How to Become Financially Independent by Investing in Real Estate
Financial independence may sound like a fool’s errand in today’s highly cut-throat real estate marketplace. But the reality is that it’s possible for anyone to achieve it – even if someone is neck deep in debt.
Regardless of your current financial woes, there’s always a way to start over. The barriers to entry in the real estate market are low – you just need to learn about all your available options.
The problem with most investors is the lack of awareness about their choices in the real estate market. In this article, we’ll deep dive into some real estate investment tips, including options that don’t require hundreds of thousands in down payment.
Start with real estate investment trusts
Real estate investment trusts (REITs) provide interesting opportunities for investors to participate in real estate without actually owning the property. In a way, REITs are very similar to mutual funds. An REIT is a business that owns a diverse set of commercial properties, including office buildings, hotels, and apartments.
REIT dividends tend to be very high, which makes them a useful investment strategy for retirees. And if you don’t need the additional income, you can reinvest the money to further diversify your real estate portfolio.
It’s worth noting that your reward depends on the type of REIT you purchase. Some REITs trade on an exchange like a stock (which makes them highly liquid); others are not traded publicly (which means you can’t sell them as easily). The bottom line is that REITs are known for their potential for long-term returns, much like the stock market.
If you’re new to the concept of REITs, it’s best to invest in publicly traded REITs by consulting a brokerage firm near you.
Invest in a real estate crowdfunding site
Much like GoFundMe and Kickstarter, real estate crowdfunding platforms allow developers to seek finances from interested investors in exchange for equity or interest. This strategy allows investors to access the real estate market while minimizing risk. It’s a win-win financial arrangement for both developers and investors.
A big advantage of real estate crowdfunding is the ability to invest your savings in ten different markets around the country. This means you can focus on properties in other states. Just like REITs, you won’t have to face the hassles commonly associated with property management, such as selecting tenants, maintaining repairs on a property, and having to evict delinquent tenants.
Real estate crowdfunding broadens the investment potential for you and offers great potential in the years to come. In 2018, the real estate crowdfunding market took at $13.2 billion and is expected to reach $869 billion by 2027 at an average compound annual growth rate of 58.3%.
Pro tip: The most well-known platforms in this niche are American Homeowner Preservation, Crowdestate OW, Fundrise, and many others.
Some words of advice: most of these platforms are only open to accredited investors (those who have an income of more than $200,000 in the last two years or have a net worth higher than $1 million). RealtyMogul is an alternative real estate crowdfunding platform for investors who can’t meet these requirements.
Buy or invest in rental properties
Let’s be honest, investing in rental properties is hard work. It’s time consuming and requires huge upfront cash. However, it has a favorable reward to risk ratio since you won’t have to contend with monthly mortgage payments.
Pro tip: To improve your odds of success, you’ll have to do your due research before buying up income property. Make sure to thoroughly vet the neighborhood by analyzing its livability, amenity, and vacancy rates. For obvious reasons, high vacancy rates are definitely not a good sign.
Some investors rent out rooms in their house, as is commonly done by many property owners, or by renting units in multi-family buildings (an expensive but rewarding venture). If you decide to buy out an entire investment property, make sure to buy one with lower combined expenses than the amount you charge in rent.
As a landlord, you’ll be responsible for fixing major repairs and make the units livable.
It helps to conduct a preliminary analysis of the return on investment (ROI) that the unit is going to generate.
The business of flipping – which is to buy low and sell high to turn a profit – applies to nearly everything you can think of, from cars and phones to jewelry and houses.
Flipping houses may sound like a fun concept on paper, but it requires a lot of research and even more trial and error. So even though you’ve seen your friend pull it off with finesse, you’ll have to figure out the best investment strategy for your specific case.
But not everyone is cut out for making accurate estimates of the market. For one, there are so many moving parts associated with investment properties, ranging from inconvenient maintenance to expensive repairs. Secondly, the longer you wait to sell the property, the less income you’ll make due to the mortgage payments. However, you can reduce your losses by living in the house.
If maintenance is going to be an issue for you, try to invest in a condominium. Condos come with low maintenance requirements because all external repairs are handled by the condo association, leaving you to deal with the interior.
Pro tip: Find an experienced real estate consultant who can help you find the right buyers.
Rent part of your home
If you’re a homeowner with a few extra rooms to spare, why not rent them out using a platform like Airbnb? It’s a convenient and quick means of making money without the hassles associated with long-term tenancy. The best part is that sites like Airbnb often prescreen potential renters and the site also provides guaranteed protection against damages.
Renting out a room is less complicated (and less rewarding) than renting out an entire unit – but at least you’re making money.
Find the ideal location to buy property
Some neighborhoods are more profitable than others – they also tend to be more expensive. Urbanized areas such as cities with a growing population represent a great investment opportunity.
A good rule of thumb is to find a location that has traditionally low property taxes and access to various amenities such as schools, parks, malls, movie theaters, and restaurants. The neighborhood should have a low crime rate and a thriving job market – which is bound to attract a large pool of renters willing to pay what you ask.
Borrowing money at low rates
It is more convenient to buy the property outright with cash. But that isn’t always possible and you may have to take out a bank loan to finance your purchase.
Here’s an obvious buying financial strategy: make sure the interest rate is manageable for you. In most cases, the interest rate on investment properties is higher than the traditional mortgage interest rate. If you decide to finance your property through a bank loan, you should seek out a low mortgage that won’t hurt your monthly profits.
Buy landlord insurance
The average homeowner insurance policy will not cover the risks associated with tenancy. This is why you should buy a policy that minimizes the specific risks that come with rental units. Landlord insurance ultimately makes your job as easier. It covers various things such as lost rental income, property damage, and even liability protection.
Liability protection is useful if the tenant ends up getting injured due to maintenance problems with the property.
Go for low-cost single-family homes
If you have a limited budget or haven’t learned the ropes of real estate investment yet, you can start with a low-cost single family home or a small apartment complex.
The advantage of buying single-family homes is that they tend to attract long term renters such as families and couples. These family units are beloved to be better tenants than single people because of the perception that they are more financially stable and can pay higher rents more regularly.
Once you’ve narrowed down your property, try to look after all the minor renovations. This will also attract financially stable tenants. Property renovations will also raise the value of your house should you decide to sell it after a few years.
Finally, try to buy an affordable property that is within your budget. Experts recommend paying n amount no higher than 12 times the annual rent you expect to make.
Financial dependence can help you take ownership of your cash flow, and more importantly, your life. To this end, there are several real estate investment strategies with high returns.
This isn’t to say that real estate is risk-free. Success depends on various options such as locations, conditions, and other variables. We recommend becoming more knowledgeable and experienced before you get into the market. As your net worth increases, so too will your capacity to diversify your investment portfolio.
If you don’t have enough cash at hand to purchase a property or are unable to seek a bank loan, start out by opening a few REIT account to get started.