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Fact Checked: Cadeem Lalor
Updated: November 11, 2022
We adhere to strict standards of editorial integrity to help you make decisions with confidence. Please be aware that some (or all) products and services linked in this article are from our sponsors.
Fact Checked: Cadeem Lalor
Updated: November 11, 2022
We adhere to strict standards of editorial integrity to help you make decisions with confidence. Please be aware that some (or all) products and services linked in this article are from our sponsors.
We adhere to strict standards of editorial integrity to help you make decisions with confidence. Please be aware that some (or all) products and services linked in this article are from our sponsors.
Owning a home is seen as a smart financial investment. Firstly, you are buying an asset that gains value over time. Then, you pay off your mortgage, you are essentially giving money back to yourself.
While you may get a better return on investment if you were to invest in the stock market, purchasing real estate can give you a strong foundation on which to build wealth.
Buying real estate doesn’t have to be limited to purchasing a home. There are multiple ways to get into the real estate game, such as investing in farmland or purchasing commercial real estate.
You might be aiming to purchase your first apartment or home to live in. Or maybe you are looking at an investment property. This guide will take you through the different types of properties, the steps to buying and selling, and so much more.
The real estate market has been a bit of a whirlwind lately.
First, there was the rush for homes during the COVID-19 pandemic, as Americans sought more space. Home prices soared, not only in metropolitan areas but in suburbs and rural regions as well.
In early 2022, interest rates started to rise. For people locked in a low rate on their mortgages, they may have escaped unscathed. But for new homebuyers, this made getting a loan more difficult — and resulted in higher monthly payments. For people with an adjustable-rate mortgage, it meant immediately paying more money to the mortgage lender.
As interest rates inch up, home prices continue to drop, indicating that the market is cooling. While this might mean that home prices are more affordable, the higher interest rates may deter a lot of potential homeowners.
At the same time, some smaller markets — such as Cincinnati and Indianapolis — have seen housing prices rise. Your best course of action when buying a home is to determine what you can afford as both a downpayment and monthly mortgage payment, then find a home that best suits your needs.
While you may get a better return on investment if you were to invest in the stock market, purchasing real estate can give you a strong foundation on which to build wealth.
Despite all this, owning a home is still considered a smart financial investment. Not only are you purchasing a physical asset that gains value over time, but when you’re paying off a mortgage, you are, in effect, giving money back to yourself.
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What is the median price of a house in the U.S as of October 2022?
Whether you’re new to the real estate game or own multiple properties, knowing the types of real estate available to you can help you evaluate where to invest.
Like any investment portfolio, a mixture of assets can provide a strong foundation. Even if you think that investing in multiple real estate properties is beyond your means, you might be surprised at the options available.
Residential real estate refers to an area that’s been developed to form a sustainable living space. These living spaces include houses, condo units, townhouses, duplexes, and co-operatives.
As the owner of real estate, you’re responsible for the maintenance of your property, and the associated fees. The fees include everything from monthly bills like hydro and water, to property, school, and municipal taxes.
With residential real estate, you can choose to live in the home on your own, or rent it out to another individual. For instance, you might own a condo but choose to rent it to someone else.
Residential real estate is generally the most accessible way of investing in real estate, as there are numerous properties available at any given time and their pricing is more in line with the cost of living.
The federal government also offers a variety of loans and incentives to make home ownership obtainable.
For instance, you might qualify for a USDA loan if you’re looking to live in a rural area, or a Veteran Affairs (VA) loan if you are a veteran. These two loans let you purchase a home with no down payment, while loans like an FHA loan require you to only put down 3.5% of the purchase price.
With skyrocketing inflation and the uncertain economy, you could be looking to diversify your investments outside of the stock market.
Commercial real estate has long been touted as a wise investment for adding stability to your portfolio. But commercial real estate has always been reserved for a few elite investors — until now.
Real estate investment trusts (REITs) offer an easier way to get into the commercial real estate game.
REITs manage properties and pass profits along to shareholders. That means you don’t have to worry about screening tenants, fixing damages or chasing down late payments. You simply sit back and watch the dividend checks roll in.
You can also invest through a crowdfunding platform that allows you to purchase a percentage of a physical asset. This can be a great way to earn passive income from commercial real estate.
You might also consider becoming a private lender. If you have underused capital, a risk tolerance greater than zero, and access to a good real estate lawyer, you can begin your journey to become a private lender.
Private lenders provide some or all of the capital needed to build, renovate, and develop real estate properties. The short-term nature of these projects means you can charge comparable interest rates to what mainstream lenders would offer. In the U.S, the interest on a private deal typically ranges from 6 to 15%.
Industrial real estate is any land or building developed to be used for production, manufacturing, assembly, warehousing or distribution. An Amazon distribution center, a car manufacturing plant, and a grocery distribution center are all examples of industrial real estate.
