What to Know Before you Invest in Real Estate

June 12, 2017

When it comes to investments, you might think of stocks and bonds first. But investing in real estate is also a solid option that you should consider. Here’s what to think about.

Before you Invest in Real Estate

There are different ways to invest in real estate, and they don’t all require hundreds of thousands of dollars. You can invest in a Real Estate Investment Trust, commonly known as a REIT, which is a vehicle that invests in real estate and has at least 100 shareholders. It can help to think of REITs as similar to mutual funds but investing in real estate instead of stocks or bonds. REITs are often traded on major exchanges, just like mutual funds and stocks, and you can start with as little as a few hundred or thousand dollars, depending on the REIT you choose.

Another option is directly investing in real estate, i.e., buying and renting out property yourself. This can be extremely expensive since you would be responsible for the entire purchase and maintenance costs. You will also need to decide what type(s) of property you want to invest in, such as residential or commercial, and extensively research the property and your financial options.

A real estate investment group is like a cross between REITs and direct investment. The group or organization finds and manages properties and brings in investors like you who finance the purchase and receive rent. In exchange for their services, the group keeps a portion of the rental income. Alternatively, you may be able to join a group that directly purchases and manages properties, eliminating the fee.

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Another possibility when it comes to investing in real estate is “flipping” properties – you purchase a run-down property, spruce it up (or even re-build on it), and sell it for a profit. This is another venture that you can do alone, through a third party, or with partners.

As with all investments, investing in real estate carries risk. Property values may not be as volatile as stocks and bonds, but as the housing bubble taught us, it’s certainly possible to buy real estate that loses value. Owning more than one property can reduce your risk, as can sharing ownership of the property via a REIT or investment group (although you thereby reduce your share of the profits as well). Real estate investments are a great way to diversify your investment portfolio and reduce your overall investment risk.

Know how much time you can spend managing your investments. Much like a mutual fund, you can invest in a REIT and just periodically check to see how your investment is performing. By contrast, if you choose to purchase and manage a property yourself, you may end up spending a great deal of time responding to calls from tenants, especially if you cannot (or choose not to) hire a property manager.

Know how much you can afford to invest in real estate. The amount of money you have to invest can be a major factor in determining what type of real estate investment you can pursue. If you only have a few thousand dollars, a REIT may be your only option. However, if you have tens or hundreds of thousands to invest, you can join a real estate investment group or buy a property outright. If you plan to borrow money, you should know your credit score and have a plan to show how you will be paying off the loan.

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