Since the beginning of civilization, real estate investing has been the most common and most successful way to build generational wealth. Look at any country, and you’ll find that the wealthiest citizens began with a single real estate investor. For this reason, you might be wondering how to create wealth investing in real estate.
Over time, a real estate investment must go up in value. Real estate is not only inherently valuable, it is inherently finite. Of course, there are other investments that increase in value faster. But there’s no investment that creates wealth as sustainably and consistently as real estate investing.
Still, what does it mean to be a real estate investor? How much money do you need to become a real estate investor? And what risks are you taking on?
Investing Directly in Residential and Commercial Real Estate
When people hear “real estate investing,” they’re usually thinking about buying property. You can buy a residential property and rent it out. You can do the same with a commercial real estate property. When it comes to commercial real estate, usually the value you own is fractional; you’ll go in with one, two, or a hundred partners.
Investing directly in real estate has pros. For example, you:
- Have direct control over the real estate you own.
- Gain its appreciated equity value.
- Make an income by renting it out or otherwise using it.
Even your own primary residence can be considered a real estate investment. When interest rates are low, many investment professionals recommend that you purchase as expensive a home as you possibly can. You build wealth at low rates and can use your home as equity.
But there are cons to managing an investment property, too:
- You need to actively manage the property; it’s not truly passive income.
- Not everyone wants to own or manage a rental property.
- You need massive wealth to begin investing in commercial real estate.
In short, investing directly in residential, multifamily real estate, or commercial real estate isn’t as straightforward as many other investment methods, but it can provide the highest stable return.
Being a Residential or Commercial Landlord
Becoming a landlord is often referred to as “passive income.” But it’s generally not. A landlord who manages their own property will need to deal with repairs, maintenance, and communications.
The only way to make it truly passive income is to hire a manager. This is the ideal method of wealth-building for those who have dozens of rental properties. Someone who only has one or two may not find it feasible, as the rental income will be split between themselves and their managers.
Owning and renting out real estate is the same as owning a business. Most landlords will create an LLC for each property, and each property will have its own income and expenses. A landlord can create an entire portfolio of hundreds of properties over time — or may just have interest in managing one or two very large commercial properties.
For those who are saving for retirement, becoming a landlord can be an excellent way to build wealth. Foremost, you have passive income into your retirement — by the time you retire, the properties have likely been entirely paid off. Second, you are able to build equity in those properties, and you can sell them if needed to fund your retirement.
Investing in Real Estate through Funds, ETFs, and Stocks
There is a more roundabout way as to how to create wealth investing in real estate: through the stock market. You can invest in a REIT (real estate investment trust), in property companies (and property management companies), and otherwise, invest directly in the market without having to purchase a property yourself.
You will see the positive cash flow of the real estate industry without any of the inherent risks of having to manage your own investment property. At the same time, you’re not going to see the kind of wealth you would see if you purchased the property on your own.
Investing in real estate through funds, ETFs, and stocks are generally considered to be lower risk. And it can even be a higher reward depending on where you place your money. Companies such as BlackRock are buying up individual housing stock. Companies such as Zillow and Trulia are getting into the home selling game. So, if you use your money to back the right horse, you can make a lot.
The challenge, of course, is that you can back the wrong company. Your investment in a diversified real estate mutual fund is going to be relatively safe. Put money in a specific stock, however, and you could find your investment is extremely volatile.
The Relationship of Real Estate, the Economy, and the Stock Market
When the stock market is volatile, erratic, or crashing, alternative and sustainable investments generally become more popular. In other words, investors frequently flee the stock market and move to real estate.
But, as we saw during the housing market crash, the stock market and the real estate market are also extremely linked. When the economy itself is down, both the housing and stock markets tend to go down as well.
Real estate obeys the same laws as the stock market; it’s better to buy when it’s low. (But, as Warren Buffett advises when it comes to stocks, it’s also better to never sell.)
Nevertheless, it took less than a decade for the country to recover from the housing market crash. As with stocks, real estate (both housing and commercial properties) are a long game. You generally should not invest directly in properties unless you expect to hold them for at least five years.
But there’s one major exception: House flipping.
Investing in Home Flipping and Home Flipping Companies
There are also investors with interests not in holding property, but in the act of “flipping” it. Investors put their money into old, ugly, or damaged houses, recondition and renovate them, and then sell them at a profit. While this is commonly done for residential real estate, it can be done with commercial real estate, too.
Investors who want passive income in the “home flipping” arena are generally “hard money lenders.” They lend their money out at a premium to people who are actually flipping houses. The people flipping houses will need to pay back that money once they have sold the property. So, the loan isn’t out for long, and the house flipper has a reason to resolve that loan quickly.
Hard money lenders are running a risk; house-flippers aren’t always adequately prepared for the challenges they face. But they can also make a lot. And there are also investors who personally invest in house flipping companies.
Diversifying in the Real Estate Business
As with any other industry, it’s important to diversify your money. Most people in the real estate business will have multiple properties, will have investments in the real estate industry, and may even have an investment loan or two.
The more you learn about the real estate market, the more you’ll be able to identify a positive investment. For instance, a real estate agent may be able to see an up-and-coming market they want to put their money in; they have “inside” knowledge most people don’t.
But what’s most important to understand is that real estate is absolutely one of the best ways to build wealth. Real property will always have inherent value in addition to its utilitarian value, which is what makes it so remarkably stable. Moreover, real property can be used in a variety of ways to build wealth, such as equity for other businesses.
FAQs on How to Create Wealth Investing in Real Estate
How can you invest in real estate with very little money?
You can invest in real estate with under $1,000 if you choose to invest in real estate trusts, funds, and stocks. This enables you to get a part of a company or a portfolio that is in the real estate industry without directly investing yourself.
How can you start investing in real estate?
Many real estate investors begin by getting their real estate license. From there, they broker their own deals and purchase properties either to rent or to flip. Those who want to create long-standing wealth generally hold their properties, renting them out as a form of passive income.
What are the dangers of investing in real estate?
Real estate can be damaged. Over time, land will always appreciate in value. But buildings and structures can become destroyed. A real estate investor can mitigate this damage by always holding the right amount of insurance, as well as umbrella insurance policies for additional peace of mind.
When should you invest in real estate?
If you’re wondering how to create wealth investing in real estate, it depends on timing. The best time to invest in real estate is, as with the stock market, when real estate is down. During a “boom” is the worst time. But it’s not always possible to tell when real estate is down or up unless there’s a dramatic crash. Because of that, the second-best time to invest in real estate is usually “now.”
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