Consumer goods are always in demand, and with more and more production and manufacturing returning to the U.S., the opportunity to invest in industrial real estate can lead to a great return on investment.
While there might be great opportunity to build wealth with industrial real estate, it also takes money to get in the game. Generally, you require a large amount of capital to purchase all or even part of an industrial site or building.
The stock market is subject to constant fluctuations. But one thing that is close to a sure-bet when it comes to investing is farmland.
Unlike stocks, whose value is dependent on a wide variety of factors, farmland’s returns are based on long-term global trends that aren’t likely to change.
Farmland is a favorite investment of billionaires like Bill Gates and Warren Buffet, who see the common sense in investing in an asset that will constantly be in demand and has a limited supply.
To get started in investing in farmland, you can try a publicly-traded real estate investment trust that specializes in farms, or try out an investing service that specializes in farmland.
Investing in real estate may seem like a difficult proposition. Even with housing prices on the decline, rising interest rates mean higher mortgage payments, which might be a strain on your budget.
At the same time, real estate has historically been one of the most effective inflation-fighting assets, and being a landlord might be an attractive way for you to collect passive income.
If owning an investment property is out of reach for you, you can try one of these alternate ways to invest in real estate:
More: Is now a good time to buy a house?
For a lot of people, real estate represents a stable asset to provide balance to a financial portfolio. It generally appreciates over time, and can give a healthy return on your investment. For example, commercial real estate has outperformed the S&P 500 over a 25-year period.
But getting into the real estate investment game can take a lot of capital.
Crowdfunding has made it easier — and more affordable — to own property. However, if you’re looking to actually become a landlord or invest in commercial real estate, you’ll need a lot of money. For instance, if you use a loan to purchase a commercial property, you’ll generally need a downpayment of 25% to 30% of the purchase price.
When you buy a home, you’re making an investment in yourself. Not only are you purchasing an asset that appreciates over time, but as you pay off your mortgage, you’re increasing your equity.
But making the jump from tenant to homeowner can be difficult, especially if you don’t properly budget.
Farmland is limited, and the commodity it produces is always in demand. The fact that the demand outweighs the supply makes it a naturally attractive investment.
Over the last 47 years, the rate of return on farmland was 10.27% — better than average returns on other forms of real estate or stocks.
While you can invest in farmland through exchange traded funds (ETFs) or real estate investment trusts (REITs), you often require a great deal of specialized knowledge or investment capital to get into the game.
A home is potentially the most expensive purchase you’ll ever make, so you want to know what you’re doing before you make an offer. You want to choose the right neighborhood, get a good price, and get the best mortgage rate.
The best time of year to purchase a house is usually the fall and winter. There may be fewer properties listed, but generally you’ll find more sellers willing to make a deal.
Here are some tips to help you out when you’re looking to buy a home:
Once you find a home you want to purchase, prepare to make an offer. If it’s accepted, you’ll need to submit a mortgage application for approval. An underwriter will check your financial background, and if everything is in order, you can close the deal on your home purchase.
Want to learn more about the magic world of real estate? Shake the sphere for eight financial facts.
For fun real estate facts
When selling a home, preparation can help you avoid making mistakes that could cost you better offers or a quicker sale.
While the housing market may be cooling, people are always looking for a home. Keep these tips in mind when selling your home to help draw those buyers to your doorstep:
Real estate taxes, or property taxes, are taxes you pay on a home and the property it’s situated on.
Real estate taxes, or property taxes, are sometimes confused with personal property taxes. Personal property taxes apply to movable assets, such as vehicles. Meanwhile, real estate taxes (or property taxes) apply to immovable assets such as a home.
The money collected goes to pay for municipal and state services like police and fire departments, schools, infrastructure, and libraries.
Real estate tax is generally collected annually, and will vary depending on where you live and other factors.
Real estate taxes are based on the assessed value of your home, and the tax rate is determined by the city and state the home is in. The amount you will need to pay is determined by multiplying the value of your home by the rate established by your city.
The amount you pay in property tax can vary over time, based on the assessed value of your home. Tax rates can also fluctuate based on your local government.
To find out what tax rate is in your area, consult your local county government.
Since real estate has personal use as well as investment purposes, it’s considered a capital asset. If you sell your home for more than you paid, it is classified as a capital gain. If you’ve had your home for more than a year, it’s considered a long-term capital gain.
Generally, the tax rate on capital gains is no more than 15%, but may be as low as 0% if your taxable income is below $40,400 ($80,400 for married couples who file jointly or qualifying widow(er)s.)
If you made capital gains selling your home, you could qualify to exclude up to $250,000 of that gain from your income ($500,000 if married and you file jointly).
To qualify, you must have owned and lived in your home for at least two of the past five years before you sold it. You must make the claim for only one property, even if you sold multiple.
More: What is fractional homeownership?
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