There are a few reasons why real estate investing is popular amongst millionaires and wealthy individuals. Specifically, every dollar you invest in real estate is continuously working for you. Contrary to popular belief, you do not need a lot of money to get into real estate investing to earn a substantial living or additional income stream.
Additionally, you probably do not have to spend a lot of time making real estate investing work for you by generating residual income. Overall, real estate investing is one of the most effective ways of creating wealth, and in many instances, it’s recession-proof.
What Does it Mean To Create Residual Income in Real Estate?
Residual income in the real estate industry is income that investors receive monthly after the property’s expenses are paid. Basically, investors contribute their capital and benefit from a regular and dependable stream of income.
Without a doubt, one of the best ways investors can generate residual income in 2021 is through real estate investing.
There are a plethora of passive real estate investment opportunities available to you in 2021. With the right information, you can begin your real estate investing career in no time.
Investing doesn’t need to be intimidating. Below, we will discuss the top seven ways to get started in real estate investing in 2021.
7 Ways to Invest in Real Estate in 2021
Owning real estate is beneficial because it is a tangible asset that will not lose its value overnight, the way that stock can. However, keep in mind that owning physical real estate requires some sort of activity and is typically not a 100% passive income. One downside to owning real estate is that it may be harder to generate higher returns and income in larger saturated cities/markets. For example, in cities like San Francisco, the cap rates can be substantially lower. On the other hand, and less expensive markets, it’s probably easier to generate higher returns.
Rental Property Tax Benefits
One of the main reasons that people enjoy owning real estate comes down to tax benefits. Specifically, investors can take advantage of powerful tax-saving provisions, including the 1031 exchange. A 1031 exchange (name after the IRS code that codifies the tax provision) allows investors to defer capital gain taxes when they swap out one property for another like-kind property. Additionally, investors can deduct operating expenses, repairs, and improvements for the property they operate and manage.
Rental Property Interest Rates
Notably, going into 2021, real estate is an attractive option because the interest rates are at an all-time low amid the Coronavirus (COVID-19) pandemic. Just be sure to consider the effort and time that goes into investing in rental properties. This may not be your best option if you have a very busy lifestyle, travel, or have a demanding career.
Crowdfunding has noticeably increased in popularity over the past ten years. Real estate crowdfunding works a little like this. A deal sponsor is typically a veteran real estate developer or investor, which will identify a lucrative investment opportunity. Next, the deal sponsor will negotiate the deal to acquire the property.
This includes gathering all the necessary paperwork and arranging to finance with the lender. When or if the deal sponsor doesn’t have the required capital to finish the project, they can raise the money from multiple investors and, in exchange, offer them a financial interest in the crowdfunding project.
REITs are an attractive option if you do not want to invest directly in real estate or you are not categorized as an accredited investor. Using a REIT, you can still invest in real estate but enjoy passive income.
A REIT is a firm that owns, manages, and operates income-producing real estate. REITs pull together money and resources from various multiple investors and use it to purchase real estate. Technically REITs are considered securities that are publicly traded on the major stock exchanges.
In other words, investors can purchase and sell REITs just like they would stock which makes them highly liquid differing from physical real estate investments. REITs can be a nice way to diversify your portfolio and a less demanding way to get into real-estate investing if you just want to get your toes wet.
REITs are broken down into three main categories: Equity REITs, Mortgage REITs, or Hybrid REITs.
Equity REITs are the most well-known types of REITs. Equity REITs focus primarily on acquiring, developing, and managing residential income-generating investment properties.
On the other hand, the lesser-known counterpart, Mortgage REITs, invest in current mortgage loans for properties throughout the country. Mainly, this is an alternative to directly purchasing an investment property.
Hybrid REITs combine Equity and Mortgage REITs. Hybrid REITs generate profits for their investors through rental income and also through interest.
Overall, REITs are a form of real estate crowdfunding. There are various platforms available for REIT crowdsourcing based upon whether you are categorized by the Securities and Exchange Commission (SEC) as an accredited or non-accredited investor.
A property syndication firm is a real estate investment that assembles investors who put together their capital to fund various real estate projects. Real estate syndications are similar to REITs. However, there are no experience requirements to invest in syndications, and there is no limit to the number of investors who can participate.
