If you are interested in investing some money, there are two primary investment variables you will want to keep in mind. First, you should look for investments that have low potential risk—this means choosing assets that have historically appreciated and are unlikely to decrease in value. Second, you should look for investments that have high potential returns—these are investments that are likely to yield returns much higher than your savings account, the inflation rate, the growth of the S&P 500, or whatever other benchmark you might choose to use.
As you’d probably expect, there is no asset you can invest in that offers no risk or unlimited return—however, there are still quite a few asset classes that can provide a fairly consistent mix of both investment goals. Real estate is an asset class that offers a great balance to investors, which is why the industry can attract hundreds of billions of dollars per year.
What is Real Estate Investing?
Real estate investing, broadly speaking, is any sort of investment that you make in a property. Typically, the primary goal of real estate investing is to increase your wealth as time goes on. This can be done in multiple different ways: generating wealth through the gradual appreciation of property values and generating income through rents or other sources of ongoing revenue.
When compared to investment vehicles containing similar levels of risk, real estate investing is generally pretty productive. Land is a resource that will always be finite, meaning that the supply of real estate will always be physically restricted (and, as of 2022, the supply of many types of properties is relatively low).
How Do I Become a Real Estate Investor?
There are many different ways to become a real estate investor. If you have available capital, you could always just buy a property (or set of properties) and then either rent or hold onto these properties as long as you want to. That said, setting up an LLC or some other holding entity might be beneficial. However, if you do not want to be in charge of managing the property, you also might consider investing in a real estate syndicate or even investing indirectly in the real estate market via a real estate investment trust (REIT).
Benefits of Real Estate Investing
The clearest benefit of investing in real estate is that, when done correctly, you can earn a significant amount of money over time. The average return on investment (ROI) for real estate properties is 10.6 percent per year. That means that an initial $100,000 investment can be expected to, on average, grow to be worth $110,600 in just one year. If you keep your money in the market for multiple years, your wealth can grow even further. Using this same average growth rate, you can expect your wealth to increase to $750,000 with a 20-year investment and just over $2 million with a 30-year investment.
Of course, this simplified profit model is leaving out a lot of important details, like inflation, possible recessions, and the costs that come with owning a property. Nevertheless, it is clear that by owning a property, you can dramatically increase your personal wealth over time. And, perhaps most importantly, your wealth can potentially come from two distinct sources: appreciation and property revenues.
Drawbacks of Real Estate Investing
Clearly, real estate investing can be very beneficial for investors—whether you are hoping to invest a lot or just a little bit, there will be plenty of opportunities to earn a strong return on your investment. However, as is the case with all speculative investments, real estate investing is not without its fair share of risks and drawbacks.
The most immediately notable drawback of real estate investing is that it is very capital intensive—owning a property typically costs hundreds of thousands, or even millions, of dollars. Additionally, if you are investing, you will likely need to part with this capital for several years before getting any notable returns. Real estate is a notoriously illiquid asset, meaning that it will take a considerable amount of time to “convert” your real estate wealth into cash that you can actually use.
Additionally, you should also keep in mind that owning a property—even without tenants—will still come with ongoing costs. Property tax, on average, equates to about 1.5 percent of a property’s value every year (so if you own a $400,000 property, you can expect to pay about $6,000 per year in property taxes). You will also likely need to pay for homeowner’s insurance, private mortgage insurance (in some cases), minimal utilities, and more. These costs might cause you to end up losing money until you can begin generating sufficient revenues. Most of the time, you can hire a property manager to help consolidate these costs, but you still need a strategy that will eventually cause you to break even.
Keeping these things in mind, you should never consider property ownership to be a ‘risk-free’ investment. Compare both the possible benefits and possible drawbacks, and then you’ll be able to decide if real estate investing is right for you.
Conclusion: The Keys to Becoming a Successful Real Estate Investor
Whether you are hoping to buy and flip, buy and hold, or buy and rent a property, there are many different ways you can profit as a real estate investor. If you are new to the industry, consider easing your way into becoming an investor by investing in a real estate syndication or buying stock in a high-performing REIT.
Once you do decide to actually purchase property, remember that location is the variable that will affect the value of a property the most—taking the time to make sure you are buying the right property in the right place at the right price will undoubtedly be worth the effort. And as your real estate portfolio begins to grow, be sure you are diversifying by making investments in different types of properties in different locations. This will help reduce asset-specific risks.
From there, it is important to remember the real estate market is always changing. And because you are buying assets with such high values, the consequences of ignoring these changes can seriously compound over time. Real estate investing can certainly be a profitable endeavor—but be sure you have a few strategies in place to help decrease your exposure to risk and maximize your potential for strong returns.
Andrew is a freelance writer that primarily focuses on real estate and finance topics. He graduated from the University of Colorado with degrees in Finance and Political Science and has since worked in the real estate, life insurance, and digital marketing industries. When he is not writing, Andrew enjoys skiing, playing piano, painting, and spending time with his wife (Maggie) and cat (Crow).