cash available for the down payment and closing costs, but you also need cash on hand for the entire renovation.
- The process requires hands-on involvement. Even if you hire a supervising contractor, you’ll want to oversee the project to make sure you’re on schedule and on budget.
- Experience is critical to success as a flipper, and it can be difficult to get experience without making major missteps and costly mistakes.
- Finding the right property requires careful market analysis. And since the deals with the most potential may be outside your local market, knowledge of multiple markets is often necessary to maximize profitability.
- You’re on the hook for finding a buyer quickly. You’re losing money every day the house sits on the market.
Advanced methods of investing in real estate
Once you’ve owned your own home and purchased an investment property or two, you are ready for a more advanced method of investing in real estate.
Consider real estate development or commercial property.
How to develop real estate projects
Real estate development typically involves purchasing a piece of property, tearing down any existing structures on the property, and building a new project from the ground up. The development could be multi-family rental property investing, commercial office space, or even industrial complexes.
The key benefits of development include:
- The excitement of building from scratch.
- Potential for substantial returns due to the value added to the project.
- Quick sales in areas where these properties are high in demand or monthly rental income when the development is complete.
And here are the potential downsides of development:
- Development requires even more capital than purchasing an income property because you need to fund the entire build.
- You need the right zoning approval in order to build. This zoning regulation can potentially limit you to certain areas.
- You need a team of experts from real estate analysts to architects to designers.
- There is more room for mistakes when building from scratch.
- Your investment is tied up for years before you see any returns.
How to invest in commercial real estate
If you want to expand your portfolio beyond low-unit residential properties, you might want to consider getting into commercial real estate investing.
Commercial properties include categories like:
- Retail stores,
- Shopping centers,
- Fitness centers,
- And medical facilities.
With so many varied property types available in commercial investing, you’ll always find new investment opportunities. And including commercial properties in your portfolio can help diversify your assets to mitigate the risk of ever-changing economic conditions.
- Here are some of the key benefits of commercial real estate:
- You can often get long-term leases (often 1-10 years) that provide stable cash flow if you buy and hold.
- Favorable financing rates are typically available for commercial real estate investments.
- You can take advantage of tax benefits.
- Adding commercial properties further diversifies your portfolio.
And here are some of the potential downsides of commercial investments:
- There is substantial capital required upfront, and obtaining financing can be challenging.
- You need specialized knowledge (if you’re going to hold the property, you’ll need to understand things like commercial leases, how to allocate common area maintenance charges, and how to handle tenant improvements).
- There is a higher level of risk with traditional commercial types like retail and office space than with standard residential. People will always need a place to live, but places to work or sell goods are becoming more optional.
Alternative ways to invest in real estate
What if you want to invest in real estate, but you don’t have enough cash available to purchase a property on your own? Or maybe you have plenty to invest, but you don’t have the time to manage a development project.
In either case, alternative investments might be a better fit for you.
Real estate crowdfunding is the general term for any investment strategy that pools funds from multiple investors to purchase a property and share in the profits.
You can crowdfund any of the investment types we’ve already covered: buy-and-hold residential, fix-and-flips, new developments, and commercial.
The benefits of investing through crowdfunding include:
- Comparatively low minimum investment amounts. You can often buy into a deal with as little as $10,000.
- Leverage. Pooling your money with other investors gives you access to the types of projects you might not be able to afford on your own.
- Diversification potential. With low investment amounts, you have the option to spread your investment among multiple projects.
- Flexibility. There are opportunities for a wide range of budgets and time frames.
- Passive income. Since crowdfunded projects are handled by a manager or sponsor, you won’t need to actively work on your project to reap the financial rewards.
The potential downsides of investing through crowdfunding:
- Since modern crowdfunding through online apps is fairly new, there isn’t a long history of performance data available.
- You won’t have control over the direction of your project.
- Like most real estate investments, crowdfunded investments are not easily liquidated. Your money will be tied up for the duration of the project.
- You might not actually own a share of the underlying property. Many crowdfunded projects use debt funding rather than equity funding, so you would own the debt instead of the property itself.
If liquidity and diversity are important to you, consider REITs (Real Estate Investment Trusts). REITs are essentially mutual funds made up of stocks in real estate-related companies.
The benefits of investing in REITs include:
- Very low investment minimums. You can purchase shares for only a few hundred dollars.
- Moderately high liquidity since REITs are traded like stocks and bonds.
- Automatic diversity since each REIT share is comprised of stock from multiple companies.
The potential downside of REITs include:
- Lack of control. Not only do you not get to choose which projects to invest in, but you also don’t get to decide which specific real estate companies are included in each REIT.
- No ownership of the asset itself. You’re investing in real estate companies, not the properties they own.
3. Real estate syndication
Real estate syndication is a special type of crowdfunding relationship between a group of investors and a fund sponsor. With syndication, the fund sponsor and all investors join into a single legal entity for the express purpose of investing in a project. This unique entity creates a stable and transparent legal ownership structure.
In addition to all the benefits of crowdfunding, syndication offers several additional benefits:
- The ability to choose your specific projects (some general crowdfunding platforms also offer this option, but some do not).
- Equity ownership in real estate projects (this may or may not be the case with general crowdfunding).
- Transparency. While the exact availability of project data varies by sponsor, syndicate investors typically have access to the entity’s records, so you can see exactly what’s happening with the project at any point.
- You get a professional team of experienced architects, designers, and market analysts to handle the entire transaction from start to finish.
In addition to the few downsides of crowdfunding, there is one specific potential downside to syndication:
- You must qualify as an accredited investor. If you don’t have the income or assets to qualify today, you can always start with other property investments, and build your equity and income until you reach this level, which gives you access to more prestigious investment opportunities.
How to Invest in Real Estate Syndication
Sign up with Gatsby Investment today to take advantage of the many unique benefits of syndication investments.
Complete the quick sign up, get accredited verified, and choose your investment project(s). Then you can kick back and watch the progress on your development project as our experienced team skillfully handles the details for you.
With Gatsby Investment, investing in real estate is enjoyable and stress-free. Sign up today!