We believe that investing in real estate has the potential to generate wealth but for a long time, it’s only been accessible to a select few. With the advent of technology, there are now alternative avenues to get your foot in the door with real estate investing but you need to know where you stand before getting started.
1) What kind of investment are you looking for?
There are a few different ways to think about this question. First, do you have the time and know-how to be an active investor vs. a passive one? And second, based on how much money you have to invest should you go chips in on one investment property or diversify across multiple?
Let’s break it down.
Despite its many advantages, real estate can be a complex investment and there are many differences between active and passive investing. If you’re a noob, you might not have figured out where your preference lies. For example: love the idea of being a landlord? Look at active options. On the flip side, if you don’t have the time to deal with it, consider passive investments. Once you’ve determined that type of investor you are, you’ll have a better handle on what investment avenue you can pursue and how much money you need to get started.
Real estate crowdfunding allows you to invest in residential, commercial, and mixed-use properties with a relatively small amount of money – in addy’s case our minimum is $1. This is a very passive form of investing that doesn’t require you to do much beyond the initial investment.
Flipping properties or renting out a property takes a lot more time and you need to be very hands-on. With rentals, you’ll be managing tenants, lease agreements and property issues. If flipping, you’ll be managing a renovation or doing it yourself. Both instances can require a lot of capital in addition to the upfront investment costs.
2) What is your expected timeline for returns?
Investing in real estate is not like investing in the stock market. In most cases, you’ll have to wait a while before you see returns. This is particularly true when investing in a single investment property, it could take up to 10 years or more to pay off.
Some crowdfunded real estate investment platforms or real estate investment trusts (REITs) will issue quarterly dividend returns. This allows you to realize some gains on a more regular basis.
This is why it’s important to determine a return timeline that you’re comfortable with. Make sure you know if and when you’ll need liquidity and whether the investment can support your needs.
3) What’s your risk tolerance?
As with any investment, there is a certain amount of risk involved and you need to figure out how much risk you’re comfortable with before going “all in”. The risk with real estate investing varies based on the type of investing that you’re doing. Crowdfunded real estate investing can allow you to diversify your available funds across a bunch of different properties in different markets. With investing in a single property, you’re making a bet that you’re going to be able to sell the property at a price that’s high enough to recoup your initial investment and make the kind of profit you’re looking for.
Shrewd investing starts with knowing how to ask the right questions. No matter which method you plan to use to put your first dollar towards real estate, knowing your answers to these three questions can help you get started.