The first thing that may come to mind with real estate investing is your home. However, people have many options when choosing where to put their money. Part of why people decide to go into real estate investing is because it takes little to no formal training.
In fact, you don’t have to be an expert in real estate to start your career. Lots of people consider it their best opportunity for long-term investment. Many even begin with their IRA or individual 401(k) to get started because the IRS allows it — creating a more flexible arrangement.
Real estate investing is often preferred since it can help you generate a consistent profitable income compared to equities and bonds. Plus, real estate investments can add stacks of diversification to your portfolio, giving you lower volatility and a higher return per unit of risk.
Here’s how you can get started.
Why Get Started in Real Estate Investing?
According to a 2019 survey by Bankrate, real estate has been the most popular investment within the last several years. The results show that 28% of people prefer it over stocks as an investment.
Moreover, many view it as a good investment and a guarantee of profits or capital retention.
Real estate investing is unique since it offers many benefits you won't find elsewhere. For example, you get several tax benefits because the IRS treats your profits as a capital gain. Therefore, you receive a lower tax percentage than with your employment income.
Another great aspect of real estate investing is the ability of increased control over your investments. With stocks and mutual funds, you must wait for the assets to grow in value passively. On the other hand, real estate investing gives you some power over your money. Plus, you can improve your knowledge and negotiation skills over time to gain some authority.
One thing many people don’t know about real estate investing is that you can use your health savings account (HSA) or self-directed IRA for funding. Many financial institutions won’t tell you this because it doesn’t make economic sense to them.
However, having an HSA allows you to invest in real estate for a low fee. Therefore, you won’t be concerned about paying account valuation or asset fees with a self-directed real estate retirement fund.
The Top Ways to Invest in Real Estate
Here are the different types of real estate investments you can use to get started:
1. Real Estate Investment Groups
Many people consider real estate investment groups (REIGs) as they take on a new career in real estate investing. REIGs are mostly ideal for those interested in owning rental properties without having to run them.
However, investing in REIGs requires significant capital and financial access. Essentially, they are similar to mutual funds.
In a typical scenario, a company will buy or build a set of condos or apartment blocks and allow investors to make purchases through the company. They then become part of the group.
Investors can own one or more units. However, the company handling the investment group manages each through maintenance, advertising and tenant interviews. The company will take a percentage of the monthly rent in exchange for the management tasks.
2. House Flipping
Flipping houses is one of the more popular types of real estate investment. In fact, 10% of homes sold are from people who purchased flipped houses in 2018 — much higher than the percentage from 2002.
House flipping is more for people with experience in renovation, marketing and valuation.
The most basic concept of flipping houses is buying a property, fixing it and selling it. In return, you can gain a wide enough margin to give you a profit. However, this real estate investment option also requires capital and the ability to oversee or make repairs.
There are also various expenses to consider, including carrying costs such as utilities, HOA dues, taxes and insurance. Plus, there are the financing, acquisition and selling fees.
The key to successfully flipping is finding the right property at the right price. It helps if you give yourself enough leeway for your budget to make enough of a profit.
If you consider using your IRA to invest in a fixer-upper, ensure all the funds come from it. You’ll use it to buy everything related to the renovation, such as laborers, inspections and materials.
Remember that mixing your personal finances with IRA funding is never a good idea. Therefore, ensuring you have the capital for the project is vital.
3. Rental Properties
Rental properties are another popular real estate investment since they can provide a stable monthly cash flow and eventually value appreciation. The cash flow is the money you make from the rent after deducting related expenses.
Expenses typically involve taxes, maintenance fees, insurance, vacancy allowances, HOA dues and mortgage payments. Acquiring a rental property below the market value gives you a huge advantage in your investment.
The only downfall about rentals is that the market can be selective. Therefore, you may not always find a good fit for each area. The more expensive the location is, the more challenging it is to find a good rental.
However, a rental property can offer various benefits, whether pursuing a single-family home, multifamily house or something high-end. It can provide you with long-term financial security. Plus, the investment acts as a hedge against inflation — increasing property value and rental income as it rises.
4. Short-Term Rentals
Most real estate investors look for residential properties to rent out. Some may live in the house and lease a portion of it. Others may rent the entire property to make the most income.
However, short-term rentals work slightly differently. Suppose you have a home that you already own. You can use it as an opportunity to become a landlord and rent it out short term without selling.
For instance, many investors choose to rent their properties through websites like Airbnb anytime they wish. You can earn income and meet various people coming through town, whether you prefer to rent it out for a week or a month.
How Beginner Real Estate Investors Can Get Started
Real estate presents many opportunities for investors. It can be your key to financial wealth, early retirement and financial stability for the rest of your life.
Even though some people may be overwhelmed initially, you can still be confident in your decisions. It all comes down to your goals, resources and abilities.
Here are the most important tips to remember when getting started in real estate investing.
1. Ensure You’re Comfortable With the Investment
Real estate can be a relatively large investment. Therefore, it helps to ensure you’ve done your homework on the property you’re considering.
Consider looking at multiple properties, research the market you’d like to invest in, and speak with other investors and real estate professionals. You must feel comfortable allocating a large chunk of your investment.
You won’t be permitted to reside in your real estate property if you use your retirement assets to invest in it. Ensure you avoid making your investment decisions based on personal preferences.
2. Research the Economics of Investing
It’s always better to have a good handle on the various costs associated with owning a property. Some investors may try to jump in on the first opportunity they get. However, it’s wise to be realistic and objective when learning about the numbers before closing on a house.
For instance, you should look at previous years’ tax returns, property taxes and maintenance records. That way, you can get an idea of the income and expenses.
It’s also a good idea to leave extra funds aside when using an IRA in case of unforeseen expenses. That’s because you must pay all your costs using your IRA funds.
3. Know the Prohibited Transaction Rules Regarding an IRA Investment
The Internal Revenue Code (IRC) states when you can’t invest. IRC sections 408 and 4975 inhibit “disqualified persons” from engaging in other certain transactions.
'Disqualified persons” under IRC Section 4975(e)(2) includes various related parties such as a lineal descendent, spouse, parents, children, son or daughter-in-law of the IRA owner. It also extends to entities where the IRA owner holds a controlling interest.
4. Be Mindful of Your Loan
You can only use non-recourse financing if you need a loan to close on your real estate IRA investment. It’s not personally guaranteed by the IRA owner or borrower. Therefore, the lender’s only recourse is against the property, not the borrower.
However, if a self-directed IRA is involved with a non-recourse loan, you would be subject to an unrelated business taxable income tax.
A self-directed IRA has its advantages, but it may not be for everyone. Therefore, investors should be mindful of their loans and consult with a tax adviser for guidance.
Get Started Investing in Real Estate
Real estate investing can be one of the most sound decisions to make. It can give you a steady income and build financial wealth.
As with any investment, it helps when you’re open to being realistic with your expectations. Ensure you research and take time before diving into the market to start on the right path.
Rose Morrison is the managing editor of Renovated.com, and has over 5 years of writing experience. Her work has been featured on The National Association of Realtors, the American Society of Home Inspectors, and other reputable publications. For more from Rose, you can follow her on Twitter.