Why Real Estate Investing?
Most people have some sort of savings account, retirement plan, or investment portfolio. For most of us, investment portfolios usually consist of stocks, bonds and mutual funds. Most commonly, we're investing in those accounts through a company 401k plan or similar retirement plan. Although these plans can be beneficial and can produce good results over time, they do not necessarily enable us to produce monthly cash flow or have much control over our retirement and future planning.
With a traditional 401k offered through an employer, we're offered to invest in specific accounts set up through a broker. These accounts can be vast or limited. Regardless, you can usually only invest in those specific accounts. This leaves you without much control. Instead, you're relying on CEOs and company boards of directors to make decisions that hopefully influence the value to increase on your investment. Ultimately, you do not have much control on whether your investment appreciates in value and sets you up for success or if it fails.
Real estate, although not super well-known, is a great way to diversify your investment portfolio. Many prefer real estate simply because it's tangible. It is something you can touch and feel. Not a number on an invesment account screen. With real estate, you will always have value. That value may change over time, but it will always have value.
They're not making any more land. Therefore, land will always have value and be worth something.
In addition to real estate always having value, there are tremendous tax benefits to owning real estate. You can depreciate the real estate over time reducing your tax burden (all the while it's actually appreciating in value in most cases). Capital expenditures are tax deductible. Investors can harness the power of a 1031 exchange when they want to sell a property to buy another (or two or three).
Real estate is also a hedge against inflation. What does that mean? That means that real estate fights inflation. For example, what $100 could buy in 1995 is definitely more than what it could buy today. With real estate, the value generally grows with inflation (or faster). So lets say that it took $100,000 to buy a home in 1995. Today, it would take $300,000. Taking inflaction into account, the homes values has grown with or faster than inflation. Meaning, that home is likely worth $350,000 or more. It is not a losing asset.
Cash flow is one of the largest benefits of buy and hold real estate investing.
As opposed to other traditional investments, like a 401k, buy and hold real estate investing actually pays you. With buy and hold investing, you own rental properties. Each month, the tenant of that property pays rent. In turn, after any fees are taken out, including a mortgage payment, you are paid the remainder. All the while, the property is appreciating in value in a stable and growing market and with a well-maintained asset. You're double dipping in all the best ways. You get paid monthly and have an asset that is growing in value. It is like having a Picasso painting on your living room wall that spits out a check every month.
There are other benefits to real estate investing as well - specifically buy and hold real estate. However, the above ones are some of the biggest reasons knowledgeable, smart investors are diverifying into real estate assets.
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How do I invest in Real Estate?
Here are the most common ways to invest in real estate:
Buy and Hold
There are other types, such as REITs or REIGs, but those rely mostly on other individuals or investing in specific plans whereas we focus on investing for individuals.
Made popular by numerous TV shows on HGTV and other cable channels, flipping has become a huge trend for those wanting to invest in real estate. Although Chip and Joanna Gaines make it look glamorous and easy, it is one of the highest risk real estate investments avenues. Why?
Flipping requires lots of cash. You must be able to purchase a property, pay for all repairs, hold the property which includes utility bills, taxes, any loan payments and more, and ultimately the risk you're selling in a great market and getting the amount you originally intended on receiving. In addition, flipping is heavily involved - it is not passive. You must constantly be involved in the process, monitor the rehab, and more. For those with lots of time on their hands, flipping can be an option.
When a person wholesales a property, they essentially are playing a middle man. In an ideal wholesale situation, a person puts a contract together on a property to buy it. While they are under contract, they will reassign the contract or property with an additional fee added on. For example, person A is selling a property for $50,000. The wholesaler agrees to buy for that amount. While under contract, the wholesaler sells it to another person for $55,000. Once all closings are complete, the wholesaler makes $50,000.
Although it may sound like easy money, wholesaling requires a lot of time and surprisingly, money. In most cases, if a wholesaler cannot find an end buyer, they must buy the property themselves. In addition, you must be great at networking and have lists of multiple investors and buyers interested in the homes you're selling.
Buy and Hold
Owning rental properties is the long-term investing strategy in real estate. Flipping and wholesaling are both transactional, short-term and must be repeated in order to continue making money. Buy and hold investing makes money and builds wealth in your sleep.
With buy and hold, you're purchasing a property with the intent to rent the property to tenants. The tenants in turn pay your mortgage payment (if applicable) in addition to a monthly paycheck. Buy and hold investing is passive income meaning you do not have to be involved in the day-to-day operations. Most buy and hold investors use property management companies to manage the asset and make payments on their behalf.
How do I get started?
First, determine what works best for your lifestyle right now.
If you're a busy professional who wants to add real estate investments to your portfolio, buy and hold may be a great option.
Are you wanting a career change and have some cash to invest, flipping may be something to explore.
Have a knack for networking and like sales? Wholesaling is a good option.
The most important thing to think about is what works for you right now. That doesn't mean forever. There are many real estate investors who started wholesaling and now do flips regularly. Other investors started with flipping and along the way kept some of the homes for buy and hold investments. You don't necessarily have to stick to one investment strategy. In addition, different market conditions may call for different methods. Buy and hold works in every market condition. However flipping works best, or is the most profitable, in a seller's market.