Real estate investing is perennially popular, and while high interest rates may be softening the market now, investors are likely to storm back to real estate with a vengeance, if and when rates fall. In fact, 29 percent of Americans said that real estate was their top pick for investing money they won’t need for at least 10 years, according to a 2022 Bankrate survey.
Consumers have a variety of ways that they can invest in real estate, including many options beyond just becoming a landlord, although that’s a time-tested option for those who want to manage a property themselves. Plus, new business platforms make it easier than ever to invest in real estate without having to come up with tens of thousands or more in cash.
In this article
- Key statistics
- Investing in real estate in 2024
- Pros and cons
- Top tax benefits
Investing in real estate – Key stats
- The average 30-year fixed-rate mortgage hit a rate of 7.09 percent annual percentage yield (APY) in January 2024, according to Bankrate data. The average 15-year fixed-rate mortgage was 6.47 percent APY.
- The overall homeownership rate in the U.S. was 66 percent in the third quarter of 2023 – in line with where it was in the fourth quarter of 2022 – according to the U.S. Census Bureau.
- In the third quarter of 2023, 79.2 percent of those ages 65 and older owned their own homes, compared to about 38.3 percent for those under age 35, according to the U.S. Census Bureau.
- In 2022, Older Gen Y and millennials (born between 1980 and 1989) comprised the largest portion of homebuyers, at 25 percent, according to the National Association of Realtors. Generation X (born between 1965 and 1979) made up the largest portion of sellers, at 24 percent.
- The median asking rent for vacant units was $1,462 a month in the third quarter of 2023, compared to $1,322 a month in the fourth quarter of 2022, according to the U.S. Census Bureau.
- The median asking price for vacant for-sale properties in the third quarter of 2023 was $314,000, compared to $284,000 in the fourth quarter of 2022, according to the U.S. Census Bureau.
- As of November 2023, the median house was on the market for 52 days, according to Realtor.com. That was up 16 days from March 2022.
- The rental vacancy rate in metro areas was 6.6 percent in the third quarter of 2023, compared to 5.8 percent in the fourth quarter of 2022, according to the U.S. Census Bureau.
Investing in real estate in 2024
The real estate market has been hit hard by rising interest rates over the last couple of years. Rising rates make homes less affordable to borrowers, meaning that owners may have to lower their asking prices to move a property, and lower affordability was the case for much of 2022 and 2023. With mortgage rates dipping in late 2023, many would-be homebuyers and analysts are hoping that the housing market will loosen up further in 2024.
Early in 2022, interest rates remained relatively low. While mortgage rates were well off their lowest levels of 2021, the Federal Reserve had yet to briskly raise interest rates. But the central bank had made it clear that it was prepared to boost rates significantly in the months ahead. As a result, savvy buyers looked to lock in lower mortgage rates on their property purchases.
Then the Fed went on an unprecedented pace of raising interest rates. The rate increases helped make real estate less affordable and many home sellers lowered their asking prices. In early 2023, the average 30-year mortgage rate sat just under 7 percent, the highest level in over a decade. Since then, mortgage rates fell back in late 2023, as it became clearer that the Federal Reserve was unlikely to raise interest rates further.
But investing in real estate is typically a long-term game, and those thinking of getting involved should think with that mindset when they go into it. And even if rates are high now, it may simply be a good time to accumulate cash for a down payment while waiting for rates to decline in 2024.
With that in mind, here are five top ways to invest in real estate.
1. Buy your own home
You might not normally think of your first residence as an investment, but many people do. It’s one of the best ways for you to invest in real estate, offering numerous benefits.
The first benefit is building equity in your home from your monthly payments, rather than paying rent which always seems to rise year after year. Some portion of your monthly mortgage goes into your own pocket, so to speak. However, experts remain divided on the pros and cons of owning your own home, and a home is not a good investment at every price, as homebuyers of the 2000s learned.
If you’re planning to stay in an area long-term, it can make sense to purchase a home because you’ll be able to lock in a monthly payment that may be as affordable as rent. Plus, banks treat owner-occupied properties more favorably, giving borrowers a lower mortgage rate and requiring a lower down payment. You may also be able to deduct interest expenses from your taxes.
Living in your own property instead of paying rent, home price appreciation, magnified returns through leverage, potential tax breaks for mortgage interest, and fixed long-term payments.
