Investing for Beginners: How to Invest in Real Estate

You can find ways to invest in real estate, even if you don't want to be a landlord.

Investing in real estate is a popular strategy to grow your wealth. Adding real estate investments to your portfolio can add diversification and help protect your wealth from the volatility of the stock market.

Check out these real estate investing tips for beginners to discover if you want to own property, buy shares in a real estate investment trust, join a real estate investment group or join the real estate movement through the sharing economy. Here’s how you can start investing in real estate.

How to Start Investing in Real Estate

Decide which route you want to take to become a real estate investor. Then, follow these general steps to start investing in real estate:

1. Choose your Real Estate Investment: REITs or Real Property

Choose the real estate investment option that fits with your financial and time availability. Less time and money are required for REIT investing with greater outlays for direct real estate investing.

2. Set Your Real Estate Investing Budget

Determine how much money you can spend on your real estate investment. Set your real estate investment budget: $1,000 to $7,000 for REIT fund investing, and up to five figures for direct real estate investors.

3. Do Your Real Estate Research

If REITs are for you, consider whether you want to invest in several sector funds or a more comprehensive ETF such as Vanguard REIT Index Fund (VNQ). For real property investing, learn the market, study the numbers and partner with a reputable real estate agent.

Learn: 13 Real Estate Secrets Only Insiders Know

4. Store Up a Cash Cushion for Real Property Investing

Direct real estate investors need more cash for unexpected expenses. Be prepared for a broken pipe, roof repair and other surprise costs.

5. Expect Setbacks When Investing in Real Estate

Like any other financial endeavor, you’re likely to experience challenges. REIT values and dividend payments might decline — or increase. Real property has its surprises and value fluctuations; if you do your homework first, you’ll be better prepared to handle the unexpected.

See: 6 States With the Biggest Real Estate Bubbles

Why Invest in Real Estate

Investing in real estate can be the right choice, depending on your investing style and financial goals. Here are few common reasons why a real estate investment could be suitable for you:

  1. Real estate investment income creates positive cash flow.
  2. Leverage to expand your profits, and as the property appreciates, your relatively small down payment yields a high level of returns.
  3. Investing in real estate offers favorable tax benefits.
  4. Real estate investing grows your net worth-as the property is paid off, your net worth expands.
  5. Real estate is an excellent hedge against inflation.

Types of Real Estate Investments

A few options exist for getting started as a real estate investor. Depending on your resources and personal interest, you can find the beginner investing choice that best suits your financial strategy. Here are four of the most accessible types of real estate investing:

1. Rental Properties

To become a direct owner in real estate, find a home, condo or apartment building, buy it and then rent it out. Before becoming a landlord, you’ll need a down payment, property inspections and to review the property’s rental potential and expense records.

Benefits of real estate investing include the opportunity for steady cash flows and capital appreciation, along with tax benefits. However, it takes due diligence to uncover a suitable rental property selling at the right price. And, a key lesson in Real Estate Investing 101 is this: The rental property’s expenses — repairs, maintenance, etc. — shouldn’t be greater than your rental income, or you’ll be losing money instead of making it.

If you have the down payment, time and motivation for direct real-estate investing, find a real estate agent who deals in rental properties and start viewing properties. Be prepared to evaluate the property’s financial records. Do the math to ensure your rental property will provide a good return on your investment.

2. Real Estate Investment Trusts

Real estate investment trusts are real estate investment companies that own or finance income-producing real estate. REITs buy many properties — including apartments, hospitals, hotels, industrial facilities, office buildings and mortgages — and then sell ownership shares to individual investors.

REIT investors enjoy many of the same benefits as direct real estate investors. REITs must pay out at least 90 percent of its taxable income to shareholders annually. REIT returns outpace the consumer price index, according to REIT.com, making REITs a good inflation hedge.

REIT funds might increase in value, but positive returns aren’t guaranteed. Buy during a housing bubbleand when real estate prices return to normal, your REIT might drop in value.

You can invest in an REIT as easily as a mutual or exchange-traded fund. Sign into your investment brokerage account, punch in the fund ticker symbol, choose the number of shares and click “buy.”

3. Real Estate Investment Groups

To start a real estate investment group, pool your money with other investors to buy property together. You get the benefits of owning a rental property — without the cash and management responsibilities.

The National Real Estate Investors Group offers education and information about how to join a group. Club goals — education alone, or education and investment — and monthly dues will vary.

Joining a real estate investment group provides the opportunity to learn and potentially invest in real property. But getting into business with others is complicated and doesn’t always work out. Read the group’s policies carefully before joining, and have an exit strategy, just in case.

To join a real estate investors’ group, search online for local groups, or start one yourself. The NREIG has resources to help you get up and running.

4. Home Rentals

With the advent of the sharing economy and websites such as Airbnb, ordinary individuals can become landlords. Expert tips to become a hotelier begin with understanding your goals for becoming a rental host. Renting your property through the sharing economy requires a serious commitment, financial outlay, appropriate insurance and ongoing management.

The benefits of renting a part of your home include extra cash and the opportunity to meet interesting, new people. Being a hotelier involves preparing the site for the visitor, managing the listing, being available for questions and concerns, and regular cleaning.

To become a hotelier host, stop by the Airbnb website for a wealth of resources to get you up and running.

Find Out: 10 Worst Real Estate Investing Mistakes

No matter what route you take to become a real estate investor, evaluate your personal circumstances before investing. Ultimately, if you’re seeking a guide to real estate investing for beginners, then get your feet wet with a small investment in a REIT fund. It’s more affordable than buying an apartment block. If you’re ready for greater real estate management, check out direct real estate investing, or rent out a room through the sharing economy.

Keep Reading: The Secret Trick to Becoming a Real Estate Mogul for Less Than $10,000