Real estate accounts for more than half of the world’s mainstream assets. It also forms a large chunk of corporate, personal and national wealth.
It, therefore, attracts the attention of many investors as a worthy option where they can invest some of their capital.
Additionally, Real estate is a popular investment option among investors since it has a wide variety of investment properties.
One could choose to invest in multi-family homes, single-family homes, and commercial properties, among others.
Whether you are a professional real estate investor or a beginner, real estate offers something for every interested investor.
Since many options could sometimes be complex and a little too expensive for beginner investors, we have put together a few options beginners could consider as they seek to invest in real property.
Before we go into that, we need to understand what this thing “real estate” is.
What is Real Estate?
When people hear this term, most of them think of land, buildings, homes, and probably structures. These are just components of real estate, not anything close to a complete definition.
The Uniform Standards of Professional Appraisal Practice (USPAP) defines real estate as an identified parcel of land, including improvements on the land.
The mention of improvements is vital since it points out that real estate includes anything that is permanently attached to the land, including roads, streams, and fences.
This definition shows how broad real estate is, contrary to what most people think.
Real estate also includes several rights that come about due to ownership of the property such as water rights, air rights, and the right of ownership of mineral deposits under the land.
Now that we understand the scope of real estate, let us explore what investment options you have as a beginner investor:
1. Real Estate Investment Trusts (REITs)
Through REITs, one can invest in real estate without physically owning the property. REITs are companies that own commercial real estate such as offices, apartments, and retail spaces, among others. REITs pay high dividends to investors.
REITs are ideal for investors who want to share in the benefits that accrue from the ownership of real property without taking part in the traditional real estate transactions.
How do REITs work?
A REIT is created when investors invest their money with a corporation which in turn uses the money to acquire and operate commercial real estate.
Just like any other stock, REITs are traded on the major exchanges. To maintain the REIT status, a corporation or trust is required to pay 90% of its earnings before tax as dividends to the investors.
REITs are ideal for investors who are seeking regular income. They allow investors entry into nonresidential properties such as malls. It is generally impossible for individual investors to purchase such properties directly.
These are some of the benefits of REITs in a nutshell:
- REITs offer portfolio diversification since you can get access to the real estate market with a very low correlation with other investment options such as bonds and stocks.
- REITs offer long-term returns and performance.
- REITs generally provide a stable stream of income through varying market conditions. The dividend yields are stable and quite substantial.
- REITs offer liquidity since shares of publicly-traded REITs can be traded on the stock exchange.
- There is oversight provided, assuring some level of transparency. Analysts, auditors, and the financial media monitor the performance and general outlook of listed REITs.
2. Single-Family Homes
Investing in single-family homes is one of the most popular investment strategies among beginners with little experience. Compared to multi-family rentals, single-family rentals are more affordable and easy to manage.
This is one of the easiest ways for beginners to enter the real estate industry. Single-family rentals are on high demand, making it a more reliable and less risky undertaking. Lenders classify them as low-risk investments and therefore offer mortgages for relatively lower interest rates.
Also, they are likely to have more prospective buyers in the market since you can target both real estate investors and homebuyers looking for a place to call home.
3. Multi-Family Homes
Investing in multi-family homes is generally not the best option for beginners. Their cost is relatively higher, and the transactions involved require more experience compared to single-family homes; the competition is stronger in this market.
However, there are certain classes of multi-family homes that can be a good option for beginner investors, and that is a duplex!
A duplex is a multi-family home with only two units. They have two separate units. Therefore, owning a duplex is having a multi-family housing that can accommodate two families.
This is a superb option for you as a beginner real estate investor; you earn higher rental income. If you live in one of the units, financing becomes easier.
4. Real Estate Crowdfunding
Real estate crowdfunding is a platform where real estate and property owners raise money for investment in real estate from a pool of investors to contribute money towards accomplishing a project.
In other words, it is a method used to raise funds to allow small real estate investors to invest in big projects.
