Investing in real estate is an excellent way to build wealth. However, it can also be a high-risk investment. Whether you purchase a single-family rental property, invest in a real estate investment trust (REIT), or contribute to a crowdfunded real estate project, it’s important to have an effective due diligence process in place. This can help you determine if an opportunity is financially sound and can meet your financial goals.
Despite the many risks, there are numerous benefits to investing in real estate. Besides the potential to generate income through rent, real estate also provides tax deductions, value appreciation, and a hedge against inflation.
As a result, real estate has become one of the most popular asset classes for investors, especially in the United States. The real estate market is cyclical and has been experiencing a growth period since 2012. However, the real estate industry can be quite volatile. As a result, investors should always take a conservative approach to the market.
A primary reason for the popularity of real estate is its liquidity. In contrast to stocks, which are illiquid and can be hard to sell, real estate is a tangible asset that has an intrinsic value, both for the raw land as well as the improvements. The value of a property can be appraised by an expert or through comparable sales and appraisals.
In addition, property values historically appreciate at a rate that exceeds annual inflation. While there are many factors that can affect property value, a well-chosen investment will generally appreciate at a faster rate than the general economy.
Real estate is often a capital-intensive industry, so many real estate investors choose to leverage their investments by taking out mortgages. This is known as “employing leverage.” While it increases the risk of loss, the return on investment can be exponentially higher than a deposit account.
Unlike the stock market, which is open to all investors regardless of size or net worth, the real estate industry is highly fragmented. As a result, seasoned investors are able to create networks of like-minded individuals and tap into the resources of the greater real estate community. These networks can provide investment opportunities and valuable insights, helping investors find the right projects for their money.
There are a few different ways to get started in the world of real estate investing. For example, purchasing a single-family rental property can be relatively affordable for most people. On the other hand, building a property empire across the country is usually beyond the reach of most people. For this reason, it’s important to consider beginner-friendly investing strategies when evaluating an opportunity.
The most common beginner-friendly strategies include wholesaling, investing in a REIT, and contributing to a real estate crowdfunding project. Each has its own pros and cons, but all have the potential to grow a portfolio of real estate investments with little upfront cost. However, if you decide to pursue any of these strategies, it’s important to have a fully-funded emergency fund to cover unexpected expenses and other risks associated with the investment.