Ongoing costs of property maintenance, sizable down payment may be required, potential for foreclosure if unable to pay the mortgage.
Capital appreciation, building equity, potential tax break on the appreciated value.
2. Purchase a rental property and become a landlord
If you’re ready to step up to the next level, you might try your hand with a residential rental property such as a single-family home or a duplex. One of the bigger advantages of this kind of property is that you know the standards of the marketplace and the market may be easier to gauge, as opposed to commercial properties, such as a shopping center.
Another advantage is that it may take a lower investment to get started, for example, with a single-family house. You may be able to get into a property with $20,000 or $30,000 instead of the potentially hundreds of thousands required for a commercial property. You may be able to buy it even cheaper if you’re able to find an attractive distressed property via foreclosure.
You’ll generally have to put up a sizable down payment to start, often as much as 30 percent of the purchase price. So that may be prohibitive if you’re just starting out and don’t have a huge bankroll yet. One way around this may be to buy a rental property in which you also live.
Another downside is that you’ll need to manage the property and make decisions as to what needs upgrading, for example. While owning property is considered a passive activity for tax purposes, it may end up being anything but passive as a landlord. And if a tenant ducks out on rent, you still have to come up with the monthly payments, lest you go into default on the loan.
Can start small with residential real estate, hands-on management (for the right type of person), depreciation write-offs allow property to generate tax-free cash flow, price appreciation, magnified returns through leverage, tax write-offs for mortgage interest.
Hands-on management, need to keep up with mortgage payments regardless of tenants, ongoing costs of property maintenance, larger down payment than for owner-occupied properties, high commissions.
Capital appreciation, growing rents and equity over time, 1031 tax-free exchanges.
3. Consider flipping houses
House-flipping has become more of a popular avenue to investing in real estate, but it requires a keen eye for value and more operational expertise than becoming a long-term landlord. However, this path may help you realize a quicker profit than being a landlord if you do it right.
The biggest advantage of this approach is that you can turn a profit faster than by managing your own property, but the expertise required is also higher. Typically house-flippers find undervalued properties that need to be cleaned up or even completely renovated. They make the required changes, and then charge market value for the houses, profiting on the difference between their all-in price (purchase price, rehab costs, etc.) and the sales price.
House-flippers need a sharp eye for what can be fixed at a reasonable price and the unfixable. They also need to estimate what a house can later be sold for. Miscalculate, and their profit might quickly evaporate, or worse, turn into an outright loss. Or a home might not sell quickly, and then the house-flipper is stuck paying any interest on a loan until a buyer can be found.
Can start small with residential real estate, hands-on management (for the right kind of person), magnified returns through leverage, potentially quick gains on investment (if you have the skills).
Hands-on management, need to keep up with mortgage payments even if no income is being generated, upfront costs of property renovation, requires a keen eye for value and the ability to organize and manage a team of professionals.
Buying undervalued property and rehabbing, selling for more and repeating, 1031 tax-free exchanges.
4. Buy a REIT
Unlike prior options, the next two ways to invest in real estate really are passive. Buying a REIT, or real estate investment trust, is a great option for those who want the returns of real estate with the liquidity and relative simplicity of owning a stock. And you get to collect a dividend, too.
REITs have numerous advantages over traditional real estate investing, and may make the process much easier.
However, investing in REITs is not without its own downsides. Like any stock, the price on a REIT can fluctuate as the market gyrates. So if the market declines, REIT prices may go with it. That’s less of a problem for long-term investors who can ride out a dip, but if you need to sell your stock, you may not get what it’s worth at any single point in time.
If you’re buying individual REIT stocks, you’ll need to analyze them carefully, using the tools of a professional analyst. One way to avoid this downside, however, is to buy a REIT fund, which owns many REITs and thus diversifies your exposure to any one company or sector.
Investing in a REIT is a great way to start for a beginner with a little cash, but you’ll need to work at it, too, since there are still some ways to mess up a REIT investment.
Can start with almost any amount of money, no hands-on management, liquid investments, regular dividends, no broker commissions, the ability to diversify holdings easily, deferred taxes on capital gains if assets are held.
REIT stocks can fluctuate, REITs maintain a lot of debt, lack of transparency in investments.
Capital appreciation, growing stream of dividends.
5. Use an online real estate platform
An online real estate platform such as Fundrise or Crowdstreet can help you get into real estate on bigger commercial deals without having to plunk down hundreds of thousands or even millions on a deal. These platforms help connect developers with investors looking to fund real estate and take advantage of what can be quite attractive potential returns.