It is sometimes referred to as peer-to-peer financing. Money is raised through online crowdfunding platforms. The borrower comes on board the platform to raise funds to improve or start a real estate project.
The investor joins the platform and invests capital intending to get higher returns on investment in the future.
A beginner real estate investor would love this option because you do not have to know the real estate industry. A beginner real estate investor would love this option because you do not have to know the real estate industry.
You just put in the money, someone else does all the work on your behalf in terms of developing and managing property, and you get to reap from the investment when it pays.
These are some of the reasons why real estate crowdfunding is a good beginner investment option. As a lender:
- You can diversify your investment over many asset classes and possibly in different countries with just a small amount of capital.
- You gain access to low-level investments without having to spend a lot of money. Some projects are offered for as low as $10.
- There is an opportunity to make short term investments, as low as under two years.
- Crowdfunds offer transparency since investors are fully aware of where their money will be invested from the onset.
- There are no investment fees charged, so you get a higher return on investment.
As a borrower:
- Your real estate investment company can start operating faster at the initial stages with peer-to-peer lending options without overstretching your finances.
- It presents you with an opportunity to grow your investor network.
- Saves you time and money since you have more people on board to support your project.
- As you still learn on the job, you can get positive criticism from your online crowdfunding community. This is an opportunity to grow your business even further.
- You will be directly marketing your real estate business since the crowdfund allows you to expose it to many investors at a go. They are in turn likely to promote your business if you foster a good relationship with them.
You need adequate information to choose the best crowdfunding for you. As you look for a crowdfunding platform, look out for its functionality, its track record, credibility, the quality of services they offer, and the level of documentation.
5. Buying and Flipping Homes
This is probably one of the most popular real estate investment techniques among newbie investors. You have probably learned a little about it on HGTV.
You have probably watched shows where a couple purchases a house, renovates it, and at the end of it all pocket a good sum of money.
Caution! This investment option can be risky because of the complexity of estimating the costs compared to your benefits. Additionally, you need a relatively higher amount of capital to buy a house.
So before trying to flip houses, you may want to consider some factors.
The capital cost of the house
Before you can earn from flipping homes, you will have to spend some money first. And because you do not want to lose your money, you will have to make a smart move.
The rule of thumb when it comes to home flipping is that you should not spend more than 70% of the value of the property after repair. This after-repair value (ARV) is the amount at which you will sell the house after rehabbing it.
You can know the ARV by carrying out market comparison in the area.
The amount and cost of repairs that need to be done
Different houses may need different improvements to flip them. Some improvements are structural while others are just cosmetic. The structural repairs are usually the most expensive.
As a beginner investor, you may want to reduce your capital cost by purchasing houses that just need a little updating; a modern kitchen, new window glazing, a little painting, among others.
This will cost much less than you will need for foundation renovations, new roof, extensive plumbing, etc.
The main point here is to get ready for the type and amount of work you are willing and able to do. Without that, you may end up with very little return on capital.
The flipping timeline
The process of looking for a house and completing a purchase takes time. The rehab process also takes time. So you need to estimate the timeline before you engage in this type of investment.
Will you hire a contractor(s) or you will carry out the work on your own?
Doing the work on your own will save you the money you would have otherwise spent on a contractor or a team of contractors. Painting and fixing broken taps may be easy, but are you qualified for plumbing works for example?
Knowing your abilities and limitations will help you determine how much help you need, and in turn, estimate your costs.
The best types of real estate investment options for beginners are those that offer excellent investment conditions. A high return on investment (ROI) with the lowest amount of risk is what you should be seeking in your first investment property.
Before you decide whether you will invest in a REIT, a crowdfund, single-family units, multi-family units, or flipping investment, assess the profitability of the investment option.
Remember your main aim as an investor is to maximize your profits as much as you possibly can, as you lower your risks.
There are other investment options newbies can try, for example investing in turnkey rental properties.
So this article is just a sneak peek of what options you have as either a complete beginner in the real estate industry or as one who has limited knowledge in real estate.
As you continue exploring your options, we wish you all the best.