How to Invest in Real Estate

Investing in real estate requires time, tolerance and money. It may not, however, require hard work, steel nerves and lack of sleep. You can be the active landlord or house flipper — or you can be a passive real estate investor. There are many options open to you.

Low interest rates and stable housing prices make it a great time to start investing in real estate now. It can be a lucrative way to earn passive income or build long-term wealth. Do you know how? The following steps will show you how to invest in real estate.

Step 1: Do a Financial Assessment.

The purpose of your financial assessment is to find out where you are and where you want to go financially. To assess, determine your financial net worth — calculate your total debt, liabilities, property ownership, income and savings. If you don’t have a cash reserve for emergencies, you should build up one before you start. Many real estate investments can be illiquid for long periods of time.

Once you’ve determined your financial net worth, think of a goal for your real estate investment — visualize it in quantitative terms. Make sure your wealth goal extends about 30 years.

Here’s an example. For a $400,000 property, let’s suppose you pay $100,000 cash and $300,000 from a mortgage loan at 2.5%. The U.S. real estate’s average annual return rate is between 3%–5%. With a 4% return, your 30-year equity would be $456,665, after deducting loan interest.

By using the historical dividend yield of ETFs or mutual funds, online investors can do a similar calculation for their 30-year return. House flippers can use a projected return. Either way, make sure you have a spreadsheet-calculated goal in mind.

Step 2: Pick a Specific Real Estate Investing Strategy.

The next step is to develop a real estate investing strategy. It is time to select your target market and your trading forum. These are some of the most popular ways to invest in real estate.

• Real estate investment trusts (REIT): A REIT is a firm that buys, sells and manages properties. Through a broker, you can buy shares of REITs and receive income from dividend yields or benefit from the increasing value for the shares.
• REIT exchange-traded funds (ETF) and mutual funds: REIT ETFs gather a group of REITs into 1 fund. It allows you to spread your investment across the entire collection of funds. These ETFs give you low-risk exposure to some of the best real estate stocks — making these funds hard to pass up.
• Real estate crowdfunding: Real estate crowdfunding is the GoFundMe of online real estate investing. It matches investors looking to invest in specific projects with real estate developers needing money to complete specific projects.
• Rental property: There are active and passive ways to buy property for the purpose of renting it out to individuals or businesses. Your return comes from the rental cash flow minus the mortgage payment, taxes and other expenses. Plus, you benefit from equity appreciation.
• Flipping investment properties: Flipping homes involves you buying an undervalued home and fixing it up to sell at its new market value. Does this sound easy? It’s not. Successful house flipping requires expert handyman skill, professional knowledge of the real estate market and great bookkeeping skills.

In this strategy phase, it’s important to put together your team. Your team could include a real estate agent, partners, attorneys, insurance agents, contractors or bookkeepers. If you plan to try real estate crowdfunding, an online crowdfunding platform would be part of your investing team.

Step 3: Secure Financing.

This is the time to fund your real estate investing plan. The amount of money in your asset pool will determine the type and depth of investments you can execute. You may start with your savings. If you plan to directly invest in real estate property, you can apply for a traditional mortgage through the FHA, VA, Fanny Mae and Freddie Mac. Many of the online real estate platforms offer financing services as well.

Online brokers don’t require much money to get started trading REITs and other real estate mutual funds. Also, you can increase your buying power by opening a margin account with an online broker. A margin account typically allows you to borrow 100% of your account balance — doubling your buying power. However, you must be careful with margin investing. A southbound stock or ETF price can result in major losses and possible overdraft fees.

Step 4: Shop for Investments.

Take your time to use all the resources available to help you make the best investment decisions. Online real estate listing sites like Zillow (NASDAQ: ZG) provide active real estate investors with comprehensive information about U.S. properties for sale. Online brokers sites offer an incredible amount of free research tools for REITs, mutual funds and REIT ETFs. Also, crowdfunding offers a wealth of real estate-related research material.

Step 5: Execute.

Whether you’re online or in a real estate broker’s office, approach your initial real estate investment like a college intern. Here are a few tips:

• Get as much help from experts as you can. It’s okay to make some mistakes, but learn from them.
• Try not to focus too much on the cost of the property or real estate share. Before making your decision, consider all other expenses like loan interest, closing costs and fees associated with buying stocks on margin.
• Let time be on your side. You can avoid making many mistakes by not rushing.