Investing in Real Estate
The Balance’s Guide to Real Estate Investing
Frequently Asked Questions
How to start in real estate investing?
The simplest way to start investing in real estate may be to do so indirectly, through a real estate investment trust (REIT), or even an ETF consisting of several REITs. You’ll gain exposure to real estate as an asset, but you won’t have to deal with the day-to-day management. If you want a more direct investment, consider a duplex or small multi-family property. If you live in one of the units you’ll have access to traditional mortgages, and you’ll begin to grow a portfolio of properties.
What is real estate investing?
Real estate investing covers a broad range of operating, investing, and financial activities all based on making money through the appreciation of real property or via cash flows tied to a property. There are several ways to make money from real estate: asset (property) appreciation, rental cash flows, and ancillary cash flow from products and services related to the property.
What is a REIT?
REITs are companies that invest in real estate such as single-family homes, apartments, retail locations, hotels, offices, warehouses, or shopping malls. Generally, REITs purchase and invest in properties to add them to their long-term portfolios, producing returns from rental income and appreciation of the properties. REITs must pay out at least 90% of their taxable income to shareholders as dividends. They allow investors to invest “passively,” without the need to actively manage real estate.
Can you start investing in real estate with little money?
Yes, you can, although don’t expect to start out buying and selling hotels. Real estate investment trust (REITs) and real-estate focused ETFs can be an easy, and low cost way to get started in real estate investing. Another option might be to join or form a real estate investment club. You’ll be able to pool resources and share knowledge with other investors just starting out.
Cap rate is the net operating income divided by current market value. Investors use this ratio to compare different investment opportunities.
Real estate investors and commercial property owners looking to buy several properties at once use one mortgage to cover multiple properties (like a blanket). Because they condense multiple mortgage applications into a single one, they’re able to save time, reduce costs, and increase efficiency for buyers.
Depreciation is a way to refer to a decline in something's value, usually due to age or wear and tear. The IRS allows real estate investors to recover some of the costs of owning a rental property through depreciation.
A construction loan is a short-term loan for real estate. You can use the loan to buy land, build on property that you already own, or renovate existing structures if your program allows. Construction loans typically last less than one year, and you usually pay them off with another "permanent" loan.
Hard Money Loan
A hard money loan is a loan from a private lender backed by a tangible asset like real estate. These loans usually have shorter terms and higher rates than traditional mortgages.
An owner-occupant is someone who purchases a property with rental units, then also resides there. This is an important concept when it comes to getting a home loan because some mortgage programs require that the borrower make the rental property being bought their primary residence.
Closing costs include payments to a variety of people and organizations for services during the homebuying process. Standard closing costs might range from 2%-5% of your home’s purchase price. But that depends on where you live, the property you’re buying, and more.
A real estate appraisal establishes a property's market value—the likely sales price it would bring if offered in an open and competitive real estate market. Lenders require appraisals when buyers use their new homes as security for their mortgages.
A restrictive covenant is a legal binding agreement that outlines what a homeowner is and is not allowed to do with their property. These rules are written into the deed of the property and may have penalties for violations.
Real Estate Owned (REO)
After a foreclosure the property is repossessed by the lender—typically a bank—will auction off the property in hopes of recouping the losses it incurred when the homeowner missed payments. If the home fails to sell in the auction, it goes on the bank's books and is referred to as a "real estate-owned" (REO) property.
An encumbrance is any legal thing that burdens or restricts usage or transfer of a property. An encumbrance can be a mortgage, a lien (voluntary or involuntary), an easement, or a restriction limiting the transfer of a title. A property free-and-clear of any encumbrances is rare.
Real property, often also called “real estate,” is land plus any other tangible improvement that might rest upon it or be installed on it.