How to Invest in Real Estate for Good Returns

If you play your cards right, making money from real estate investment is possible, even with higher interest rates. It’s a good way to mix things up in your investment portfolio and eventually make good money without too much effort. Keep in mind that there are various ways to invest in real estate beyond being a traditional landlord. Here are some useful tips on how to invest in real estate. We also have the pros and cons of investing in real estate. So go ahead, and start investing in real estate today!

The real estate market this year

High-interest rates are causing problems in the real estate market. When rates go up, it’s harder for people to afford homes, so sellers often have to lower prices. This has been happening a lot in 2022 and early 2023.

In 2022, interest rates were low. People took advantage of this to get lower mortgage rates on their home purchases. However, the Federal Reserve, which controls interest rates, raised them quickly. This made real estate less affordable, and many home sellers had to drop their prices. By early 2023, the average 30-year mortgage rate was just under 7 percent, the highest in more than 10 years.

How to invest in real estate?

Money in real estate understanding financing

Real estate is usually a long-term investment. Even though rates are high now, it might be a good idea to save money for a down payment and wait for rates to go down before buying.

Here are some smart ways to invest in real estate.

Purchase a home

Think of your first home as a smart investment in real estate. It’s a great way to build equity, which means some of your monthly payments contribute to your property value. Unlike renting where you don’t own anything, owning a home lets you invest in your future. However, not everyone agrees on whether owning a home is always a good investment. It depends on various factors.

If you plan to stay in an area for a long time, buying a home can be a good idea. You get a stable monthly payment, often similar to rent. Banks also like it when you live in the home you own, so they might offer you a lower mortgage rate and ask for a smaller down payment. Plus, you might get some tax benefits by deducting interest expenses. So, owning a home can be a smart move, but it’s essential to consider all the factors.

Pros:

Saves you from paying rent.
You can build good equity.
You can enjoy home price appreciation.
There is a potential for tax breaks on appreciated value, better mortgage interest, and fixed long-term payments.

Cons:

Buying a house requires a significant amount of down payment.
There is an ongoing cost of property maintenance.
There’s a risk of foreclosure if the homebuyer is unable to repay the mortgage.

Buy a rental property

If you’re ready to take your real estate game up a notch, you might want to consider renting out a house and becoming a landlord. The rental property market is easier to understand compared to big commercial places such as shopping centers and office buildings.

Another perk is that it might cost less to get started, especially with a single-family home. You could dive in with $20,000 or $30,000 instead of needing hundreds of thousands for a big commercial spot. If you’re lucky, you might snag a distressed property on the cheap through foreclosure.

Pros:

You can start small with residential real estate.
You can generate a good cash flow due to regular rents and capital appreciation.
There is usually price appreciation and tax write-offs for mortgage interest.

Cons:

Usually, you will need to cough up a good amount of downpayment upfront as compared to owner-occupied properties. It can be around 30 percent of the property’s price.
Being a landlord can be pretty hands-on. You’ll have to handle property management, long-term vacancy periods, difficult tenants, and routine property maintenance.
Your real estate agent may ask for a high commission-based payment.

Consider house flipping

Flipping houses is a popular way to invest in real estate. Remember that you should have a discerning eye for value and a high level of expertise in buying and selling houses as compared to long-term landlords. If executed correctly, house flipping can yield a quicker return on investment than traditional property management.

Successful house-flippers typically identify undervalued properties in need of refurbishment, make necessary improvements, and then sell the houses at market value, pocketing the difference between their total investment (purchase price, renovation costs, etc.) and the selling price.

Pros:

Unlike a long-term landlord, a flipper can make a quick profit.
Buying an undervalued property, fixing it, and selling for more gives a lot of satisfaction.

Cons:

A miscalculation about predicting the resale value of a house could lead to a rapid loss of profit or a net loss.
If a flipped home doesn’t sell promptly, you may incur high interest on a loan.
Flippers risk losing money if the house takes too long to sell.
The owner needs to keep up with mortgage payments even if no income is being generated.

Buy real estate investment trusts (REIT)

Opting for a real estate investment trust (REIT) is an excellent choice for those seeking real estate returns coupled with the liquidity and straightforwardness of stock ownership. Plus, you get the added benefit of collecting dividends.

REITs offer numerous advantages over traditional real estate investment, potentially simplifying the overall process. However, it’s important to note that investing in REITs comes with its own set of drawbacks. Similar to any stock, REIT prices can fluctuate with market movements. While this might not be a major concern for long-term investors capable of weathering market downturns, those needing to sell their stocks might face challenges in getting their investment’s full value at any given moment.

For individuals purchasing individual REIT stocks, a thorough analysis is necessary, utilizing the tools of a professional analyst. One way to mitigate this risk is by opting for a REIT fund, which holds a diversified portfolio of REITs, reducing exposure to the fluctuations of any single company or sector.

Pros:

Investing in a REIT is an excellent starting point for beginners with limited funds.
A good way to generate passive income through capital appreciation.
Ensures regular dividends.
Doesn’t involve broker commissions.

