How To Invest In Real Estate: A Guide For Beginners

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Have you ever wondered how real estate investing works? It’s an important question. Among houses, apartments, offices, hotels, and industrial buildings, there’s over $35 trillion invested in real estate.

This video helps you understand some of the basic ideas behind real estate investing.

A real estate investment often starts when somebody purchases a piece of property, which then has the potential to generate value for that investor in multiple ways: as payments collected from tenants; and as appreciation over time, as the property itself becomes more valuable on the market.

For example, imagine you purchase a house for $500,000, which you plan to rent to tenants. Typically, for a $500,000 property, your investment includes a 20% down payment — $100,000 — and an 80% mortgage — $400,000. We call this $100,000 of equity and $400,000 of debt. To simplify the math, ignore closing costs for now.

Congratulations, you own a rental property! Now what? Find your tenants!

Say there’s a similar, nearby house that rents for $2,500 a month. You match that — that’s $30,000 a year, in gross rental income. Your total return is that amount, minus expenses and mortgage interest... plus the change in your property’s value over time.

Let's walk through that in more detail: You have to pay your property taxes and insurance, as well as some ongoing operating and maintenance costs. Let’s say, $5,000. Mortgage interest is your other major expense. Your $400,000 mortgage might have a 4.5% interest rate: that’s another $18,000 in costs.

So, $7,000 a year in residual income. $7,000 divided by your $100,000 investment equals a 7% annual return. For simplification, we’re ignoring things like income tax and depreciation.

But there’s more than just cash flow. You can also benefit from potential appreciation in both the rent and property value. The industry rule of thumb is 3% per year of appreciation. Altogether, you might make 7% a year in rent and 3% in appreciation. That’s a 10% annual return over the long term.

For comparison. the stock market has an average historical return of about 8% return a year. In fact, real estate has outperformed stocks over the past 30 to 40 years.

But not everyone has the time or money to be a landlord. That's why Fundrise has built the first easy-to-use online platform for real estate investing. Imagine getting all the benefits of owning real estate directly but at a fraction of the cost, and without having to do the work.

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But what if I want to live in one of the properties that I invested in?

SpiralBreeze

The best investment one can do right now is investing on real estate though stocks are good but ever since I swapped to real estate, I've seen so much difference.

AndrewMike-nhoo