Low Risk Real Estate Investing
Low Risk Real Estate Investing
Real estate investment can be a lucrative opportunity for those who are willing to put in the time and effort to learn the ins and outs of the market. However, it can also be a daunting task for those who are new to the industry. Luckily, there are several ways to ease into the real estate investment market without taking on too much risk. In this article, we will explore some of these options and discuss their benefits.
Owning Your Own Home
Owning a house and living there as your primary residence is one of the most common ways to get started in real estate investment. This not only provides a place to live but also allows you to build equity over time. By paying down your mortgage and making improvements to your property, you can increase its value and potentially sell it for a profit in the future. Ramsey Solutions emphasizes the need to pay off debts (including a mortgage) before considering expanding into other real estate investment opportunities. To increase net worth, debts must be reduced and income must be increased as opposed to increasing income while simultaneously increasing debts.
House Hacking
House hacking is a strategy for new investors and an especially popular one for young investors because it appeals to those with low cash flow. Hacking involves purchasing a multi-unit property (up to four units) and living in one unit while renting out the others. The rental income can help offset the cost of the mortgage and provide a steady stream of income as long as the units are occupied and rents are paid. Additionally, you can learn valuable skills as a landlord and gain experience in managing rental properties.
Business Insider suggests that although this investment strategy can be very effective, there is a lot of risk when this is the primary method of income and units are unexpectedly vacated or the property is damaged and needs repair. Although house hacking is easy to set up, it can be very difficult to get out of a house hacking arrangement because the tenant leases would need to be finished and rents would temporarily dry up while waiting for the house to sell. On the flip side, if you choose to move out and keep the property as an investment, this arrangement is feasible and much less tricky.
Renting Out a Room
If you own your own home but don't want to take on the responsibility of managing a multi-unit property, you can still generate rental income by renting out a spare room. This is a great option for those who live in high-demand areas or near universities where rental rates are high. It can also be a good way to offset the cost of your mortgage or other expenses.
Real Estate Investment Trusts (REITs)
For those who prefer a more passive approach to real estate investment, real estate investment trusts (REITs) can be a great option. REITs are companies that own and operate income-generating real estate properties. By investing in a REIT, you can benefit from the income generated by the properties without having to manage them yourself. REITs also provide diversification benefits, as they typically invest in a variety of properties across different sectors (such as residential, commercial, and industrial). NerdWallet suggests that new investors use a broker and create a brokerage account to invest in publicly-traded REITs. New investors should avoid purchasing hard to value non-traded REITs which are difficult to resell.
Real Estate Syndication
Real estate syndication is a strategy in which multiple investors pool their resources together to purchase a larger property that they would not be able to afford individually. The agreement is typically structured as a Limited Partnership or Limited Liability Corporation, according to Fortune Builders. This can include anything from apartment buildings to commercial properties. Each investor typically contributes a certain amount of money and receives a share of the profits based on their investment while the sponsor is in charge of acquiring and managing the property. This can be a great way to invest in larger properties and potentially generate higher returns than with other strategies, while also having less property management responsibility since the sponsor takes care of that aspect and investors share a more passive role.
Although real estate investing might seem appealing, it can be hard to take the plunge and get started! These are some ways that an interested investor can dip their toes in the water to see if they want to jump on in and purchase an investment property. These are also great ways to build wealth for an investor who cannot immediately afford to purchase their own rental property, but wants to begin the process of acquiring passive income through real estate investing.