Real estate syndications are a great opportunity for both experienced investors and new investors. In other words, real estate syndications allow both seasoned and novice real estate investors to acquire larger properties with much less capital to expand their real estate portfolio, diversify, increase cash flow, and earn more money.
Overall, real estate syndications are considered one of the best passive income streams to have in your real estate portfolio.
Since 2008, the short-term rental industry has been booming, spearheaded by companies like Airbnb. For the most part, Airbnbs can be more profitable than renting a property on a long-term basis to just one tenant. The main reason for this is that you can charge higher nightly rates for short-term rentals on average.
Overall, your average occupancy will not change substantially throughout the year, especially if you price your Airbnb correctly. The downside to Airbnb Rentals is that your profits are largely based on the local demand. So, if you don’t have a rental located in a large city or a vacation hotspot, short-term rentals may not be very profitable for you.
Flipping homes is another way to start your real estate investment career. While the process can be somewhat risky, it can also be extremely rewarding if done correctly and in the right markets. Even amid the global COVID-19 pandemic, property values are still rising in some markets, making it a good time to start flipping houses. The process of “Flipping a house” is simple. An investor will purchase a home under market value. Next, the investor will repair and renovate the property and then sell it for a profit.
Success in Flipping Homes
To be successful in the flipping industry, you need to have a method of locating homes that can be purchased for below market value. Ideally, homes that only require minor repairs are the best homes to flip. However, if a home requires substantial repairs but is also listed well below market value, this may also be a home you want to look into.
Downside of Flipping Homes
The downside of flipping is that you have to be prepared for your property to stay on the market longer than expected. There’s plenty that can go wrong when flipping a house. Therefore, it is important to have a plan and not go in unprepared for your first flip. You also have to understand that not every project will generate substantial profits.
Overall, when flipping properties, you take a huge chance. This is why it’s important to understand the property’s location, market, repairs required, and price. Potential house flippers should also know this is one of the most time, money, and energy-consuming ways to invest in real estate. Remember there is potential for massive profits with flipping properties, but certainly no guarantee that a house flip will sell any better than before the renovation. Nevertheless, if you have the knack for the flipping business, this could be one of the best financial decisions that you make.
Investing in mortgage notes presents various unique opportunities and is another option within the active real estate investing field. Mortgage notes earn higher average returns relative to other types of real estate investments. The process works like this. When an investor or home buyer wants to purchase a home, but they don’t have all the cash, they will seek financing to get a mortgage loan. The homebuyer will make a down payment towards the purchase price and borrow the balance from a bank or credit union. In exchange for loaning the money, the borrower will sign a promissory note and a mortgage.
A promissory note, commonly referred to as “a note,” promises to repay the mortgage debt signed by the borrowers. Typically, a note is not recorded in public records, but it is still a legal document that is enforceable.
A mortgage is a separate document that uses the property as security for the loan. In general, the mortgage allows the lender to foreclose on the property and take back possession, should the borrower stop making their mortgage payments.
These two documents serve different functions, but they go hand-in-hand. Specifically, a lender will never create a note without a mortgage.
Buying Remaining Debt
When you purchase a note and mortgage, you are technically buying the remaining debt that must be paid on the note, secured by the property as outlined in the mortgage. Keep in mind that you’re not actually buying the property. Instead, you’re buying the debt and secured interest in the property.
Basically, a note buyer/investor takes on the role of the bank. In other words, you receive the monthly Principal and Interest payments still due on the property. Additionally, if the borrower defaults, you can still take legal action against them.
The majority of loans are purchased and sold at full price. However, some loans may be purchased at a discount, especially if they do not perform or are underperforming. Additionally, the note holder may want to get rid of the loan bad enough that it would be willing to relinquish it at a discount.
The Bottom Line for Real Estate Investing
Overall, these are the top 7 ways to get started with real estate investing going into 2021. While each method has its own unique pros and cons, investing in mortgage notes stands out and is a great way to diversify your portfolio as we enter 2021. Mortgage notes are easy investments and can generate substantial income. Additionally, real estate notes are great for the current economy – offering people greater flexibility to help keep their homes.
Also, be sure to check out The MWMfund Learning Center for more educational content.