- Judith Akatugba
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Investing in real estate can be lucrative as it offers the possibility of both long-term appreciation and passive income. It can also be a wise strategy to broaden the diversification of your portfolio beyond the conventional holdings of mutual funds, equities, and bonds.
Even while purchasing a property could be your first venture into real estate investing, there are many other ways to get involved in the market, including house flipping, rental properties, real estate investment trusts (REITs), and online real estate platforms.
These six real estate investments might help you diversify your holdings.
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1. Buy a rental property
Purchasing and renting out a property to either long-term or short-term tenants is a traditional real estate investment strategy. One of the biggest benefits of being a landlord is that you may write off a lot of the expenses related to the property, such as upkeep, depreciation, insurance premiums, utilities, maintenance, and administrative expenditures.
Of course, the drawbacks of owning rental property include the potential for lengthy payback periods, expensive startup expenses, and troublesome tenants. With the correct property, you can still benefit from good cash flow and long-term appreciation. Additionally, if you sell the house and purchase a “like-kind” property, you can postpone paying capital gains taxes by using a 1031 exchange.
2. Rent out a room
One great approach to experiment with real estate investing is through house hacking. The plan is to rent out a portion of your house, like an auxiliary dwelling unit (ADU), the basement, the attic, or a single room. Depending on how well the space is maintained, there may not be much start-up expenses. Moreover, the additional revenue can assist in covering your monthly housing costs as you accumulate equity and pay off your mortgage.
Investing in a multifamily property and renting out the remaining units while residing in one apartment is a more sophisticated housing hack. If you’re renting out a room or half of a duplex, you can use an online platform like Airbnb to identify long-term tenants or, if allowed, offer the area to short-term rentals.
3. Use an online real estate investing platform
In the realm of real estate investment, online platforms for real estate investing—also referred to as “crowdfunding websites”—are relatively new. These platforms connect prospective investors and developers so that they can pool their funds to finance real estate projects with as little as $500. Investors receive debt or equity in a project in return, along with distributions on a monthly or quarterly basis if everything proceeds as planned. These investments carry greater risk and are typically less liquid than publicly traded REITs, so you might not be able to sell your shares fast, even though they have higher potential profits.
While some platforms, like RealtyMogul, are exclusive to accredited investors, others provide opportunities for both accredited and non-accredited investors. Depending on the platform, investors usually pay an annual management fee that ranges from roughly 0.25% to 2.50%. Additional costs could also be involved.
4. Turn a house around
Purchasing a cheap property, making repairs, and then reselling it for a profit is known as house flipping. Purchasing the correct property can help you make money more quickly than managing one, but it’s not as simple as it seems on television. You must be able to identify a property’s potential and have a plan for making it a reality in order to be a successful flipper. In order to make a profit, you also need to have enough money, a trustworthy group of contractors, and precise cost-estimating abilities.
Effective project management abilities are also advantageous. You will save money on holding expenses, such as mortgage payments, utilities, property taxes, homeowners’ association (HOA) dues, and insurance, the faster you can sell the property.
5. Invest in a REIT
If you want exposure to real estate without the hassles and responsibilities of managing rentals, a REIT can be a great choice. An organization that owns and manages assets that generate revenue, such as hotels, retail establishments, offices, warehouses, medical facilities, and apartment buildings, is known as a REIT. A REIT owns a portfolio of assets and combines the capital of numerous investors, much like mutual funds. A proportionate amount of the income is earned by investors who purchase REIT shares.
The majority of REITs are easily and highly liquidly tradable on stock markets, which is one of their primary selling points. Rent received from its real estate holdings and space leased are how a REIT generates revenue. Dividends are how investors make money in return. REITs are required by law to distribute shareholder dividends equal to at least 90% of their taxable income annually.
6. Make a real estate investment group (REIG) investment.
A group of private investors that pool their resources and knowledge to purchase properties that generate revenue is known as a real estate investment group, or REIG. If you want to own rental properties but don’t want to be the only one in charge of managing them, they can be a smart choice for you. The buying power (and collective experience) of the REIGs is utilized to invest in a variety of real estate, such as commercial buildings, apartment complexes, and condominiums.
