Diversifying Your Investments With Real Estate
Do you want to start investing in real estate? Or, expand your existing real estate investment portfolio?
Getting Your Start Investing In Real Estate
Real estate is a highly lucrative way to invest for income and capital appreciation. Also, investors have more options than ever for buying and selling real estate.
Various types of property are an accessible, tangible asset to invest in for most people. That said, getting started isn’t always easy, and it often takes new investors some time to develop a cohesive real estate investment strategy.
This article will cover everything you need to know as you add real estate to your investment portfolio. Remember that most new real estate investors only put a small percentage of their portfolio into real estate. It is important to diversify your investments to mitigate risk and generate consistent returns.
My five tips are next. But first, save this pin to Pinterest so you can return later.
1. Rent Out an Extra Room
If you want to start small as a real estate investor, you can always use your existing property to earn more money. This doesn’t require you to make any extra investment, so you can get a feel for managing a rental property without putting any money down.
Services like Airbnb make it easy to connect with interested renters, and you can make a significant income depending on the size and condition of your place and your location. You’ll be managing short-term rentals, so there’s no ongoing commitment.
On the other hand, you may be more interested in subletting the room for a more extended period of time. There are countless subletting Facebook groups that help you find interested renters in your area. Long-term rentals don’t always offer the same earnings potential, but you won’t have to spend as much time maintaining the room between renters.
Renting out a room provides the additional benefit of generating income for future investments. It’s the perfect way to get started. You can use your money to make a more substantial real estate investment later.
2. Buy a Rental Property
Beyond renting out a room in your home, you can also invest in a rental property to separate your investment from your own life. Of course, it may take you some time to offset the sale price, so this is more of a long-term investment option compared to renting out a single room.
If you need a place to stay, you can also buy a rental property and keep a room for yourself. For example, in a three-bedroom apartment, you can live in a single room while making an investment income from the rest of the place.
Since you’re investing in a tangible asset, you’ll have something to show for your investment if you ever decide to move somewhere else or take the entire property for yourself. You’ll also have the option to take on long-term or short-term tenants, depending on your preferences.
Remember that you’ll probably need to hire a property manager if you’re running a rental property on your own. They’ll be responsible for maintenance and upkeep, which can be incredibly helpful if you don’t have experience with those kinds of projects. Don’t forget to include the cost of a property manager when budgeting for your new rental property.
Tip: Offer Your Current Property as Leverage
If you’re having trouble putting together enough cash to invest in a rental property, consider taking out a mortgage secured by your existing property. This gives you a much wider range of options compared to what you can buy in cash.
Of course, using your current home as leverage is a significant decision that shouldn’t be taken lightly. You could be forced to default if something goes wrong or market conditions change, potentially leading you to forfeit both properties.
Tip: Talk to a Lawyer
Real estate law is incredibly complex, and new investors are at a major disadvantage if they don’t talk to a lawyer with real estate experience. They’ll be able to help you understand the legal implications of each decision and avoid as much liability as possible.
For example, while people generally buy personal property under their names, this may not be the best strategy for investing in a rental property. Separating your personal and business holdings helps protect your personal assets in the event of a lawsuit.
A lawyer is a worthwhile investment for anyone entering the world of real estate. If you don’t feel like you can afford one, you definitely can’t afford to invest in real estate without legal advice. He or she can identify the best way to classify your investment and help you make more informed decisions.
Tip: Compare Lenders
Mortgage lenders aren’t necessarily created equal, and shopping around can help you get a much better offer. Even a small reduction in your interest rate could lead to substantial savings, so it’s worth taking some time to evaluate different lenders. Fortunately, it’s easy to get quotes from multiple lenders online.
That said, the interest rate isn’t the only thing to consider when considering mortgage options. Closing costs can also be a substantial expense, and longer terms allow interest to accumulate over a longer period of time. The first or most convenient option isn’t always the best choice.
3. Invest Online
Real estate is an intimidating field for new investors, and online services are the simplest way to start. LendingClub, Prosper, and similar websites are designed to connect investors to borrowers who need help with various real estate projects. For example, a user who wants to renovate their home may not have enough capital to complete the project on his or her own. Online investors can offer assistance with finance in exchange for distributions on either a quarterly or monthly basis.
Of course, this kind of investment is naturally less liquid than many other ways to use your money, and you won’t be able to simply sell your shares like you could with a stock or mutual fund. It’s important to understand that this is a speculative option—it may take some time to get your initial investment back and start generating returns.
Furthermore, some online real estate investment services are intended for wealthy investors with experience. For example, certain websites only accept investments from accredited investors who have at least $1 million in net worth or $200,000 in annual income, but there are other ways to invest online if you don’t meet those qualifications.
4. Flip Properties
Flipping homes comes with a higher degree of risk, a higher barrier to entry, and more hands-on work, but it also provides an incredible opportunity for profit. Renovating a home can substantially increase its value, generating a significant return if you have the knowledge and experience to fix the property effectively.
While flipping properties may not be the right asset for brand-new investors on your own, it can be effective if you cooperate with someone with more experience. You can offer time or money if they provide the expertise to identify good values and coordinate repairs and renovations.
If you don’t have cash on hand to cover the cost of a second home, consider moving into the new property until you can fix it up and find a buyer. From there, you can use the sale value to cover a new purchase or simply rent a new place until you can repeat the process.
Over time, you may generate enough revenue from flipping homes to be able to cover other real estate investments. You’ll also gain the expertise necessary to fix up properties independently without assistance from someone with more experience.
5. Invest in Real Estate Investment Trusts
Real estate investment trusts, or REITs, are an increasingly popular way to put money into real estate. In contrast to managing a rental property or renting out a room, you won’t need to get involved with any specific piece of real estate.
Instead, real estate investment trusts function more like a mutual fund than a typical real estate investment. Trusts generally buy a wide range of buildings, including hotels, apartments, and office buildings, diversifying your investment and preventing it from being tied to any individual property.
These trusts are a great way to start investing for income from real estate as they don’t require as much experience or day-to-day work. Many real estate investment trusts also pay dividends, giving you more money to save, spend, or invest depending on your financial situation.
Most REITs are traded publicly, and you should start with these types of trusts unless you’re highly confident in another investment. It’s almost always easier to sell a publicly-traded REIT investment than one not sold on the market. Furthermore, this allows you to invest through a conventional brokerage firm.
Recap: How To Start Investing In Real Estate
Real estate can be an attractive investment alternative to stocks and bonds. But, when you start investing in real estate, it can be confusing.
On the other hand, real estate has the potential to appreciate significantly over time. In addition to the attractive investment income potential it provides
These traits make real estate one of the better items to invest in. So, the sooner you invest, the sooner you can start generating returns and eventually reinvesting in more properties.
These are just a few of the best ways to start investing in real estate.
- Rent out an extra room
- Buy a rental property
- Invest online
- Flip properties
- Invest in Real Estate Investment Trusts
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Author Bio: Tom Scott founded the consulting and coaching firm Dividends Diversify, LLC. He leverages his expertise and decades of experience in goal setting, relocation assistance, and investing for long-term wealth to help clients reach their full potential.