A Beginner’s Guide to Investing in Real Estate

Real estate, better understood as immovable property, is a parcel or tract of land along with any improvements made to it. Investing in real estate is considered one of the most profitable sources of income and wealth generation in the 21st century. There is a wide variety of options when it comes to investing in real estates, such as becoming a landlord for rental property, flipping undervalued real estate after fixing it up, and products like real estate investment trusts (REITs) which provide investors with the ability to maintain liquidity and keep real estate in their investment portfolio. Real estate also accounts for 60 per cent of the world’s mainstream assets and a significant portion of all national, corporate, and personal wealth (RealtyMogul, 2021). Although investments in real estate are quite lucrative prospects, it must not be assumed that it is easy to invest in real estate, and that too with limited knowledge. Continue reading to understand how to invest in real estate and what to consider while making investment choices.

The act of investing in real estate is to purchase any land along with any man-made additions to that land. There are several categories of real estate investment, but the most popular are residential, commercial, and industrial real estate. Investing in each category requires different techniques and prerequisites. Profits in real estate investments are made either by an increase in values or rental incomes. As land becomes scarce due to rapid urbanisation, and demand for housing and infrastructure increases due to population growth, the value of land is constantly increasing over time. Property values also go up based on the perceived desirability of a neighbourhood, and improving certain aspects of a property can result in significant value gains for the property itself. Many real estate investors are looking to generate income by renting properties. By renting out a property, not only is it appreciating in value over time, but there is also a monthly income that helps generate a cash flow for the investor (Esajian, 2021). Moreover, landlords and property owners can often pitch in a greater amount for rent than the monthly mortgage payment, which develops equity and income at the same time (Wilson, 2018).

Investing in real estate can be an intimidating task, especially when an individual is not familiar with the terms revolving around real estate. There is a host of confusing jargon and acronyms that are difficult to grasp for the average individual, such as capitalisation rate, cash flow, net operating income (NOI), real estate investment trusts (REITs), and return on investment (ROI). A capitalisation rate, or cap rate, is used to calculate the value of an investment deal. It is expressed as a percentage and is calculated using the market value of a property (Chen, 2020). Cash flow is another concept used to describe the inflows and outflows of cash related to a property. A rental property will often calculate this cash flow to get a better understanding of the rent and expenses (Investopedia, 2021). Properties with a positive cash flow are more suitable for investing in rental real estate. The net operating income is the result of subtracting the net operating expenses from the net revenue income, giving the profit portion of the operation. Moreover, real estate investment trusts (REITs) are firms that manage investment portfolios based on income-generating properties. Lastly, a common term used in real estate investing is the return on investments (ROI). It is calculated by taking the ratio between the net profit and how much capital was used for the investment. The higher the ratio, the better the gains.

Real estate investing can be a difficult task for new investors. It can take several months before investors feel confident in the real estate market. Beginner-friendly strategies in real estate can help investors with little experience to remain highly profitable without risking much of their capital. The strategies are namely wholesaling, prehabbing, REIT investing, online real estate platforms, and purchase of rental real estate. The wholesaling strategy allows for investors to act as a middleman between buyers and sellers. A property is identified and secured for its market value, after which it is assigned to an end buyer for a profit. The idea is to market existing properties listed on the market and pitch them to investors/buyers. Prehabbing is the process of applying minor cosmetic updates to a property to increase its value. The property is then placed in the market or is further sold to an investor who conducts a full rehab (Braun, 2021).

Another option for beginners is to invest in real estate investment trusts (REITs). As a company operates and manages income-generating properties, a new investor can mitigate the risk of loss in his early investments. Also, the income generated by REITs is distributed as dividends among investors without applying tax on 90 percent of the profits. The method is also the most liquid than other models of investing in real estate. Furthermore, buying a rental income property is another great way of generating monthly income while hiring a property manager to overlook the process. Lastly, online real estate platforms provide the best opportunity for new investors as they connect investors with real estate developers. The main role of the investor is to finance real estate projects in exchange for monthly or quarterly payments (Kennon, 2021).

Real estate is an immovable property along with any man-made improvements made to it. Investing in real estate is quickly becoming one of the most profitable sources of generating income and wealth. Be it residential, commercial, or industrial real estate, the prospects for growth remain strong as land is becoming a scarce resource over time. With demand for housing and infrastructure rising due to population growth and rapid urbanisation, real estate investment becomes a highly lucrative field. But new investors must familiarise themselves with the terms used in the real estate market. A good strategy for new investors is to utilise beginner-friendly methods of investing in real estate such as wholesaling, rehabbing, REIT investing, purchasing rental properties, and investing in online real estate platforms.

Braun, K. (2021). Real Estate Investing For Beginners: Getting Started. Retrieved from https://www.clevergirlfinance.com/blog/real-estate-investing-for-beginners/

Chen, J. (2020). Capitalization Rate. Retrieved from https://www.investopedia.com/terms/c/capitalizationrate.asp

Esajian, P. (2021). How To Invest In Real Estate: A Beginner’s Guide. Retrieved from https://www.fortunebuilders.com/investing-in-real-estate-for-beginners/

Investopedia. (2021). Free Cash Flow vs. Operating Cash Flow: What’s the Difference? Retrieved from https://www.investopedia.com/ask/answers/111314/whats-difference-between-free-cash-flow-and-operating-cash-flow.asp

Kennon, J. (2021). Real Estate Investing for Beginners. Retrieved from https://www.thebalance.com/real-estate-investing-101-357985

RealtyMogul. (2021). Real Estate Investing for Beginners – Real Estate 101. Retrieved from https://www.realtymogul.com/knowledge-center/article/real-estate-investing-beginners-real-estate-101

Wilson, D. (2018). 8 tips on real estate investing for beginners. Retrieved from https://azbigmedia.com/real-estate/big-deals/investment/8-tips-on-real-estate-investing-for-beginners/