If you’re thinking about investing in real estate, you’re probably considering several options; you might be looking for a way to diversify your portfolio, or you might be looking for the best possible returns on your investment. And you probably want to take into account how much time it will take for you to recoup your investment, as well as how much you plan to pay for rent.
If you’re like most people, you probably get a little confused when you read about real estate investing, and you’re not sure if you can get involved. Don’t worry, we’re here to help.
“Do I need to be a landlord to invest in real estate?” This is a question often asked by new investors in the real estate market. The answer is not completely black and white, but in most cases, it is not required to be a landlord in order to invest in real estate.. Read more about how to invest in real estate with no money and let us know what you think.
Real Estate Investing Types
When most people think of landlords, they think of the guy who comes knocking on the door every month asking for the rent. However, there are several sorts of real estate investing, and not all of them entail chasing down rent checks.
The following are a few of the most popular types.
A simple house that you own and rent out to someone else is one of the most prevalent and accessible types of real estate investing.
This is how many landlords (including me) begin. My husband and I bought a farm with a house on it with the intention of renovating it and living on the farm. To cut a long tale short, it didn’t work out, and we had to relocate across the nation to find work.
We were unable to sell the house at the time, so we rented it out and became unwitting landlords.
Housing for Multiple Families
This might be anything from a duplex to a 100-door apartment complex with several apartments. You can do this by buying a multi-unit property, living in one, and renting out the others, or by a modified form known as “house hacking,” in which you buy a multi-unit property, live in one, and rent out the others (s).
This is an excellent way to get your feet wet in the real estate market, especially since you may utilize a first-time homebuyer mortgage on a multi-unit property as long as it’s your primary residence.
Flipping, made popular by multiple HGTV episodes, entails purchasing a home in need of repair, repairing it (either yourself or outsourcing out the labor), and then selling it for a profit.
You’ll need a thorough understanding of house repairs to produce accurate estimates of how much the renovations will cost in order to make flipping viable.
REITs (real estate investment trusts) are professionally managed real estate investment trusts.
They work similarly to mutual funds in that you can buy a share in a REIT and profit from the business without having to worry about being a direct landlord.
Raw, undeveloped property can also be purchased as a real estate investment. Some people flip land by upgrading it and reselling it, while others buy it in the hopes that its value would rise over time as the neighborhood develops.
Land investing, like flipping, necessitates in-depth industry knowledge in order to assess whether a deal is worthwhile.
What are the Advantages and Disadvantages of Becoming a Landlord?
Among all the different forms and styles of real estate investing, being a landlord of a single-family or modest multi-family property is arguably the most frequent. It provides the investor with a great level of control as well as a significant profit potential.
For the past three years, I’ve been a landlord, and it’s been a rollercoaster ride with exhilarating highs, terrible lows, and a lot of shifting around in between.
Being a landlord has both compelling benefits and substantial drawbacks, and real estate investing isn’t for everyone. Let’s take a look at what makes landlording so tempting, as well as what can make you reconsider.
The Benefits of Being a Landlord
1. There are a variety of ways to profit. Real estate is unique in that it has three income streams built in: rental payments, appreciation (land tends to appreciate in value over time), and equity (paying off your mortgage).
2. The ability to leverage (debt). Other people’s money – OPM — can be used to invest in real estate.
The capacity to buy real estate with leverage (debt) increases your returns. For example, if I put $100,000 in stock and it earns 7.5 percent interest on average over a year, I will receive $7,500 in return.
Instead, if I buy a $100,000 house with a mortgage, I just have to put down roughly $20,000. So, if my house improves by just 3%, I’ll get $3,000, or 15% of my $20,000 investment—more than double what I’d make in the stock market.
Furthermore, borrowing lowers the upfront cost of real estate transactions, allowing you to take advantage of larger bargains than you might otherwise afford.
Returns are number three. There’s a reason why so many millionaires and billionaires made their fortunes in real estate. The supercharged combination of cash flow, appreciation, and equity, as well as the leveraged magnifying of profits, results in returns that the stock market just cannot match.
Even if you don’t become a landlord and instead invest in a real estate investment trust or REIT (more on that below), you’ll likely make more money in real estate over time than you would in stocks due to real estate’s distinct benefits.
4. Tax treatment that is favorable. Because you own a landlording business as a real estate investor, you can deduct a variety of business expenses to lower your taxable income. You can also deduct a specific amount from your taxes for depreciation (wear and tear on your property). These are just a handful of the tax benefits available to real estate investors.
Individuals can access it. To become a landlord, you don’t need to be a hedge fund manager or a bitcoin specialist. All you need is some self-education, perseverance, strong processes, and money for a down payment. In truth, the majority of landlords are regular individuals like you and me, with only three units on average and 40% of landlords having a total property worth of less than $200,000.
6. Income from a passive source. You may outsource most of the work that real estate demands with a well-built team that includes property managers, contractors, real estate agents, and handymen, turning your landlording firm into a source of passive income.
The Drawbacks of Being a Landlord
1. Being available 24 hours a day, seven days a week. You’re the go-to guy for every toilet issue, lockout, and leaky roof — day, night, and holidays — if you’re managing your properties yourself (which you probably will at first). Nothing beats sitting down to a cup of cocoa on a nice, chilly evening only to be disrupted by a tenant’s furnace breakdown.
