If you’ve decided to take the leap and start investing in real estate, congratulations! You’ve embarked on a journey that could potentially supplement your earnings. However, it can be a stressful experience if you don’t know your way around.
But worry not! This comprehensive guide will help you learn the ropes since it provides tips on the best real estate investments, spells out investing strategies with proven track records, and lists the best states for investing.
Why Invest in Real Estate
The US real estate industry is a robust and lucrative market, with a value of $113.58 trillion as of 2023. Residential real estate takes the lion’s share of the market, accounting for $88.91 trillion, while commercial real estate has a value of $24.67 trillion.
According to Redfin, the value of the housing market experienced a 5.3% annual increase ($2 trillion increase for a total of $47.5 trillion) in 2023, which is more than the total national debt ($34.8 trillion as of Q3 2024).
Value of US homes vs national debt
Besides it being an enticing investment vehicle, here are other reasons to invest in real estate:
- An additional source of income: Investing in rental property can help earn some passive income to cover the cost of the mortgage repayment and even supplement your earnings. The current market is especially lucrative as rents are rising faster than wages, with rents increasing by 4% between 2019 and 2023 compared to 20.2% for wages during the same period.
- Potentially reduce your tax bill: There is a possibility of minimizing your tax burden by investing in real estate, such as deferring profits in a 1031 like-kind exchange or a Topic No. 701 personal-residence exemption for selling your home.
- Diversify investment portfolio: You should consider investing in real estate as a hedge against losses when the stock market performs poorly. Diversifying your portfolio spreads your risk, improving your chances of navigating downturns unscathed.
Best Real Estate Investments in 2024
After extensive research, we found that these are the best real estate investments:
1. Rental properties
Becoming a landlord is a great way to earn some income. At the moment, the typical home is 37% more costly to buy than rent on a monthly basis, so naturally, more people are flocking to rentals.
As a result, rents for 2-bedroom apartments reached an all-time high of $1,716 in May 2023. Further, rental prices kept rising steadily, hitting $1,847 in March 2024.
However, remember that unless you hire a property manager, owning a rental property comes with extra responsibilities like maintaining the property, running adverts to find tenants, filing taxes, securing insurance, and paying the mortgage. On the other hand, hiring a property manager will mean a cut on your take-home.
2. REITS
Real estate investment trusts (REITs) are corporations or trusts formed to consolidate investors’ cash to buy, manage, and sell income-generating real estate properties.
They are bought and sold on major exchanges as you would stocks. A REIT pays 90% of its taxable profits to shareholders as dividends, so it does not have to pay corporate income tax.
Unknown to many, REITs outperform stocks over the long term. Data from the FTSE NAREIT shows it performed better than the S&P 500 over the past 20, 25, and 50-year periods.
REITS outperforms the S&P 500 in the long term.
Source: https://www.fool.com/research/reits-vs-stocks/
Although all equity REITs made a loss of 5.8% in April 2024, they bounced back in May 2024, chalking up 3.1%. Mortgage REITs offered 12.5% in dividends, while Equity REITs chipped in with 4.2%.
All REITs performance
Source: https://www.reit.com/data-research/data/quarterly-reit-performance-data
3. Real estate investment groups (REIGs)
These operate like mutual funds for rental properties. They are appropriate for the investor who does not have the time to manage real estate but wants to enjoy the benefits of a landlord.
A REIG is a company that buys properties and allows investors to join the group. You can own as many units as you wish. The company will then take charge of maintaining, advertising, and running the properties in exchange for a cut of the monthly rent.
There are different types of REIGs:
- Equity REIG: The most common, where investors earn income generated from rent, capital gains, and appreciation. A REIG can invest in multiple types of properties, like commercial, residential, or industrial real estate. Aimed at cash flow and long-term growth and investors who don’t mind real estate’s volatility and illiquidity.
- Debt REIG: Invest in debt instruments (such as mortgages and loans) secured by real estate. They generate income from fees, interest payments, and principal repayments. Are not as lucrative as Equity REIGs, but are less risky. Suited to investors looking for predictable and steady income geared toward capital preservation rather than maximizing returns.
- Hybrid: Refers to a REIG that invests in both debt and equity instruments. Enjoys the features of both types of REIGs, providing a balanced result of income and growth while diversifying exposure to varied market conditions. Moderate risk for the returns.
4. Real estate limited partnerships (RELP)
Similar to REIGs, only RELPs are set up for a finite number of years. The general partner (an expert in real estate investments) will set up a plan to acquire a viable real estate project and seek investors to finance the property’s purchase in exchange for shares.
The partners might receive some income from the unit as they wait for an opportune time, as the end goal is the sizable profit they will hopefully receive from selling the property.
5. Mutual funds
Real estate mutual funds usually invest in real estate operating companies and REITs, allowing for diversified portfolio and exposure. Several investors pool their cash to purchase securities in REITs or companies investing in real estate.
A real estate mutual fund refers to pooled investment consisting of real estate and other diverse investment vehicles, such as stocks and bonds, placed under professional portfolio management.
Investors receive returns from real estate mutual funds in two main ways:
- Capital appreciation: An increase in the net asset value could mean greater profits if the underlying property is sold at this higher value.
