Investing is a key way to ensure financial wellness. Many beginners are allured to invest in different investment types as they get to hear about them from peers or in general.
Although, when you are new to the world of investment you lack the idea of where to invest and how to do it in the right manner as you don’t want to lose your hard-earned money.
Real estate investment is one type that fascinates many beginners. This blog will introduce you to the idea of investing and what to do when you think about investing in real estate.
What is investing?
Investing means when you commit your money to gain financial returns in the future. Everyone has financial goals, and investing is an important activity to accomplish those goals.
When you put your money into a project for some time to gain profits, it can be said as an investment. It is different from saving because investing the money or capital does not rest; rather it is allocated to some project in which you expect gains, profits, or income.
Investing can go wrong too, as the other side of gain is loss; therefore, it is necessary to invest wisely and allocate your money to something that promises gain in times to come.
The kind of returns you get in investing depends upon the type of projects you invest your money into. Risk and return are usually related in investing, and they are like two sides of the same coin.
Typically, low risk is related to low expected returns, whereas higher returns relate to higher risk in investing.
Different kinds of investments
There are many forms of investments and as a beginner, you must have an idea about each one of them.
Companies offer stocks for investors, so when you buy a stock, you become a fractional owner of the company. Those who buy stocks are called shareholders. They can earn profit by trading during appreciation or by getting periodic dividends from the profits made by the company.
Two basic types of funds are ETFs (Exchange-traded funds) and mutual funds. ETFs are like stocks and are traded on stock exchanges. Mutual funds are unlike ETFs, and they are often valued by the end of the trading day. Investors can invest in stocks, shares, bonds, etc. using funds which are managed mostly by investment managers.
These are debt obligations of organizations such as corporations, municipalities, or governments. When you buy a bond, you receive regular interest payments and a return when the bond matures.
- Investment Trusts
They are a kind of pooled investment. REITs (Real Estate Investment Trusts) are one of the most famous forms of investment trusts. Using REITs, one can invest in residential and commercial properties.
- Alternative Investments
These include private equity and hedge funds. These are mostly available to investors who meet certain net worth or income criteria.
They include oil, metals, grains, currencies, financial instruments, etc.
Things to consider before investing in real estate
Investing in real estate is a promising and time-tested form of investment. This is just why many people choose it, but if you are a beginner in real estate investment, there are things that you should know before investing in real estate. Here is what you need to know while investing in this domain.
- Location of the Property
- Location is the key aspect of real estate investing.
- Know the location where you are going to invest
- It must be in proximity to major amenities
- Location should be promising and guarantee future appreciation
- Property Valuation
- Most common valuation methods in real estate are the sales comparison approach, cost approach, and income approach
- Purpose of Investment
- Buy and personal use
- Buy and lease
- Buy and sell in the short-term
- Buy and sell in the long-term
- Profit Opportunities and Expected Cash Flow
- Rental income
- Available tax benefits
- Renovation before sale
- Understand how to handle loans
- Go for a mortgage type that suits your situation
- Get properly acquainted with mortgage terms and conditions
- Property Type – Newly constructed as compared to Existing Property
- Research about the construction company a little – past projects and reputation in the real estate market.
- Indirect investments – other ways to invest
- Stocks of real estate companies
- Mutual funds and ETFs focused on the real estate sector.
- Mortgage-backed securities
- Mortgage bonds
- Watch your Credit Score
- Pay your bills on time
- Review your credit report
- Pay down debt
- Use less than 30% credit
- Watch Real Estate Market
- Mortgage rates
- Property inventory
Past trends of real estate market in US
Real estate in the US has long been considered a wise investment type. Before 2007, housing data trended that those prices kept climbing. The average sale price of US homes increased every year from 1963 to 2007.
Home prices suffered during the Great Recession, and post that they improved. When the COVID-19 pandemic started, the real estate market again took a small hit in the US. Though, as the vaccination started, home prices climbed to an all-time high in 2022.
Why invest in real estate market
Given below are ten reasons you should invest in real estate:
- Promises steady cash flow in the form of monthly rental income
- Guarantees great returns as you can invest and sell later for huge profits
- A long-term investment that provides long-term security to investors
- Provides tax benefits
- Boosts your diversification
- A source of passive income
- Gives you the ability to leverage funds
- Provides protection against inflation
- Boosts your capital and net-worth
- Enables great control and a sense of fulfillment
5 Ways a beginner can invest in real estate market
Beginners can easily invest in the real estate market by choosing any of these five ways:
- Buying REITs as mentioned earlier in the blog
- Using an online platform for real estate investment, for example, companies like LendingClub and Prosper.
- You can invest in rental properties
- By flipping investment properties like living and fixing the property to sell it out later for major profits.
- By renting part of your home. This one is the easiest and a basic way of earning using real estate that you own.