How to Invest in Real Estate

Buying and owning real estate is an exciting investment strategy, that can be both satisfying and lucrative. Unlike stock and bond investors, prospective real estate owners can use leverage to buy a property by paying a portion of the total cost up front, then paying off the balance, plus interest, over time. While a traditional mortgage generally requires a 20% to 25% down payment, in some cases, a 5% down payment is all it takes to purchase an entire property. This ability to control the asset the moment papers are signed emboldens both real estate flippers and landlords, who can, in turn, take out second mortgages on their homes in order to make down payments on additional properties.

KEY TAKEAWAYS

  • Aspiring real estate owners can buy a property using leverage, paying a portion of its total cost up front, then paying off the balance over time.
  • The four chief ways in which investors can make money through real estate are: 1) becoming landlords of rental properties, 2) real estate trading (a.k.a. flipping), 3) real estate investment groups, and 4) real estate investment trusts (REITs).

    So You Want to Be a Landlord

    Ideal for: People with DIY and renovation skills, who have the patience to manage tenants.

    What It Takes to Get Started: Substantial capital needed to finance up-front maintenance costs and cover vacant months.

    Real Estate Investment Groups

    Ideal for: People who want to own rental real estate without the hassles of running it.

    What It Takes to Get Started: A capital cushion and access to financing.

    Pros: This is a much more hands-off approach to real estate that still provides income and appreciation.

    Real Estate Trading (a.k.a. Flipping)

    Ideal for: People with significant experience in real estate valuation and marketing.

    What It Takes to Get Started: Capital and the ability to do or oversee repairs as needed.

    Pros: Real estate trading has a shorter time period during which capital and effort are tied up in a property. But depending on market conditions, there can be significant returns, even in shorter time frames.

    Real Estate Investment Trusts (REITs)

    Ideal for: Investors who want portfolio exposure to real estate without a traditional real estate transaction.

    What It Takes to Get Started: Investment capital.
    Pros: REITs are essentially dividend-paying stocks whose core holdings comprise commercial real estate properties with long-term, cash producing leases

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