The Basics of Active Real Estate Investing in 2024

Active real estate investing can be a tough but lucrative endeavor if done correctly. With the real estate market constantly evolving, it's important for investors to stay informed and adaptable. Whether you're a seasoned investor or a newcomer to the real estate scene, understanding the basics of active investing is the key to success. This blog will explore the fundamentals, strategies, and current trends to help you navigate the world of active real estate investing in 2024 and beyond.

What Is Real Estate Investing?

Real estate investing is the purchase, lease, or sale of land, real estate, and real property for the purpose of earning money. There are three main types of active real estate investing:

• Residential Investing - Residential real estate includes a wide range of housing types, including single-family homes, townhouses, condos, and multi-family residences. Essentially, buildings used for living and not for work are categorized as residential real estate. If the property has more than four units, however, it is considered commercial real estate.
• Commercial Investing - Commercial real estate is the most straightforward category in real estate investing. It includes any property that is used for business, such as offices, retail spaces, or residential properties with more than four units
• Industrial Investing - Industrial real estate is a small but mighty category of real estate investing and consists of anything used for industrial business purposes. Common examples of this are shipping and storage warehouses, factories, and powerplants.

How Do You Make Money With Active Real Estate Investing?

The real estate industry has been appealing to people wanting to diversify their investments and build wealth. In fact, in June 2023, investors bought nearly 26 percent of all sold single-family homes. Purchasing real estate gives you three main ways to make money:

Rent

Rent is the most common form of income from real estate. Continuous rental payments from residences, commercial buildings, and warehouses can add money to your bank account with minimal effort.

To keep the entirety of the rent payment, you'll want to act as the landlord. Keep in mind you will be responsible for fixing repairs or any other issues that come up. Consider hiring a property management company if the work of being a landlord seems excessive. Management companies often take part of the rent as payment.

Appreciation

Appreciation is the increase in property value over time, often a result of a developing or more popular area. For example, a house bought for $300,000 could sell for $100,000 more in many years without any additions to the property.

While appreciation will give you a larger return on your initial investment, your revenue will come as a lump sum, and returns are not guaranteed. Remember that you’re still responsible for maintaining properties before selling, so you will have to invest time and money into the property as it appreciates in value. You might consider renting out a property for a regular return and then selling it for appreciation once the property value increases.

Interest from Loans

Earning money from loan interest is trickier for individuals and is more often used by private equity firms. Essentially, the investor will loan money to a real estate developer, who will have to pay back with interest. The income the investor garners comes from the loan’s interest. Different types of loan investment include:

• Senior Debt
• Junior Debt
• Mezzanine Debt

The loans can also be secured or unsecured. Secured loans protect the investor in case of foreclosure or project shutdown.

What Are the Most Effective Real Estate Investing Strategies in 2024?

Investment opportunities come in many forms and work depending on an individual's skills. There are three main types of active real estate investing strategies:

• House Flipping - Though popularized on television, house flipping isn’t as glamorous as it seems. Flipping is the process of purchasing a home, then making renovations and improving the home’s value to sell it at a better price. While that may sound easy, understanding the real estate market is crucial for investors to make informed decisions. Poor house flipping can lead to overspending and cause the property to be overvalued.
• Rental Properties - Rental properties offer steady income but require time investment. Finding tenants is the challenge. You need to check income, background, and compatibility before approving them to rent your property. To lease your property to tenants, you need a lawyer to draft a lease agreement and arrange rent payments, property maintenance, and evictions. A real estate property management company can handle this, but you will have to share your rental income with them.
• Airbnb & VRBO - Airbnbs and VRBOs are a new form of real estate investing that offers short-term rentals in private homes. Investors often rent properties through Airbnb or VRBO due to benefits like booking management and customer service. Airbnbs can generate per-night fees, while VRBOs can generate more income due to longer-term vacation requirements. Both options offer positive aspects for property management. Airbnb can double property profits by booking with many guests, but there's no guarantee guests will book, and some associations and apartment management companies may forbid guests. Research local amenities and avoid breaking rules before listing properties.

What is Active Versus Passive Real Estate Investing?

