Directly owning real estate is one of the oldest and most reliable forms of investing on the planet. Whether you were a feudal lord 1000 years ago or Donald Trump today, buying and holding real estate has always been a strong path to wealth generation. So, it is no wonder that we regularly get questions in regards to how to start investing in real estate.
There are two ways to invest in real estate. The most familiar route for most is the direct form of real estate ownership. This is where an investor directly owns and manages their properties. The second form is passive investment where the investor owns a percentage of a investment property or company, but the management of the investment is left to others akin to investing in the stock market.
The bulk of the interest we see in real estate from our clients is in direct ownership. For those wanting to dip their toes into real estate, first you must decide on the type of property you're interested in. Typically this falls into choosing between residential, commercial, or undeveloped property. There are nuances between all three, so your individual skill set and financial position should be considered before choosing.
The starting place for many real estate investors is purchasing a residential rental property. Most investors have managed their own personal residence, so buying another to rent is fairly straightforward. A huge advantage to investing in residential property is the reliable cash flow. Most homes can be consistently rented with a low vacancy rate creating a solid cash flow generation.
Residential properties are not without their drawbacks, however. Of the real estate investing options it debatably has the highest time commitment related to the investment. If one is looking to build a portfolio of residential properties this can create significant scaling issues. If you accumulate 5 or more properties you might quickly find yourself overwhelmed with managing tenants and property upkeep. If your schedule doesn't have the flexibility to manage this, then residential property investment may not be for you.
Commercial property investment may be a more attractive target for those who are cash rich and time poor. For those looking to invest seven digits or more in real estate, it is much easier to scale those dollars when dealing in the commercial realm. Commercial properties are known for longer droughts in vacancy rates versus residential properties. I've seen these types of properties go vacant for years, so if your finances can't support this type of risk then commercial investment won't be for you. Additionally, commercial leases are infinitely more complicated to handle than residential lease paperwork. Between this and the regulatory hurdles I highly advise a good attorney to be on your speed dial if investing in commercial.
Lastly, and most speculatively, there is undeveloped land. Because of the speculative nature of land purchases it can be quite difficult to find a bank to assist in any potential financing needs. Also, most likely you will experience terrible cash flow from your land. However, if you have a long time horizon one can do quite well with this investment. A tract of land may not grow in value for decades, but when the right circumstances arrive it might sky rocket in value.
I'll give one last word of advice for those starting in real estate investment, and that will be in regards to leverage. Having a strong cash position is crucial in purchasing and managing real estate. Using high amounts of leverage and poor cash flow can turn your investment into a Chapter 13 Bankruptcy.
