One of the best places to invest is in real estate. Commercial and residential real estate values have increased steadily over the past several decades. Despite the housing crisis of 2007, there has been an average yearly increase of 6.4% for residential homes, alone. Both residential and commercial real estate can be very lucrative, especially in rapidly growing cities, where land and property values can rise exponentially in a very short time.

However, first-time real estate investors may make some costly mistakes, leading to either a loss on their investment or additional expenses that they might not be able to afford. There is a right way to invest in real estate, whether you’re planning to buy commercial or residential property to make a profit. 

Get Your Finances In Order

Real estate is an expensive investment, so your finances must be in a healthy state before you invest. You might need to have a store of cash on hand to make a down payment, and for commercial properties, the upfront cash required may be a lot higher than the funds you need to purchase a home. A cash reserve for unexpected expenses, such as property updates and repairs, is also a good idea to have. A cash reserve for unexpected expenses, such as property updates and repairs, is also a good idea to have. Your cash reserve should be separate from your emergency fund, however. Aside from establishing a fund for personal emergencies, you should also pay off any existing consumer debt (such as credit cards) and automate your savings for retirement. Real estate is an investment in your future, but before taking the plunge, you need to make sure that your personal finances are protected. 

Consider Buying a REIT

A Real Estate Investment Trust (REIT) is a way to get your feet wet with real estate investing with less risk. REITs work kind of like mutual funds, where you invest in a company instead of the property itself. Usually, REITs are commercial real estate investments in buildings such as retail stores, offices, apartments or condominiums, and even hotels. One of the appeals of REITs is that they usually return higher dividends to their investors. While there are private REITs, it’s often safer to invest in publicly-traded REITs through brokerage firms. Investing in publicly-traded REITs will keep your funds more liquid.

Try House Hacking with Rental Properties

One way to get your foot in the door with real estate without taking on a huge property is to try house hacking. This method of real estate investing involves purchasing a multi-family property and renting out the units while living in one yourself. You can often recover the full cost of your mortgage and expenses from the rental income, and may even make a little bit extra. 

Another modern form of house hacking you could try is renting out rooms or units in your investment property on a website like Airbnb or VRBO. The downside to this approach is that you might not have full occupancy all of the time. Still, you may be able to make more income if your property is located in a busy city or has close proximity to popular tourist or sporting attractions.  

Do a Flip, If You’re Handy

For those with handyman skills or the ambition to DIY, you might turn a substantial profit by house flipping. The basic idea with a flip is that you purchase an underpriced fixer-upper home or multi-family building, renovate it yourself for as little as possible, and then sell it at a higher price to make a profit. However, house flipping is often portrayed on TV as being a lot easier than it actually is, and the math for repairs and renovations expenses can get tricky. One way to try this method with less risk is to partner with a contractor or home builder who knows what they’re doing when it comes to estimates. 

Research Your Local Market

Before you invest in a property, whether it’s a commercial building or a house, you should be sure to know the local market well. If you’re not investing in your city or neighborhood, talk to the local real estate agents to get a better feel for the area. This research is vital for understanding the value of your investment before you take the risk.

Know the Risks and Liabilities

Always have a professional inspection done before you finalize your real estate investment purchase. Not only do you need to know what you’re taking on, but the inspection can also reveal potential opportunities to make a higher profit. For example, if the property needs some work in an area and you have a contractor who can do the same job for less, you might be able to purchase the property at a discount. 

If the building is located in an area where natural disasters occur, such as earthquakes, you should also have additional inspections completed to make sure your investment is up to code. An earthquake retrofit inspection is particularly important if your commercial property investment is constructed with less stable architecture or materials. Examples include unreinforced masonry (such as brick), non-ductile concrete, tilt-up construction, and soft-story architecture with residences above a parking garage or storefront with minimal reinforcement. 

By having an earthquake retrofit inspection and completing the necessary retrofitting, you can protect your assets, and more importantly, your tenants’ lives. Retrofitting also reduces your liability, and you may be able to negotiate more favorable terms with your property insurance provider. 

Keep it Simple

Avoid spreading yourself too thin by investing in too many properties. In the same way, don’t put all your eggs in one basket by pouring your heart and soul into just one property. You should also avoid getting too attached to your real estate property since you might find yourself holding onto an unprofitable investment. 

Instead, keep your real estate investing game simple, and don’t try to go big too quickly. If you want to generate passive income, real estate is a great option to invest and then receive lucrative returns. If you’re expecting to make millions quickly, however, you’re probably going to be disappointed. Real estate is a long game, and it can often take months or even years for your investment to really pay off.