Real estate investing is investing in property or land with the intent of eventually being able to sell your holdings for a profit. Real estate investing can be as simple as buying your own home, but it can also include riskier bets with much less certain returns.
Investing in real estate means purchasing property or buildings that you expect to increase in value over time, providing a return on your money. Real estate investing can vary widely in its nature, from extremely safe, long-term investments to very risky speculation with no guarantee of a return.
While most people don’t engage directly in real estate as an investment, the range of opportunities make it an important piece of your portfolio to remember and a great way to diversify your investments beyond just stocks and bonds if you’re looking to branch out.
Types of Real Estate Investing
There are a variety of different ways that you can put your money to work in buying and selling property, including many that don’t require you to actively or directly participate in the selection and management of those buildings or spaces.
Most Americans are investing in real estate when they purchase a house. While you may take out a mortgage and buy a house for the express purpose of securing a place to live for you and your family, if home prices in the area increase over time (as they typically do), the value of the house you purchase can appreciate to a level well beyond what you initially paid for it, making it a valuable investment in addition to a home for your family.
Beyond simply purchasing a home, you may also secure property with the intent of providing yourself with an income stream. That can be as simple as purchasing a vacation home with the plan to rent it out for most of the year or as complex as buying up a strip mall with the intent of leasing space out to small business owners and everything in between.
Owning property you can collect rent on can be an excellent investment, with the chance to both collect a steady stream of income and see the overall value of the property increase over time, but there are a lot of variables that go with renting out your beach house, let alone becoming a landlord, so it’s important to do your research before purchasing any sort of investment property.
Real estate investment trusts (REITs) are securities that are made up of real estate holdings. They will essentially trade like a stock, usually offering large dividends, but their value is in the portfolio of investment properties underlying them. Many REITs will focus on a certain type of asset or region (like strip malls in Southern California, for instance) and then pay dividends to investors from the income generated through rent. Owning a REIT is like owning rental property, but it comes without having to take care of the duties involved with managing rental property.
The variation within REITs is considerable, so it’s very important to research them carefully before making an investment. While some are stable, relatively safe investments that would make a solid piece of a 401k, plenty of others are very risky and don’t make sense unless you’re ready to take some big chances with your money.
Some real estate investing involves owning for the short term only, buying properties with the intent to “flip” them within the next few months. If you have identified what appears to be an undervalued property, buying it and fixing it up can net you a major windfall when you sell it later.
Flipping properties can be extremely risky and involve a lot of work, but it can also be a lucrative way to turn your knowledge of a specific real estate market into a quick return on your money. If you have the funds and a very strong sense of how price trends are progressing for a certain area or region, you might be able to generate significant returns from flipping property.