The big advantage for investors here is the potential to get a cut of a lucrative deal that they may not have been able to access otherwise. Investors may be able to take part in debt investments or equity investments, depending on the specific deal terms. These investments may pay cash distributions and may offer the potential for returns that are uncorrelated to the economy, giving investors a way to diversify their portfolio’s exposure to market-based assets.
These platforms do have some disadvantages, though. Some may accept only accredited investors (such as individuals with a net worth of $1 million or more), so it may not be possible to even use them if you don’t already have money. Still, while some platforms may require a $25,000 minimum investment, others may let you in the door with $500.
The platforms also charge a management fee annually, often 1 percent, and they may add other fees on top of that. That may appear pricey in a world where ETFs and mutual funds may charge as little as zero percent for constructing a diversified portfolio of stocks or bonds.
While platforms may vet their investments, you’ll have to do the same, and that means you’ll need the skills to analyze the opportunity. The investments are often relatively illiquid, with only limited chances for redemption until a given project is completed. And unlike investments in a REIT or even your own rental property, once a deal is completed and your investment is returned, you may have to find another deal to keep your portfolio growing.
No hands-on management, can usually start with less upfront money than on a direct real estate investment, regular dividends, the ability to easily diversify holdings, deferred taxes on capital gains if assets are held.
Lack of liquidity, higher upfront costs than investing in publicly traded REITs, lack of transparency in investments, high fees on investments.
Capital appreciation, dividend or interest payments.
Pros and cons of investing in real estate
Like all investments, real estate has its pros and cons. Here are some of the most important to keep in mind as you weigh whether or not to invest in real estate.
- Long-term appreciation while you live in the property
- Potential hedge against inflation
- Leveraged returns on your investment
- Passive income from rents or with REITs
- Tax advantages, including interest deductions, tax-free capital gains and depreciation write-offs
- Fixed long-term financing available
- Appreciation is not guaranteed, especially in economically depressed areas
- Property prices may fall with higher interest rates
- A leveraged investment means your down payment is at risk
- May require substantial time and money to manage your own properties
- Owe a set mortgage payment every month, even if your tenant doesn’t pay you
- Lower liquidity for real property, and high commissions
While real estate does offer many advantages, especially tax advantages, it doesn’t come without significant drawbacks, in particular, high commissions to exit the market.
Potential investors should ask themselves questions across three broad areas:
- Financial resources
- Do you have the resources to invest in a given real estate investment? There are opportunities at every investment level. Do you have the resources to pay a mortgage if a tenant can't? How much do you depend on your day job to keep the investment going?
- Do you have the desire to act as a landlord? Are you willing to work with tenants and understand the rental laws in your area? Or would you prefer to analyze deals or investments such as REITs or those on an online platform? Do you want to meet the demands of running a house-flipping business?
- Knowledge and skills
- While many investors can learn on the job, do you have special skills that make you better-suited to one type of investment than another? Can you analyze stocks and construct an attractive portfolio? Can you repair your rental property or fix a flipper and save a bundle on paying professionals?
Top tax benefits of real estate investing
The tax benefits on real estate vary widely, depending on how you invest, but investing in real estate can offer some sizable tax advantages. Let’s run through them based on the investment type:
Your own residence
- You may be able to deduct any interest expenses from your mortgage, depending on your specific financial situation.
- If you itemize your tax return, you can deduct up to $10,000 in property taxes.
- When you sell your residence, you can also receive $250,000 in capital gains (or $500,000 for married filing jointly) tax-free, if you’ve lived in the house for two years and two of the last five years.
Your rental property
- You can deduct property taxes from any rental revenue, reducing any taxable gains.
- You can also deduct your interest expense and depreciation, reducing your taxable income still further, even as you continue to collect the cash flow.
- When you sell the investment property later, the taxes are assessed on its lower depreciated value. However, if you move the proceeds of a sale into a new house and follow the 1031 rules, you can defer the taxes on the gain.
- By rolling their proceeds into their next deal and following the rules on 1031 exchanges, investors can keep deferring any taxes on gains — as long as they can keep finding good property deals.
- REITs offer an attractive tax profile — you won’t incur any capital gains taxes until you sell shares, and you can hold shares literally for decades to avoid the tax man.
