In the United States, almost 2/3rds of people own the home they live in. Home ownership is usually the first experience of real estate ownership or investment for most people. It can be an expensive ask to try and make a down payment and grab your first property though, which is usually what stops people from getting started. There are ways around this though.
If you’re lucky enough to have the cash available, it’s always best to buy a property outright and keep the investment to yourself. For some people, even a down payment for our homes is too much, so we need other options. For others, there’s a big investment opportunity available but at a much bigger cost than what they could fund alone. In either situation (and everything in between) there are still options available to you.
Firstly let’s talk about mortgages and loans. I’m sure you already know what a loan is, and a mortgage is basically just a loan which is secured against your home. The bank will loan you most of the purchase price as long as you show you can make the payments. Your credit score affects what mortgage rates are available to you but generally, the interest is lower than on a loan because the amount is so large, is secured against real estate, and the principal is paid back over a longer time period.
When starting off you probably can’t buy real estate outright, so taking out a loan or mortgage is the way to go. If even a single deposit is out of your reach though, there are joint funding options available to you. This can be in the form of a houseshare, a crowd-funded purchase with a group of investors, or even the use of a real estate investment trust (REIT).
A REIT works the same way as a mutual fund, except it invests in property instead of in stocks & shares. The trust pools together cash from a number of investors and then starts making moves on the property market. A trust could have a few holdings or thousands, and the value of the trust can be a few hundred thousand dollars or multi-millions. There are trusts of all types. Buying into a REIT or a crowd-funded purchase is a lot cheaper than buying the property alone. It means you only own a small percentage though, which is often tied to what you can afford up front, so you’ll only get a percentage of the gains too.
Types of Real Estate Investment
It’s important that you figure out early on what you want from your real estate investments. There are different strategies which make huge differences to what you can earn and when it’s paid to you. Let’s go over the big ones now.
This is where your investment is tied to the value of the property. Your aim is to buy cheap and hold while the price rises. This is a popular technique for real estate investments because the prices almost always move up over the long term. There’s only a certain amount of property available in the world, and as population increases, there’s more demand for what already exists. Keep in mind there can be crashes and price drops, the general idea here is to hold over the very long-term, often decades at a time, to see an increase.
The exception here is when an area suddenly becomes much more popular than it was. Gentrification can cause this, as can an increase in available jobs. Likewise, a natural disaster or downturn in nearby areas could drive more people to your area, boosting prices. These methods can see a fast increase in price, making them a potentially great shorter term investment too. Unless you have good reason to believe one of these situations will happen, shorter-term it’s best not to expect a sudden upturn.
Other times this works well is if a property becomes available for below cost. It can then be bought and turned around for a profit in a short amount of time.
With cash flow, you aren’t buying a property just to hold and sell when it increases in value. The idea here is to rent out the property and collect rent as income. The rent can be used to pay off any outstanding debts such as a mortgage, and also to fund the maintenance and management of the property.
Once these factors are covered, any leftover cash is yours as profit. Of course, you still own the property too, so if it does increase in price, you can still sell and make a profit. That isn’t the aim of this strategy though, the aim is stable, long-term cash flow. People interested in following this strategy go for real estate that will be popular and easy to rent out, such as apartments or land which has particular zoning permits.
Here you would buy some real estate and increase its’ value, selling it for a profit. This could be a rundown property which needs renovation or other work before being suitable for use. It could also be property which you buy and build additional buildings/rooms on, increasing value in that way. Yet another option would be to buy a rental building, increase the value by raising prices or adding features like vending machines, then selling the now-operational building to somebody else at a higher price.
There are all sorts of real estate investments, with most of them falling into one of these categories or even combining them. You can definitely buy a house, fix it up, earn rental income, and flip it for a profit when the time comes – there’s no need to be constrained into one type of investment, but you should know up front what your primary strategy is.
There’s no quick and fast answer to real estate investments, it’s a matter of choice. The cheapest way to get started is with a single residential or commercial property. From there you can expand into other areas like industrial real estate or construction, which are more expensive options.