There are three primary ways to invest in real estate:
- Through REITs (real estate investment trusts), which behave like a mutual fund and allow you invest in a collection of real estate investments that generate a consistent income
- Invest in real estate projects through real estate crowdfunding platforms
- Buying tangible properties that you can live in or rent
With any real estate investment, you are hoping to make money when the value of a property goes up. The value is based, like any other investment, on supply and demand. The higher the demand and lower the supply, the higher the value.
While all three of the primary ways to invest in real estate can make you money, I am going to focus on number 3, since I think owning tangible properties is the best and most profitable way to invest in real estate. When you actually own a property, you can do amazing things with it and real estate is amazing because it’s the only investment that you can actually live in.
When you buy your first property you will owe a lot of money on it if you are taking out a mortgage from a bank (which you should definitely do). As you pay down the mortgage and property appreciates (goes up in value) your equity (the percentage of the property you own) grows. But you don’t have to pay the mortgage yourself, you can get renters in the property to cover it by house hacking.
While your renters might barely cover the cost of the mortgage at first, over time as the property gets more valuable, you can increase rent and start putting the extra money you get after the mortgage is paid in your pocket (or even better you can invest it stocks, bonds, or other properties!). There are many real estate investors who get enough money from their rental properties to cover the mortgages, their monthly living expenses, and have more left over to keep investing.
Over time you should get more and more cash flow from your properties, the value of the property will continue to appreciate, and your ownership percentage will also grow. Eventually, you can even pay off the mortgage and then all of the rent money will be yours and you will have an asset that will hopefully continue to go up in value. Then you can sell it to recoup the value and invest the money another way, or keep the rental cash flow for life.
This is why you can and should include real estate income in your early retirement calculations. Because if you have properties that are generating consistent cash flow (and can for life!) then you actually need less money saved to retire early. You can also factor in property values into your net-worth because they are assets and they can go up in value. It’s incredible.