2. Tenants who are nonpaying, disruptive, or demanding. I vividly recall the horrible sensation in my stomach as I summoned a lawyer to defend me against two renters who threatened to sue me. I knew they didn’t have a good case against me, but it made me physically ill until we were able to handle the situation. Every landlord has a few horror stories about concrete poured down toilet drains, holes punched in walls, or passive-aggressive renters who took out every lightbulb on their way out the door. Tenants that are obnoxious, nonpaying, or damaging are a major reason why individuals are hesitant to become landlords.
3. Renter-friendly legislation. It might be difficult to get rid of bad tenants once you have them. It can take months to evict a nonpaying renter and cost you thousands of dollars in attorney expenses and lost rent.
4. Repairs/expenses Even with insurance, unexpected expenses can quickly deplete your real estate profits. My emergency money was completely depleted overnight due to an oil leak from my tenant’s furnace and the subsequent destruction of the wrecked basement floor. And the losses were not covered by insurance. Start with a large emergency fund if you intend to become a landlord. Similarly to your personal emergency fund, aim for three to six months’ worth of expenses per door, plus more if your home is older, like mine is.
5. An asset that is difficult to sell. Even if the market is down, you may sell your assets and receive your money back if you need to get your money out of stocks or cryptocurrency. In a real estate investment, however, this is not the case. A losing real estate transaction might take months or even years to sell, and you’ll have to cover the fees of selling as well.
Is It Possible for Me to Invest in Real Estate Without Becoming a Landlord?
Absolutely. Real estate is a great investment, but not everyone can or wants to deal with tenant calls at 2 a.m. or lock rekeying every few months.
REITs are a terrific option to invest in real estate if you want a low-risk, hands-off approach. Professional property management businesses look after several properties in various places for a REIT (often across multiple real estate types).
They maintain all of the toilets and collect all of the rents, and they continue to provide you with returns in the form of rent and appreciation.
Previously, REITs were solely available to high-net-worth individuals, but today, some REITs are traded on the New York Stock Exchange.
There are also various apps that allow you to invest in REITs, such as Fundrise. Fundrise has a considerably lower investment requirement ($1,000) than acquiring your own property. Dividends are automatically reinvested in your account, allowing your portfolio to expand over time. They’ll never contact you at 2 a.m., either.
Is Property Investing Right for Me?
If you’ve made it this far and are still undecided about investing in real estate, consider the following questions.
1. Am I willing to take a chance? Real estate entails a significant degree of risk. You’re a good prospect for real estate investing if you can stick it out for a few months or longer without worrying about your investments. If the notion of losing money or having a vacant property gives you the stomach flu, you might be better off investing in a more conservative asset class.
2. Do I have a steady financial situation? Our emergency fund has been depleted twice as a result of our real estate investment. While both times were traumatic, I fear to think what life would have been like without that money to cushion the blows. It’s better to put off large real estate investments until you have enough cash to cover a major system breakdown (i.e., plumbing, electricity, or furnace).
3. Do I like to manage my investments myself? Surfing the internet for my next real estate buy gives me a buzz, and I don’t mind using my paintbrush and impact wrench if it means I’ll have a tenant paying down my mortgage. But it isn’t the case for everyone. Some people don’t have the time or motivation to invest in real estate because of the analysis and sweat equity required, and are better suited to other asset types.
Check out our guide on how to become a landlord if you answered yes to all of the above questions and are ready to learn more about how to become a landlord and find your first rental property.
And, even if you replied no, don’t dismiss real estate investing completely. REITs like Fundrise were created for folks like you who want the diversification and profits of real estate without the hassle of swinging a hammer or chasing overdue rent checks.
The world is your oyster as an investor. There are numerous investing alternatives available, with something for everyone. If you’re risk averse and merely want to make sure you don’t lose money, investing in bonds and commodities like gold is an excellent way to protect your money against inflation.
There are stocks, ETFs, and REITs that you can choose once and forget about for six months or more before you have to look at them again if you’re the set-it-and-forget-it type. If you’re brave and have an analytical mind, speculative assets like cryptocurrencies and small-cap stocks will provide you with the thrills you’re looking for.
However, if you want to earn above-average returns and aren’t scared of putting in some effort, real estate is the asset class for you.
Real estate is one of the best investments because of the benefits of monthly cash flow, tax breaks, appreciation, and the opportunity to use a mortgage—and have the tenant pay for it.
Even if you don’t want to own a home, REITs allow you to take use of all the advantages that real estate has to offer.
Real estate ownership, like any other investment, carries hazards. A leaking pipe, disgruntled tenants, or an economic depression may all derail your real estate investment as quickly as a bad news day might derail a stock. However, if you do your homework and have a good emergency fund in place to weather the storms, real estate may provide some of the finest long-term profits.
In short, no. But, as a real estate investor you probably have a pretty good idea of how the property you’re thinking about investing in will perform, and you have a pretty good idea of what your return on investment will look like. However, this sort of planning is only going to help you if you have a lot of time and a lot of money to invest. Both of those things are going to be pretty much impossible if you’re a landlord.. Read more about types of real estate investment and let us know what you think.
Frequently Asked Questions
Is becoming a landlord a good investment?
The answer to this question is not easily answered. It depends on the situation and the person.
Do you need a license to invest in property?
Yes, you will need to have a license in order to invest in property.
Can you be a landlord without owning the property?
You can be a landlord without owning the property.
This article broadly covered the following related topics:
- investing in rental property for beginners
- buying a rental property
- how to buy rental property
- how to buy a rental property
- buying rental property