Are you thinking of dipping your toes into real estate? Real estate investing for beginners boils down to two methods: direct investing and indirect investing. Direct investing usually requires daily management of the property. Indirect investing involves real estate stocks and a hands-off approach.
This article will show you different ways of investing in real estate with little money. Let's explore.
Buy Real Estate REITs
Real Estate Investment Trusts (REITs) allow you to invest in real estate without owning physical property. Rather, you're investing in companies that own various types of properties, such as office buildings or retail stores.
To buy REITs, you need a brokerage account. The main draw of REITs is the high dividends yielded to investors. Buying REITs are among the best real estate stocks due to long-term gains. With that, they come with some risks, such as:
• Taxation: Since the government classifies REIT dividends as standard income, you could face a hefty tax bill.
• Lack of Diversification: Many REITs concentrate on a single property type, depriving investors of a diversified portfolio. Therefore, choose several REITs that focus on different properties.
• Interest Rate Fluctuations: REITs are sensitive to interest rate changes. Rising interest rates have a negative impact on REITs.
Despite the cons, REITs provide a faster route to real estate investing. Best of all, REITs provide fast liquidity.
Become A Landlord
If you prefer the direct approach, you can learn about real estate by owning it directly. Becoming a landlord involves the following steps:
1. Determine if the prospective property will produce adequate cashflow
2. Set aside enough money to purchase a property (or obtain a mortgage)
3. Save additional money for unforeseen costs (i.e. repairs or maintenance)
4. Read all landlord-tenant laws
5. Secure landlord insurance
6. Renovate the property as necessary
To become a landlord, you must have the patience to deal with tenants regularly. Moreover, the properties come with ongoing commitments in the form of insurance, maintenance, and repairs.
Become a landlord only if you intend to commit to the role full-time. If you want to buy real estate, read this article for more information.
Choose REIGs
Real Estate Investment Groups (REIGs) give you access to rental properties without owning them. They invest in rental properties, and they are similar to mutual funds. Under an REIG, you're buying a property from a company that constructs the units.
Buying the properties makes you part of the investment group. You own the properties, and the builder manages the property (i.e. maintenance, repairs, etc.)
This is a great option if you want to own a rental property without becoming mired in management duties. You can also own several properties within the group. With that, take note of the cons:
• Fees: Since REIGs are similar to mutual funds, they also have the same fee structure.
• Vacancy Risk: You may lose income if the units remain unoccupied for extended periods.
• Less Transparency: Many REIGs are private; therefore, you may encounter shady companies looking to rip off investors.
The best way to avoid scams and hassles is to research the reputation of the company.
Real Estate Investing For Beginners
What Else Should I Know? When it comes to real estate investing for beginners, the best advice is to know what works best for you. If you don't have time to manage properties, consider REITs or REIGs. If you want to learn real estate directly, you can become a landlord. Visit the Real Estate section of the Frugal Finance Blog to learn more about land investments and property investing today.