HOW TO INVEST IN REAL ESTATE
Real estate comes with incredible benefits for investors.
As a source of passive income, it never dries up or matures, but instead provides ongoing income with no loss of assets. In fact, the underlying asset appreciates over time, even as you pay down the mortgage against it. That makes real estate investment an excellent source of retirement income. It diversifies your asset allocation and protects against sequence of returns risk because you don’t need to sell any assets to produce the income.
Then, there are the tax benefits. Investors can deduct for every conceivable expense, from mortgage interest to maintenance costs to property management fees. They can even deduct some paper expenses that they never actually incurred, such as depreciation.
But for all those advantages, it also comes with its share of downsides and risks. Each property requires a high cash investment in the form of a down payment and closing costs. Real estate is notoriously illiquid, making it expensive and slow to sell. It also requires both skill and work to invest in, unlike stocks, which you can buy instantly through an index fund with no specialized knowledge.
Still, the knowledge and skill that you need to buy your first property isn’t rocket science. Anyone can learn how to invest in real estate.
Here are seven tips to follow when buying your first investment property to avoid pitfalls and earn a strong profit from the outset.
Get the
Numbers Right
Turnkey
Properties
Stay Detached
& be Patient
Negotiate
Arrange
Financing
Don't Bank
on Appreciation
Be Prepared
to Evict
Direct real estate investing is not a good fit for many, or even most, people. They just don’t have the patience and discipline.
Fortunately, you don’t have to invest directly to gain real estate exposure in your portfolio. Indirect ways to invest in real estate include REITs, which you can buy instantly through your brokerage account or IRA. You can also invest in real estate crowdfunding websites.
While these once allowed only accredited investors to participate, a few, such as Fundrise, now allow anyone to invest.
If you do have the interest, patience, and temperament to invest directly in real estate, your discipline will be rewarded with predictable returns, strong tax benefits, and high-yield passive income. One easy way to buy your first investment property is to live in it by house hacking. Contrary to popular belief, you don’t have to buy a multifamily property to house hack. You can house hack with roommates, with an accessory dwelling unit, by renting out rooms on Airbnb, or even by bringing in a foreign exchange student.
You have plenty of options for real estate investing, whether you choose direct ownership or a more hands-off approach. Either way, make sure you do your homework and vet each investment carefully, paying particular attention to the numbers.
