Billionaire entrepreneur Andrew Carnegie has long been famously quoted as saying that "90% of all millionaires became so through owning real estate," but is that still true today? At the very least, the perception that real estate makes people wealthy continues. In fact, a 2023 Gallup poll found that Americans continue to see real estate as the best long-term investment, just as they have over the last several years.
For many Americans, investing in real estate is as simple as purchasing their own home. According to the U.S. Census Bureau's 2021 Survey of Income and Program Participation, 28.5% of the typical American's net worth is in home equity.
However, someone's primary residence generally doesn't do the heavy lifting in making them wealthy, especially when they have other real estate investments. While many investors may immediately look at real estate investment trusts (REITs), this article is focused on owning real property (or a share in real property) rather than buying publicly-traded REITs, which essentially trade like stocks.
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Here are three different ways to invest in real estate.
Become a landlord
When most people think about investing in real estate, becoming a landlord is usually the first thing that comes to mind. You can choose from owning residential or commercial properties. However, owning residential real estate is probably an easier place to start because the home-rental market tends to be easier to understand and often requires a smaller investment to get started.
You can get started in various ways, like by purchasing a duplex, moving into one side, and renting out the other. Alternatively, if you own your home, you can move out, buy another home or condo, and rent out your previous residence.
If you're buying a rental property outright, you'll need to make a sizable down payment, often around 30% of the purchase price. For this reason, starting with a duplex and renting out the other side can make it possible for those without a large amount of money to become a landlord.
One thing to keep in mind is that all rental properties require management, which you can do yourself or hire a property manager to do.
Flipping houses
Another option is to buy a home, fix it up, and then sell it, a strategy better known as house-flipping. Careful calculations are required to be successful with this strategy. You'll need to consider the home's purchase price, the amount needed to fix it up, and how much you'll be able to sell it for when it's fixed.
A good shorthand is to avoid paying over 70% of the home’s after-repair value minus what you'll spend on fixing it up. Additionally, you can boost your profits on a house flip through a 1031 exchange, which allows you to trade one investment property for another without paying capital gains taxes on the one you're selling. Many house flippers also save money by living in the house they're fixing up until they're finished and ready to sell it.
One thing to keep in mind with this strategy is that flipping houses requires more skills than simply owning property and collecting rent. You'll need an eye for value and be able to spot potential in distressed properties. It will also help if you can do your own renovations.
Crowdfunding
Finally, one of the newer ways to invest in real estate is through crowdfunding platforms like Yieldstreet or Fundrise. These platforms allow investors to get a piece of the really big commercial real estate action without investing millions of dollars in a single transaction.
Developers using these platforms essentially establish a pool that multiple investors can put money in for a piece of the final property. A key benefit is being able to own a share of expensive commercial real estate that you wouldn't be able to afford to invest in otherwise, although you'll have to pay an annual management fee, usually 1%, and possibly other fees.
One thing to keep in mind is that some of these platforms require you to be an accredited investor, while the other two ways to invest in real estate do not. You should also do your own due diligence on each individual opportunity, even though the platforms themselves may vet them.
Bottom line
There are many benefits to investing in real estate using any of these three methods. Of course, being a landlord creates a passive income stream, enabling you to bring in money without doing any work in exchange. Additionally, investing through a crowdfunding platform often brings regular cash distributions, although it depends on the individual deal.
There are also many tax benefits. For example, when you own an investment property, you may be able to deduct your mortgage payments, interest, property taxes, and depreciation. Finally, if you've invested wisely, the value of your investment property should appreciate over time, making your investment more and more valuable.
However, real estate investing won't make you rich overnight, so it's important to understand that these are long-term investments rather than short-term, get-rich-quick schemes.
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