Article | 3:14 min read

What to Know About Investing in Real Estate


It's a good time to consider making investments in real estate. The nation's housing market is looking up and demand for rental properties continues to soar. If that's not enough incentive, Zillow reported home values are expected to rise 2.6 percent over the next year [1].

But where should amateur investors start? It can be a tricky subject to broach for those who haven't previously ventured into in the market.

Some people look to buy small apartments where they can rent out various units to tenants. Others hope to buy distressed properties, complete a series of renovations and then sell them in a timely matter for a profit.

Leonard Baron, a self-published author on real estate investing and a lecturer at San Diego State University, told U.S. News & World Report there are two methods most people should consider when looking to get into the world of real estate: direct ownership or buying shares in a real estate investment trust (REIT) [2].

Rich Ellinger of Wealthminder, a financial planning, investing and retirement firm, told Zillow REITs act like stocks. They have the potential for capital appreciation and the potential for loss.

"Although subject to economic fluctuation, REITs have performed well in the past few decades," Ellinger said. "Over the past 20 years, REITs have appreciated approximately 13 percent per year - the top among all equity classes."

Meanwhile, direct ownership can be a strong route compared to REITs because the investor owns the property, rather than just a stake in a particular building.

Baron warned investors to do their homework before becoming direct owners of property.

"It's a very complicated asset," Baron said. "But because it's a physical asset, people think it isn't complicated. People way underestimate the number of issues that come up."

Warning call
Baron warned people against taking investment advice from a real estate agent and assuming their own personal background in owning a home translates to managing a rental.

Prospective investors should avoid listening to real estate agents about what properties will yield a strong return because real estate agents are looking to make a commission on the property the investor buys. This means they might be less than impartial when choosing a unit.

Meanwhile, people shouldn't lean on their homeownership experiences too much because meeting rental regulations is a different realm. Renting out a property is distinct from owning a home because the owner will need to make sure the building meets certain guidelines. That includes following all safety guidelines, keeping up with fair housing rental regulations and making sure the building meets all city codes.

Considering cash flow
While flipping a home has it's upside, Zillow reported most owners don't net a large profit when they sell shortly after their initial purchase.

House flipping can be a smart option for those who are experienced in construction or home renovation, but those who don't know how to renovate a home might want to consider a different path to real estate investments.

Andy Prescott, who runs the savings website, Art of Being Cheap, told Zillow he subtracted all of his expected monthly payments of owning a home - mortgage, insurance and taxes - from the amount he expected to receive for renting out the property.

"If that number had been close to zero, I would have been nervous about unexpected expenses, but since I had a few hundred dollars cushion I knew renting my home out would work out well," Prescott said.

One problem home flippers have is if the property doesn't sell quickly, because they will still have to pay taxes on the property and keep up with any needed maintenance. However, when this occurs, home flippers can choose to rent the property instead of keeping it listed on the market to take care of some of those costs.

[1]. How to Get Started in Real Estate Investing

[2]. How to Begin Investing in Real Estate

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