- Dividends: Mutual funds announce dividends. Taxes are paid before distributing the dividends, so the proceeds are tax-free.
6. Multifamily homes
The multifamily segment is worth $3.8 trillion and is renowned for its stability, adaptability to market dynamics, and consistent cash flow. Investing in multifamily homes presents opportunities for multiple revenue streams with an annual cash-on-cash return rate of about 5-10%.
This figure reflects the rental income only but does not account for the returns you will receive if you decide to sell or refinance the property. Taking into account the sale of the profit bumps up the returns to 18-22% on average yearly.
A study by the National Multifamily Housing Council (NMHC) shows the multifamily sector offers the highest returns and lowest volatility of all commercial real estate (CRE) sectors.
Multifamily units outperforming other CRE segments in the long run
7. Farmland
This is an underrated and often ignored sector in real estate, yet it has one of the best ROIs. It is a market that was worth $3.18 trillion in 2022, covering about 52% of all US land base.
Non-operator farmland owners (they own the land but don’t actively participate in farming) accounted for 31% of all farms in 2014. In the past 30 years up to 2024, non-operator owners rented about 40% of all farmland.
Farmland real estate growth in value
The value of farmland increased by 7.4% in 2023, with a compound annualized growth rate of 4.6% for the period between 2017 and 2022. Average annual returns is 12.8%, and the sector has recorded positive returns yearly since 1990.
Strategies for Investing in Real Estate
These are the most popular real estate investing strategies:
1. Buy and hold
This refers to the practice where an investor buys a property, holds on to it long-term, and sells it when prices rise. With median home prices rising more than 200% over the past 20 years, it’s easy to see the appeal of this strategy.
You can also force appreciation by making improvements to the property, such as remodeling and raising the rent. Holding property for the long haul has several other benefits, such as tax shelter occasioned by depreciation and steady amortization of loans.
2. Fix and flip
This strategy involves targeting rundown homes, improving them, and selling them for a profit. Fix-and-flip investors enjoyed an average ROI of about 27.5% (gross profit of $66,000) in 2023.
Returns on house flipping
However, you must possess knowledge of spotting structural issues in buildings to have any success using this strategy. If you don’t have the skills to gauge the structural integrity of properties, you could always engage experienced contractors or real estate agents.
Finding finances for the project might also be tricky because traditional lenders won’t advance you a standard mortgage for a fix-and-flip home. You can only rely on your savings or business partners.
3. Wholesaling
Find a property with great potential for high profits and link a buyer to the seller at a higher price than the selling price. Collect the difference in selling price and the amount the buyer pays.
It is heavily reliant on the “driving for dollars” technique, as most users of this strategy drive around neighborhoods looking for promising properties. You need a vast network of potential buyers and strong sales and marketing skills to pull this off.
4. BRRRR
It is short for “Buy, Rehabilitate, Rent, Refinance, Repeat.” It follows the same principles as fixing and flipping homes, but in BRRRR, you rent the unit instead of selling. After buying a distressed property, fix it, lease it, and once it has gained a history of cash flow, refinance and get cash to fund the next project.
It is a time and resource-intensive strategy, as you must have the resources to pull off the repairs without expecting to receive cash in the near future. You will also spend time managing the repairs and sourcing tenants.
Best States to Invest In
One of the best-known phrases in real estate is “location, location, location,” with good reason. Your success in real estate investments will have a strong relation to where you buy the property. Therefore, it is essential that you buy a property in the best real estate markets.
Each state has its own pros and cons, so it is critical that you familiarize yourself with information pointing to the suitability of investing in a particular state.
After an extensive review of real estate data, we’ve compiled the list below showcasing some of the best states to invest in:
1. Idaho
The 14th largest state’s median home price of $460,955 is reasonably above the US median home price of $363,438 in June 2024. Its GDP has grown by over 15% in the five years to 2023, and annual employment growth is 2.7%.
2. South Carolina
Homes are affordable, as they will set you back $301,130 only, while the value of homes increased by 3.7% between June 2023 and 2024. The state charges a lowly effective property tax rate of 0.50%, minimizing operating expenses.
3. Kentucky
This state is well suited to beginner real estate investors because homes cost just $251,300 as of June 2024, a 3% increase year-over-year (YoY). The typical rent is about $1,259, and there are no rent controls. Population growth is 0.32% YoY in 2023.
4. Indiana
With a median household income of $66,785, low cost of living (91.5), lowly home value of $242,500 (as of November 2023), and annual home appreciation rate of 6.1% between Q2 2022 and Q2 2023, Indiana presents an enticing prospect for real estate investment.
5. Georgia
The typical home has a manageable cost of $316,000. The median household income of $72,837 combined with a low annualized unemployment rate of 3.2% in May 2024 and a 1.3% jobs growth YoY in June 2024 place Georgia on the radar of most savvy real estate investors.
Final Word
Your best chance to stay ahead of the competition is to invest time learning and researching about the real estate business.
This will help you gain insights on making inroads in the industry and how to avoid potential pitfalls. Most of the information is readily available online on helpful sites such as BiggerPockets and Realtor.com.
Further, consult experienced contractors and real estate agents operating in your target area to learn more about the intricacies of the local market. They are a source of expert knowledge and networking opportunities when you start operating in that area.
