Investing in real estate is one of the best ways to build wealth. Real estate almost always appreciates in value, and rental income can grow your net worth substantially. Most people who achieve generational wealth invest heavily in real estate, so it’s a proven path to long-term success.
There are several valuable strategies you can use to build wealth through real estate. The following are some of the most popular real estate investment options:
Residential Rental Properties
Residential property is often where investors start their real estate ventures. There are several accessible ways to begin investing in residential real estate.
One of the most popular ways to begin generating income from real estate is “house hacking.” This involves renting out part of your primary residence and using the rental income to cover all or part of your mortgage. For example, you could purchase a duplex, live in one side, and rent out the other. Some homeowners rent out extra bedrooms in their primary residences for additional income, too. You can use this extra income to save for your next investment property or to pay off your mortgage faster.
Another common way to build a real estate portfolio is to rent out your home instead of selling it when you move. Most homeowners sell their first homes in order to upgrade after a few years. However, if you can hold onto your original property, it can become a great source of income.
Once you have enough capital, multifamily properties are an excellent investment. They tend to have better cash flow than single-family homes. If one tenant moves out, you can still collect rent from the other units. Managing multiple units and tenants requires more work, but it also offers a better return on your investment.
Commercial Real Estate
Commercial real estate investing is similar in many ways to residential investing, but you’re renting the property to businesses instead of residents. You could purchase offices, retail stores, or industrial buildings.
Commercial real estate can offer a great return on investment. In most cases, commercial properties have longer lease periods than residential homes. Less turnover means more consistent rental income. Commercial properties usually have a smaller pool of potential buyers, too, so you face less competition when trying to break into the market.
One important consideration to keep in mind is that local, state, and federal regulations for commercial properties can be different from regulations for residences. Before investing in commercial real estate, you should consult with a lawyer to make sure you’re familiar with all the relevant laws.
Flipping Homes
Flipping is an investment strategy that involves purchasing an old or run-down home, renovating it, and selling it for a profit. This is not a passive, long-term strategy for generating wealth as you don’t hold onto the property to generate rental income. Instead, it’s a way to turn a profit fairly quickly.
Fixing and flipping homes can be an excellent source of income, but it’s far more hands-on than other forms of real estate investing. You either need to possess the skills to renovate the property yourself, or you need to hire contractors for the work, which will cut into your profits.
The timing of the flip is also key. There’s never a guarantee that you’ll be able to sell a home after renovating it. To have the best chances for success, you should look for homes in up-and-coming areas or hot real estate markets. Identifying the best place and time to purchase houses for flipping is an important skill that will maximize your profits.
Real Estate Syndication
Owning and managing your own rental properties can be highly rewarding, but it’s not the right venture for everyone. Although owning rental properties is often referred to as “passive income,” it requires a lot of hands-on work. You have to identify which properties you want to purchase, find and vet your tenants, and deal with turnover as residents come and go. Additionally, you have to manage maintenance, repairs, and renovations. Even if you hire a property management company to assist with these tasks, being the sole owner of a rental property can be an enormous responsibility.
Fortunately, it is possible to invest in real estate without taking on all the responsibilities of a sole owner and manager. If you want to include real estate in your investment portfolio without directly managing properties, real estate syndication could be the right option.
A real estate syndicate is a group of accredited investors who have pooled their funds together to purchase apartment buildings or commercial properties. The general partner, or sponsor, leads the process by gathering funds from the other investors, purchasing the properties, and renovating the buildings.
All the other investors are limited partners. They provide funding for the investment in exchange for a share of the rental income and the profits when the property is eventually sold. In most cases, syndicates sell their properties within about five years.
Syndicates have a high potential for a return on investment. As a limited partner, you’d receive fully passive income from the rental properties. It’s also a good opportunity to invest in real estate that you wouldn’t have the funds for on your own. However, you have limited control over the asset and can’t sell your shares whenever you want. You also need to carefully vet the sponsor before investing to make sure they’re experienced and reputable.
Real Estate Investment Trusts (REITs)
An REIT is a company that owns and manages income-generating real estate. Investing in an REIT is similar to investing in a syndicate in that both are passive forms of income and are good ways to diversify your portfolio. When investing in an REIT, though, you only purchase shares in the company that owns the real estate. You do not own the real estate itself.
The returns on REITs are not quite as high as the returns on real estate syndicates, but REITs offer their own benefits. Most are publicly traded, so you can sell your shares at any time. REITs have a lower barrier to entry, too. While you have to be an accredited investor to buy into a syndicate, anyone can purchase shares in an REIT.
The Best Strategy for Building Wealth
The right real estate investment strategy for you depends on your current portfolio, your available funds, and your interests. Some investors prefer purchasing and managing rental properties on their own. Others invest in syndicates or REITs to build wealth passively.
If you’re new to investing in real estate, it’s best to start small. Rent out a property you already own, and save up those profits to make additional investments when you’re ready. Keep an eye on the market to make sure you’re buying or selling at the right time, and consult with trusted experts in your area when deciding on next steps.