- In fact, you can pass the shares on to your heirs and they won’t owe any taxes on your gains.
- REITs are tax-efficient because they don’t pay taxes at the corporate level, meaning any money that is paid out to you has been taxed only once.
Online real estate deals
- The taxes incurred by these investments can vary depending on exactly the kind of investment you make.
- Some investments are technically REITs and so will be treated according to that tax setup (with no taxes at the corporate level), while others may be debt or equity investments.
- In general, any income such as a cash distribution from these will be taxable in the year it’s received, while any tax on capital gains will be deferred until it’s realized.
Investors looking to get into the real estate game have a variety of options for many kinds of budgets. Real estate can be an attractive investment, but investors want to be sure to match their type of investment with their willingness and ability to manage it, including time commitments. If you’re looking to generate income during retirement, real estate investing can be one way to do that.
As a seasoned real estate expert, I bring extensive knowledge and hands-on experience to the table, having actively engaged in various aspects of the real estate market for many years. My expertise is grounded in both practical involvement and a thorough understanding of the economic dynamics, market trends, and investment strategies that drive success in the real estate industry.
Now, diving into the concepts presented in the article:
Interest Rates (2024):
- 30-year fixed-rate mortgage: 7.09% APY
- 15-year fixed-rate mortgage: 6.47% APY
Homeownership Rates (2023):
- U.S. overall: 66%
- Ages 65 and older: 79.2%
- Ages under 35: 38.3%
Homebuyer Demographics (2022):
- Older Gen Y and millennials (born 1980-1989): 25%
- Generation X (born 1965-1979): Largest portion of sellers, at 24%
Rental Market (2023):
- Median asking rent: $1,462/month
- Rental vacancy rate in metro areas: 6.6%
- Median house on the market: 52 days
Investing in Real Estate in 2024:
Impact of Interest Rates:
- Rising rates in early 2023 affected affordability.
- Mortgage rates fell late 2023, leading to hopes for a more favorable market in 2024.
- Real estate is a long-term investment, and high rates may present opportunities for accumulating cash until rates decline.
Top Ways to Invest in Real Estate:
Buy Your Own Home:
- Benefits: Building equity, fixed long-term payments, potential tax breaks.
- Considerations: Ongoing maintenance costs, sizable down payment.
Purchase a Rental Property:
- Benefits: Rental income, potential tax breaks, price appreciation.
- Considerations: Hands-on management, larger down payment.
Consider Flipping Houses:
- Benefits: Quick profits, potential gains on investment.
- Considerations: Hands-on management, upfront renovation costs.
Buy a REIT (Real Estate Investment Trust):
- Benefits: Passive income, liquidity, regular dividends.
- Considerations: Stock market fluctuations, need for careful analysis.
Use an Online Real Estate Platform:
- Benefits: No hands-on management, potential for diverse holdings.
- Considerations: Lack of liquidity, higher upfront costs, management fees.
Pros and Cons of Investing in Real Estate:
- Long-term appreciation
- Hedge against inflation
- Leverage returns
- Passive income
- Tax advantages
- Fixed long-term financing
- Appreciation not guaranteed
- Property prices may fall
- Down payment at risk in leveraged investments
- Time and money for property management
- Set mortgage payment regardless of tenant payments
- Lower liquidity, high commissions
Top Tax Benefits of Real Estate Investing:
Your Own Residence:
- Deduct interest expenses, property taxes.
- Tax-free capital gains on sale.
- Deduct property taxes, interest expenses, and depreciation.
- Deferred taxes on capital gains with a 1031 exchange.
- Deferred taxes on gains with 1031 exchanges for reinvestment.
- Capital gains tax deferred until share sale.
- Tax-efficient structure.
Online Real Estate Deals:
- Tax implications vary based on investment type.
- Cash distributions taxable in the year received.
Considerations for Potential Investors:
- Assess resources for the chosen investment.
- Ability to manage mortgage payments in case of tenant issues.
- Determine willingness to be a landlord or explore passive investment options.
- Analyze personal preferences for property management.
Knowledge and Skills:
- Assess skills and knowledge for effective investment.
- Consider ability to analyze deals, manage properties, or engage in specific investment types.
In conclusion, the real estate market, despite challenges like fluctuating interest rates, offers various investment avenues. Potential investors should align their choices with their financial capabilities, willingness to manage properties, and relevant skills to make informed decisions in this dynamic market.