Positively, you can participate in deals that broaden your horizons and learn from other, more seasoned real estate investors by joining REIGs. On the other hand, if you associate with an inept or inexperienced organization, the investment may fail and membership costs may reduce your profits. However, if you investigate the group and find someone who shares your objectives and risk tolerance, joining a REIG might be a rewarding endeavor.
Time Stamp: There is a lot of possibilities when investing in real estate.
Numerous advantages can come from real estate investments, such as tax advantages, portfolio diversification, steady income flow, long-term appreciation, and the capacity to leverage your money. Nevertheless, there are disadvantages as well, such as a lack of cash, expensive startup expenses, and the fact that real estate investing can be a laborious process.
However, it’s important to keep in mind that there are a variety of real estate investment strategies, and some may be more appropriate than others. For instance, if you’re searching for an investment that provides both tax savings and hands-on control, rental property can be a smart choice. If you want a more liquid investment and a hands-off attitude, you could choose a REIT. You could invest in both rental properties and REITs if you want the best of both worlds. You are not limited to choose a single kind of investment, after all.
In the end, real estate investing is determined by your objectives, level of risk tolerance, and time horizon. You can choose an investment that suits you by doing your homework, consulting with a financial counselor, and investigating your possibilities.
Frequently asked questions (FAQs)
How much do real estate investors make?
The amount of money that a real estate investor can make is unlimited. For instance, it is said that Irvine Company founder Donald Bren has made $15.5 billion from his investments in commercial real estate. Naturally, not all real estate investors have this kind of success.
Based on their record over the previous 50 years, equity REIT investors may anticipate a total annual return of between 6% and 11%, according to data from Nareit (the National Association of Real Estate Investment Trusts). As of July 31, the YTD return was 5.03%.
Additionally, you can work in the field. The average annual compensation for real estate investors is $139,851, according to ZipRecruiter. Your location, the investment(s) you make, the quantity of transactions you do, your time commitment, your risk tolerance, your level of capitalization, and perhaps a little bit of luck will all ultimately determine your earning potential.
What are the benefits and drawbacks of real estate investing?
Real estate investing, like all investments, has advantages and disadvantages to take into account. Positive aspects of real estate investing include diversification of portfolios, long-term appreciation, passive cash flow, and tax benefits such as depreciation, tax-deferred capital gains, and deductions. The drawbacks of real estate investing include the potential for time commitment, declining property values, unpredictable income, and challenging quick sales.
Of course, there are risks and rewards associated with different kinds of real estate investments. Before determining whether a specific investment makes sense for your goals, risk tolerance, and financial circumstances, do your research.
Which are the best tax advantages of investing in real estate?
Depending on how you invest, real estate has different tax treatment.
The largest tax benefits are associated with rental property ownership. For instance, you might be able to subtract:
interest on a mortgage.
taxes on real estate and occupation.
Insurance premiums.
Maintenance and repairs (improvements must be depreciated).
utilities.
Advertising.
fees for professionals and attorneys.
Travel costs related to managing the property.
Home office expenses.
Devaluation.
Pay and benefits for both independent contractors and employees.
losses that insurance does not cover.
Capital gains taxes that are postponed (via 1031 exchanges).
a maximum deduction of 20% of your net rental revenue (this deduction is good until 2025).
When you rent out a room in your home, the same restrictions apply, but, as with the home office deduction, you can only deduct costs associated with the actual rented area and not the entire house. You can deduct 25% (300 ÷ 1,200) of your housing expenses, for instance, if you rent out a 300 square foot room in a 1,200 square foot house.
Whether you are treated as a dealer or an investor by the Internal Revenue Service (IRS) will determine how you are treated tax-wise when flipping houses. Consulting with an advisor is advised. You may be able to write off some costs associated with house flipping by forming an LLC. These costs can include building licenses, property taxes, and remodeling charges for houses that are sold. Generally speaking, though, capital improvement costs are not deductible. Rather, they are typically included in the property’s basis, which might lessen the amount of capital gains you have to pay when you sell.
Although other real estate investments don’t have the same tax advantages as rental property, you are still required to pay taxes on your income, capital gains, and dividends. To maximize the returns on your real estate assets, a tax expert or financial counselor can help you with tax strategy optimization.
