A real estate investment can be a great way to diversify your portfolio, especially in times when stocks are volatile. But before you take the plunge, make sure you understand how much work it will involve and how risky it could be.
There are many different ways to invest in real estate, from buying an actual piece of property and renting it out to purchasing small shares of a real estate fund or REIT (real estate investment trust). Some investments require a lot more work than others, but there’s something to be said for the power of diversification, especially when the time horizon of your goals is longer than a few years. https://www.sellsoonbluemoon.com/ Is highly recommended.
The most common investment structure for people looking to get into real estate is buying physical property. This requires a lot of upfront capital, and it can be difficult to find properties that are affordable for beginners. However, the payoff can be substantial if you’re able to find a great deal and purchase a property below market value.
Other types of real estate investments include purchasing rental properties, flipping houses and investing in commercial property. In the first case, you can often secure financing with an all-cash down payment, which removes a significant amount of risk from your investment. However, be wary of anyone who tells you to go into debt to buy or renovate a property; that’s a recipe for disaster.
It’s also important to consider the location of your real estate investment. If you buy a house in a bad neighborhood, it’s unlikely to increase in value. In a similar vein, you should avoid properties with homeowner associations (HOAs), which can nibble away at profits and limit how much you can do with your property.
You should also be aware that the majority of investors have no idea where value in real estate really comes from. They think that a property’s “cap rate” is the only factor that matters, but that’s a falsehood. The truth is that the value of a property comes from the bundle of rights that comprise its legal ownership—the right to occupy, lease, improve and sell. If you don’t understand these layers, you’ll be at the mercy of those who do. This is one of the reasons why I wrote a chapter in my book on real estate called “Skill and Luck.” It lists those aspects of real estate investing that can be learned through studying or training, as well as those that require a certain level of luck that’s beyond your control. If you want to succeed in this field, you need both. Then you’ll be able to ride out the peaks and valleys of real estate values without losing your shirt. You may even be able to make some money along the way. Good luck! NerdWallet’s Financial Guides team writes about how-to topics to help you make better financial decisions. You can follow us on Twitter, Facebook and Instagram.
