The housing market has fully recovered from the crash in 2008 in many areas. In the 50 largest metros in the U.S., median house prices have increased by almost $50,000 since 2009. Some home values now exceed their 2006 highs. Is now a great time to invest in real estate or should you be cautious? And what is the best way to invest in real estate?
Almost everyone will invest in real estate at some point in their lives, but most of them don’t think of it as investing. Home ownership is the most popular way to invest in real estate. Owning a home is part of the American dream and is seen by many as a primary indicator of financial success. The home ownership rate in the U.S. is 64%, which means owning a home is much more popular than renting. Owning your residence isn’t for everyone, though, and it isn’t the only way to invest in the real estate market.
When you should consider buying a house
If you aren’t planning to be in an area for a longer period of time (5+ years), you may not want to buy a house. The real estate market can be volatile, which means if you think you’ll be selling your house not too long after buying it, the risk that you’ll lose money on your house is much higher. The rule of thumb for home buying is 20% down; this gives you a buffer zone so if the value of your home drops, you have a better chance of not owing more on your home than it’s worth. If you end up underwater on your home, it may be impossible for you to move without taking a big financial hit.
If or when you buy a house, make sure you’re doing it for the right reasons. Renting has benefits as well; you aren’t locked in to one property and can move whenever your lease is up, you normally aren’t responsible for much of the maintenance and upkeep on the property, and you don’t have any equity tied up in a house.
Of course, buying a home means you don’t have to worry about a landlord, and the primary financial benefit to owning a home is the equity that you build in the property. Renters aren’t “throwing their money away,” as some people say, but their rent payments aren’t building any equity. When you own a home, you don’t have to worry about ownership of your building changing, increases in rent, and you have much more control over your living space.
Different ways to invest in real estate
Despite what you see on YouTube, buying rental properties isn’t the only way to invest in real estate. Buying a home can be considered an investment in real estate, but you probably don’t buy a home just because you might get a good return on your investment. You can also invest in real estate without owning any property through your portfolio, in REITs. All forms of real estate investing can be put into two categories, passive and active.
Any investment that requires some amount of work is an active investment to a certain degree (although it still may be considered a passive investment by the IRS). The more traditional form of investing in real estate, and probably the type you hear the most about online, is buying property and renting it out. Owning a rental property can be very profitable and a good investment, but there is a learning curve; you’ve got to know what you’re doing, and you need to enjoy it to be able to do it long-term.
Private real estate deals can offer a more passive form of investing in real estate, but there still is an active component and some amount of work involved. There’s a good deal of research involved in making sure you’re getting into the right investment, and you may not be able to easily find information about your potential investment.
The most passive form of real estate is investing in funds with real estate holdings. A real estate investment trust, or REIT, is a company that owns, operates, or finances properties. REITs can give you a taste of real estate investing without the work of owning property.
Our latest show is all about real estate; we cover six different ways to invest in real estate and highlight the negatives and the positives of real estate investing. Learn more about how to get started in real estate investing by watching our latest show below.