Buying property has long been a foundational way to build wealth across generations. There will always be risks, however, so it’s understandable that you might be looking for the safest way to get into real estate investing.
To help you get started, we’ll give you the five safest ways to invest in real estate along with some strategies that new investors can use to manage risks.
What Makes an Investment “Safe?”
If you’re looking for the safest way to get into real estate investing, first you need to understand what makes an investment safe and how it applies to buying property.
Safe investments maintain your principal, which is the initial capital you invest, while generating returns, although they may be modest. Safe investments also have low volatility, or stable price movement, and high liquidity, meaning you can convert your investment asset into cash quickly.
Of all the ways you can invest, putting your money in property is considered one of the safest. For starters, it’s a tangible asset, offering a level of security you won’t find with many other assets because of real estate’s intrinsic value. And historically, the value of real estate has risen over time. Real estate can also generate passive income.
However, real estate does not come without its risks. Property prices can rise and fall, although less frequently than with other assets like stocks. Real estate also comes with low liquidity. The average time to sell a home in the U.S. is nearly three months, which can require more patience.
Still, for more cautious investors, the advantage goes to low-risk real estate investments that potentially deliver appreciation over time and provide lower returns than assets that can deliver higher returns but at higher risks. And with the right market research and due diligence, you can lower that risk even further.
5 Safest Ways to Start Real Estate Investing
If you’re ready to get going, consider these beginner real estate strategies as five of the safest ways to kick off your property investing.
1. Real Estate Investment Trusts (REITs)
Real estate investment trusts (REITs) may be considered the safest real estate investment. REITs are companies that operate, own, or finance income-generating residential or commercial properties. They typically invest in a diversified basket of holdings, which can help spread risk.
You can buy shares of a REIT, like a stock, and receive quarterly or annual dividends without physically owning or having to manage the real estate. In fact, publicly traded REITs are required by law to pay out 90% of profits to shareholders.
2. Real Estate Crowdfunding Platforms
Real estate crowdfunding platforms can help simplify real estate investing for beginners. Online platforms offer real estate crowdfunding (where your involvement in a property is hands-off) and fractional ownership (where involvement can vary, but the property is typically professionally managed).
Online platforms vet properties and allow you to invest in projects or properties you might not be able to afford otherwise. Crowdfunding real estate pools money from many investors, sometimes as little as $100. With fractional ownership, you buy a share of a property at much lower upfront capital for a rental or vacation home.
3. House Hacking
With house hacking, you can use a low down-payment program to purchase a multi-family house, such as a duplex or triplex, live in one unit and rent out the other units. The rent you collect for the other units can cover your mortgage and other property expenses or deliver a profit. Meanwhile, you gain equity in the property and potential appreciation.
4. Turnkey Rental Properties
If you’re new to real estate investing and have a buy-and-hold strategy, a turnkey rental property may be the right choice. Turnkey properties are typically fully renovated and ready for renting. For you, that means the property can generate cash flow right away. Turnkey properties are also often professionally managed, requiring little effort on your part to prepare or maintain the property.
5. Partnering With Experienced Investors
Having a mentor is a great way to start. Imagine learning the ins and outs of real estate investing from an experienced partner while earning returns on your properties. As a beginner, you also share the cost of the capital investment and the risks with others, so you’re not out on your own.
These partnerships are often called real estate syndications or investment groups and are headed by a sponsor who uses their experience to find and vet properties and handle their day-to-day operations.
Strategies to Reduce Risk as a New Investor
While real estate may be safer than other investments, it’s not without risks. Consider these tips on how to manage and mitigate them:
- Start small and diversify: As someone new to the game, be patient, start small, learn the ropes and diversify wisely.
- Run the numbers: Get a clear understanding of the financial metrics you need to evaluate investments such as net operating income (NOI), capitalization rate (cap rate), cash-on-cash return and vacancy rate.
- Understand the local market: Thoroughly analyze your market, evaluating employment and population growth, housing prices and up-and-coming neighborhoods.
- Choose the right financing structure: The loan you choose for your investments will impact your profits and goals. Typical investor loans include hard money loans, private money loans or traditional home loans.
- Work with trusted professionals: A team of real estate professionals can help you make informed decisions to be successful. Team members include an agent, mortgage broker, lender, inspector, contractor and property manager.
Final Thoughts: Why Real Estate Appeals to Cautious Investors
If you’re a cautious investor, you now know some of the safest ways to get into real estate investing and why it holds a reputation as a stable, long-term way to make money.
While turning a profit isn’t guaranteed, real estate returns, unlike stock returns, can be easier to predict. With little correlation to the stock and bond markets, real estate is a tangible asset that can produce recurring income through rent, hold the potential to appreciate and diversify your investment portfolio. Consider using our pointers to start your investing journey.
Frequently Asked Questions
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The safest investment depends on your risk tolerance, available time, financial circumstances and goals. Your choice may also come down to how hands-on you want to be. For example, you could manage a single-family home for higher potential returns but greater oversight (hands-on) or buy shares of a REIT that holds income-producing properties and pays a dividend, but typically offers lower returns (hands-off).
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Buying an investment property comes with potential risks, but as a beginner, you can increase your chances of success through a cautious approach and thoroughly preparing and understanding the risks (tenant issues, vacancies, unexpected repairs, management challenges, financial issues and market volatility).
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You can deploy any one of several strategies to begin investing in real estate with little capital, including using the money of others — lenders, partners or sellers — to leverage deals. From wholesaling to house hacking to crowdfunding, careful research can lead you to the option that works best for you.
