How to Invest in Real Estate for Beginners

If you’re new to investing in property, you may be wondering how to invest in real estate. It’s no surprise that the financial risks that come with property investment can feel overwhelming. So, how do you get started with the least amount of risk possible? Stay with us while we take a look at all things real estate investing for beginners. 

Here, we’ll look at how to invest in real estate by breaking down the most practical investment options available, covering the pros and cons so that you can make informed decisions as a real estate newbie. 

Option 1: real estate investment trusts (REITs)

In short,  REITs are the simplest and most passive way to invest in large-scale real estate, for example, commercial buildings, apartment complexes or data centres. The trick here, however, is that you don’t ever have to buy a physical property. Instead,  you can think of them as mutual funds for real estate. 

The stock market approach

Here’s how it works. You’ll buy and sell shares easily on the major stock exchanges, and the great news is that you can start by investing as little as the price of one share. Another great advantage of REITs is that they often hold hundreds of properties, which automatically lowers your risks. 

However, there are a few things that you’ll need to keep in mind if you decide to take this approach. You won’t have any say in the management or the operations of these properties. Your investment is tied to the stock market, which means the value of the property will fluctuate daily. Also, you’ll need to keep in mind that dividends are often taxed as ordinary income, not as capital gains. 

This real estate investment is best for investors with a lower budget and who prefer low commitment and a passive investment.

Option 2: rental properties 

Next on our list of investing in real estate for beginners is the most chosen, and it is a more hands-on approach to real estate investment. You’ll buy property and then rent it out for monthly rental income, while the property appreciates in value. Here, you can use a mortgage to control a larger asset (property) with a fraction of a down payment 

It also allows you to use leverage (a mortgage) to control a large asset with a relatively small down payment.

Being a landlord

One of the best parts of being a landlord is that you get to choose the tenants you rent to,  as well as the rental price and if you want to implement any renovations. Also, choosing a valuable property means that you’ll generate positive monthly income. Another perk of being a landlord is that you can deduct expenses, such as property taxes, mortgage interest, and depreciation. 

Things to keep in mind when taking this route are that you’ll need to ensure you have a big enough pot of money to ensure you can afford the down payment, as well as reserves for any issues that may arise. You’ll also need to make sure that you manage tenants, evictions and maintenance – should this arise. This is where landlord insurance comes in handy! Knowing that you can manage the risks as much as possible is always something that will be at the back of your mind. 

This type of real estate investment for beginners is best for those who have enough capital saved and a willingness to commit enough time to make it work. 

Option 3: real estate crowdfunding

With real estate crowdfunding, numerous investors will pool their money together to collectively fund large commercial or residential projects. This way, you become a part-owner of a project managed by a professional firm. 

The pooled approach

When it comes to the pooled approach, the advantage is that entry points are often lower than a full down payment. The next advantage is that experienced real estate firms will handle the day-to-day operations and development of the real estate. Also, there is scope for diversification. You’ll have the opportunity to invest small amounts of money across multiple geographic regions or asset types. 

A few disadvantages, however, are that your money is often tied up for 3-7 years, the success of your real estate investment depends on the expertise of the project sponsor, and some of the highest-quality leads can at times be restricted to high-net-worth individuals. 

This type of real estate investment is best for investors with a moderate budget who want passive investment, but also want to avoid the stock market volatility that comes with REITs. 

Option 4: House hacking

This option may be one of the most effective ways for a beginner to invest in real estate because it involves buying a multi-unit property, living in one of the units, and then renting out the rest. 

The ‘live for free’ approach

House hacking is the option with the least financial risk, as the rent you collect from the other units will cover your mortgage payment. Also, you’ll likely reduce or eliminate your largest monthly expense, which is housing. 

The only downside to this option is that you’ll be living very close to, or next to, your tenant, and because you are the owner, you’ll be responsible for maintenance. Also, you’ll need to find properties in areas with multi-family residences, which limits your options. 

But, this option is still great for individuals who have a very low budget and who are willing to commit their time to their tenants being in such close proximity. 

So, which option is the best real estate investment for beginners? 

The best real estate investment for beginners will very much depend on each individual’s personal circumstances. There is no single best option. But if you’re still looking to make a decision,  here’s how you can decide. 

By now, you may have a better idea of which option for real estate investment is best suited to your circumstances and your goals. Real estate investment for beginners is an exciting venture and with the options available, you’ll be able to make the best decision for you. 

For more information on landlord insurance and protecting your property investment, make sure to get in touch with our friendly team of experts at CIA Landlord Insurance on 01788 818 670.