Cons:

Such stocks can fluctuate according to market conditions.
There’s a certain lack of transparency in REIT investments.

What are the benefits and drawbacks of investing in real estate?

As with any type of investment, real estate investment comes with its own set of advantages and disadvantages.

Pros	Cons
Long-term appreciation while residing in the property	There’s no guarantee of price appreciation
Potential as a hedge against inflation	Property prices may decline with higher interest rates
Leveraged returns on your investment	A leveraged investment puts your down payment at risk
Passive income through rent or with REITs	Management of your own properties may demand substantial time and money
Tax benefits, including interest deductions, tax-free capital gains, and depreciation write-offs	Obligation to pay a set mortgage amount every month, regardless of tenant payments
Access to fixed long-term financing	Real property has lower liquidity and involves high commissions, particularly when exiting the market

What should you consider before investing in real estate?

Before making any kind of real estate investment decision, ask yourself these questions:

Can you afford to invest in a given real estate investment?
Do you have the requisite resources to repay a mortgage?
Are you depending on just your salary to keep the investment going?
Do you have the qualities or aptitude to be a hands-on landlord?
Do you have a sound knowledge about investments such as REITs or online real estate platforms?
Are you skilled enough to run a profitable house-flipping business?

Your answers will be an indication of whether you should go ahead with the investment plan or not.

What are the tax benefits of real estate investments?

The tax benefits on real estate vary widely, depending on how you invest, how much you invest, and the type of real estate investment.

Primary residence

If you choose to itemize your tax return, you have the potential to deduct up to $10,000 in property taxes. Additionally, when you sell your primary residence and meet certain criteria—such as having lived in the house for at least two years within the last five years—you can enjoy tax-free capital gains of up to $250,000 (or $500,000 for those married and filing jointly).

Rental property

By deducting property taxes from rental revenue, you can effectively diminish any taxable gains. Additionally, the ability to deduct interest expenses and depreciation further lowers your taxable income, all while maintaining a steady cash flow. When eventually selling the investment property, taxes are assessed based on its depreciated value, offering potential savings. Alternatively, adhering to the 1031 rules and reinvesting the sale proceeds into a new house enables the deferral of taxes on the gained amount, presenting a strategic option for minimizing tax obligations.

House-flipping

Investors have the opportunity to continually defer taxes on gains by reinvesting their proceeds into subsequent deals and adhering to the regulations governing 1031 exchanges. This strategy allows them to maintain tax advantages, provided they can consistently identify and secure lucrative property deals.

REITs

REITs also have a tax advantage, as capital gains taxes are deferred until you decide to sell your shares. This allows you to hold onto them for extended periods without triggering tax obligations. Moreover, the flexibility extends to passing on these shares to your heirs, who can inherit them without incurring any taxes on the accrued gains.

The tax efficiency of REITs stems from their structure, as they are not subject to corporate-level taxes. Consequently, any distributions made to investors represent income that has been taxed only once, contributing to the overall tax efficiency of investing in real estate through REITs.

Last thoughts

When you’re thinking about investing your money, there are plenty of options such as stocks, bonds, mutual funds, and real estate. Real estate is a good choice for investors at any experience level, offering various options for different budgets. It can be a rewarding investment, but it’s important to pick the right type that matches your ability and willingness to manage it. If you’re aiming to generate good income, investing in real estate could be a way to achieve that goal.

FAQs

What is real estate investment?

Real estate investment involves purchasing, owning, and managing properties with the expectation of earning a return on the investment.

How do I get started in real estate investment?

Start by researching the market, setting investment goals, and determining your budget. You can always take the help of a real estate expert.

What are the most obvious benefits of real estate investment?

Benefits include potential for long-term appreciation, rental income, tax advantages, and portfolio diversification.

What are the risks involved in real estate investments?

Risks include market fluctuations, economic downturns, property depreciation, and the potential challenges of property management.

Is there a way to reduce the risks in real estate investment?

Diversify your portfolio, thoroughly research properties and markets, stay informed about economic trends, and consider working with experienced professionals in real estate.

Is real estate a good investment for beginners?

Real estate can be a good investment for beginners, especially with careful research, planning, and possibly starting with less complex options like REITs.

How do I finance real estate projects?

Financing options include mortgages, loans, partnerships, through accredited investors, or using your own capital. A mortgage broker or financial advisor will be the best person to guide you.

How do taxes work with real estate investment?

Real estate investors may benefit from tax deductions, depreciation write-offs, and capital gains tax advantages.

Written by Ramona Sinha. November 19, 2023

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.

Your opinion matters, leave a comment

Comments

November 28, 2023 Log in to Reply
henryjjames3214566@gmail.com
“Even with increasing interest rates, real estate investing can be profitable if you play your cards well. It’s a smart approach to diversify your investments over time and earn decent returns with little work. Remember that being a conventional landlord is not the only method to invest in real estate. Here are a few helpful pointers for real estate investing, whether you’re a seasoned investor or someone looking to take my class to delve into the intricacies of this market. The benefits and drawbacks of real estate investing are also present. So go ahead and begin your real estate investment journey today.”