While they sound very similar, there are a few major differences between active and passive real estate investing. Let’s break it down below.

Active Investing

Active real estate investing is when an investor is hands-on. To find homes that fit their investment goals, active real estate investors research the market, choose properties, and negotiate with the seller. An active real estate investor may also take direct responsibility for the property management following the closing. They handle rent payments and repairs, advertise the property for lease, check potential tenants, and handle repairs.

The advantages of active real estate investing include minimum fees, maximum control, and direct tax benefits. However, it necessitates market knowledge, a knowledge of landlord-tenant legislation, and an understanding of rental property management. Due to the significant amount of capital invested in down payments for properties, less liquidity is required. But, when every investment is actively managed, it becomes difficult to grow and diversify a portfolio.

Passive Investing

When an investor invests money in a real estate venture, like self-storage, and hires a third party to handle the majority of the work, this is passive real estate investing. A private real estate investment's sponsors or property managers will create and carry out the business strategy, find and purchase real estate that fits the investment requirements, secure affordable financing, and manage the property's daily operations.

Even passive real estate investors must, however, engage in some level of activity. For example, they must regularly study financial performance reports and analyze offering memorandums for crowdfunding and private equity self-storage opportunities.

Benefits of investing in passive real estate include access to investment-grade assets, better diversification, less expertise in managing investments, and more liquidity in publicly traded REITs. With everything, passive investing has its drawbacks, including less control over investments, higher administrative costs, fees paid to third parties, and splitting profits.

What Are the Risks and Considerations for Real Estate Investing?

Real estate offers potential for cash flow, tax benefits, and property appreciation, but investors must be aware of risks like market changes and tenant challenges. Being prepared to manage these risks can help develop strategies that reduce risk and protect against losses.

The following real estate investment risks should be taken into account if you're considering a big investment:

• General Market Risks - Economic conditions can lead to decreased rental revenue and property values due to tighter lending requirements, decreased consumer confidence, and job losses. To lower this risk, be aware of economic indicators, avoid excessive debt during market highs, keep cash-on-hand, and diversify your assets.
• Location Risks - Property value is influenced by factors like crime rates and school quality, as well as regional variables. To protect investment homes, explore local dynamics like development plans and employment prospects and get to know the prospective area.
• Property Risks - Potential structural issues with the foundation, roof, plumbing, or electrical systems may require significant modifications and lead to costly, unforeseen expenses. Ignoring these may worsen the issue and necessitate greater repairs. Before buying a house, hire a qualified inspector to reduce risk and consider backing out if structural issues are found.
• Negative Cash Flow Risks - Real estate investing aims to generate positive cash flow, but overestimating rental revenue or other expenses can lead to negative cash flow, lowering returns. To avoid this, investors should accurately estimate costs before purchasing a home, have sufficient cash-on-hand if expenses exceed expectations, or consider raising rent.
• Vacancy Risks - A rental property's vacancy can negatively impact its profitability, especially considering continued bills for utilities, insurance, taxes, mortgage, and upkeep. To minimize vacancy, set competitive rates, develop relationships with renters, and advertise for new tenants efficiently. This will attract excellent tenants and minimize vacancy, ensuring the property's long-term stability and profitability.
• Tenant Risks - Tenants pose risks to properties like damage, missed payments, neglect of maintenance issues, keeping unauthorized occupants, and violating lease agreements. Tenant screening is crucial for investment protection, ensuring tenant dependability through credit and background checks. An effective lease agreement with obligations and consequences is essential.
• Financial Risks - Real estate investors often use loans to finance, boosting returns but also posing risks like financial losses or foreclosure and interest rate fluctuations impacting cash flow and loan costs. Only take loans that you can afford to repay. Be ready for fluctuations, and keep emergency cash-on-hand.

Get Your Real Estate License and Start Investing Today

The truth is that active real estate investing requires a lot of knowledge about real estate and the real estate market. Start your career in real estate investment by first getting your real estate license online. At VanEd, we offer state-mandated real estate pre-license courses to help you obtain your license and pass your state's real estate exam. Visit our full catalog of courses available on our website today!

Written and Published by: VanEd