You've decided to take the plunge and invest in real estate. We've put together this overview as a beginner's guide to real estate investing. Your main goal is to make your money work for you today to have increased cash in the future. The money you make in the future is called your profit, or return on investment.
That profit (or return) must be enough to cover the cost of:
Real estate investment is rewarding and can pave the way for your financial independence, but you need to understand the underlying factors that control your experience.
In this article we will cover the following topics:
Real estate is a smart investment to build wealth because of the following factors:
Real estate investing generates consistent cash flow. Cash flow is the net amount of cash moving in and out of an investment. Cash received is inflow, and money spent is outflow.
The ability to generate consistent cash flow is an appealing feature of real estate investing. Some examples that generate positive cash flow:
Real estate investment is versatile and profitable. Are you ready to start your journey to financial independence? If so, check out our "7 Real Estate Investment Strategies" as the first step to establishing your real estate empire.
The investment property makes money for you in two ways: rents from tenants and appreciation.
Appreciation occurs when the price of your property becomes more valuable. In the United States, the national appreciation average is about 3.5 percent per year. When the time comes to sell (also called divesting) the property, you earn a lump sum return on your investment.
The lump-sum payment from the sale coupled with the rental income over the life of your investment makes real estate investing a high-performing asset in your investment portfolio.
Real estate investing is an integral part of a balanced portfolio. The economic forces at play in the stock markets exist in a different market from real estate investing. As a result, the volatility of the stock market does not directly affect real estate investment.
When compared to stocks and bonds, real estate investing is:
The graph highlights the relative stability of real estate investments since the end of WW2.
Real estate is a limited physical asset. As a result, the property holds value by being scarce. As population increases and real estate availability decreases, land's value appreciates. Refer to the S&P/Case-Shiller U.S National Home Price Index to see the rise in the value of median home prices.
As you get ready to dive into the world of real estate investing, you will need to adjust your mindset. Read our "Four Ways To Develop A Real Estate Investing Mindset" as the first step in generating wealth from real estate investment.
Real estate investments can create tax advantages for you. The tax amount you pay is impacted by a variety of elements:
Accordingly, it’s important to discuss tax responsibility with your tax advisor for each of your investments.
In general, rental income and capital gains will be taxed eventually. However, you have the following tax benefits available to you as a real estate investor:
You have two options when real estate investing: active or passive.
Active real estate investment means that you directly own the real estate. The benefit of being an active investor is that you have more control over the property. The amount of power you wield also opens you up to more responsibility and risk. Active investments require time, effort, and expertise for continued success. Passive real estate investment means providing the capital (cash) and letting professional investors handle the money for you. Investors usually leverage a fund and let you have less responsibility. While passive investors surrender some control, they gain more flexibility via REITs, mutual funds, and various real estate opportunities. In addition, passive real estate investing requires less expertise, effort, and management.
No matter how you choose to invest in real estate, you will want to mitigate your risk. Are you ready to make sure your real estate investing business is protected? Start with our investor quiz, and we'll help you find ways to protect your assets.
Now that we’ve covered the basics of real estate investing, you’re ready to progress to the next step. To recap, here are the major things to know about real estate investing as a beginner.
#1 Real estate investing is profitable and stable.
#2 There are tons of tax breaks for real estate investors.
#3 Active and Passive real estate investments are both viable options.
Real estate investing is hot right now. It might be the right time for you to jump in on the market. If so, read our guide, “How To Start Real Estate Investing in Your 30s”.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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