The factors that affect the real estate market are numerous. High mortgage rates, low inventory, demographic shifts, and shaky consumer confidence are just a few. How these interconnected influences will eventually play out in 2024 is currently being guessed at by the experts.
Despite some uncertainty, real estate remains a smart place to invest your money because, historically, it tends to appreciate in value. It’s true that you can’t liquidate these assets in minutes like you can a stock. It can take months to sell a property. Still, a real estate investment isn’t subject to the same level of volatility of other markets – which makes it a great asset to add to your portfolio. In most cases, you can pass on rising expenses like higher mortgage rates while still building equity.
Whether you are new to the world of real estate investing or want to expand your reach, due diligence is key. If you stick to investing in cost-efficient opportunities with lower risks, you can make it work for you. Here are four opportunities you should consider in 2024.
1. Mobile Home Parks
There are many types of property you can invest in, including office buildings and other commercial properties, apartment complexes, single-family rentals, and vacation homes. What may not be on your list in mobile home parks. If they’re not, you could miss out on a great opportunity. Tenant longevity, lower purchase price per unit, less buyer competition, a healthy demand for small homes with small lots, and the downsizing of many retirees are just a few of the advantages.
As municipalities reduce or eliminate zoning for new mobile home parks, their scarcity can keep the ones you invest in with full occupancy. This inelasticity makes them a significant investment in periods of high inflation. As Lifestyle Investing expert Justin Donald observes, “The fantastic part about mobile home parks will always remain — you can adjust rents with very little trouble in more challenging times. No other investment has that benefit.”
Before investing, you’ll want to obtain and carefully review the mobile home park’s business records to determine the potential return on your investment. You may be able to identify ways to make the property more profitable once you invest. Perhaps you can handle maintenance tasks currently contracted out or pass along utility costs the present owner is paying.
If you don’t want to operate a mobile home park, you may find a current owner looking for an infusion of investment capital to make improvements. You might partner with other investors, supplying some of the needed capital. You would then earn your respective share of the proceeds.
2. Owner-Occupied Properties
Buying yourself a home to live in is an investment. But it will not make any money until you sell it for more than you paid. That’s likely not the investment you want to grow your real estate portfolio. In this case, you may want to think bigger — as in, multi-unit big.
In November 2023, Fannie Mae began accepting 5% down payments on owner-occupied duplexes, triplexes, and fourplexes. That’s a steep reduction from the previous 15% to 25% the agency previously required from buyers seeking its accessible financing options. What that means for investors is coming up with a lot less cash upfront.
Loan maximums are nearly $1.4 million, which may get you into a sought-after location. Plus, the Federal Housing Administration’s 75% test has been eliminated for these purchases. That means you don’t have to prove that 75% of the rent on the units will cover the mortgage payment.
Of course, the tradeoff is that you will be neighbors with your tenants. If that’s too close for comfort, occupying your investment may not work. Needing the space of a larger single-family home may also knock this investment out of the running.
But if you’re a first-time real estate investor looking to get in with minimal cash, owner occupancy under these new rules can be a lucrative start. You may also generate enough rental income to pay for your own unit.
3. Real Estate Investment Trusts
If all you want to do is invest in real estate, not own it or manage it, you’re in luck. You can head to the stock exchange and invest in a real estate investment trust. It might be a great way to dip your toe in the real estate waters if you aren’t ready to jump in the deep end.
Equity REIT companies typically own a variety of commercial properties, including shopping centers, hotels, office buildings, apartment complexes, and more. There are also multiple paths you can choose to invest in one. You can buy stock in a single company, in a REIT mutual fund, or in a real estate exchange-traded fund that invests in the property market.
Your investment remains liquid because you’re buying stock rather than real property. Plus, you end up with a diverse portfolio of properties rather than a single one. You earn dividends without maintaining property or running a business to make your investment pay off.
Make sure you do your homework on the type of REIT investment you make. Rates of return and other factors vary between the three types. However, federal law requires REITs to return 90% of their annual dividends to their shareholders. That requirement makes them a source of steady cash flow. And since the assets related to the stock are tangible, REITs are generally less volatile than other stocks.
Of course, the profitability of REITs is subject to the waxing and waning of the economy the same way more hands-on real estate investments are. Because there are so many options, you may want to spend time with a financial advisor to weigh them all.
4. Tax Sheltering
If you decide to go all in on a real estate investment, you’ll get a few tax breaks on the income you earn from it. Remember that this type of investment offers the advantages of appreciation in the property’s value and increasing equity as you pay down any mortgages. That means you can make more money from your investment over the long term.
Of course, Uncle Sam requires you to pay him some of your income. Offsetting that income with deductions, though, is fair game. In fact, you can deduct any reasonable business costs you incur while you own, manage, and operate a property. And that can substantially lower the tax burden on your investment income.
You can depreciate the costs associated with buying and improving the real property throughout its useful life. That’s currently 39 years for commercial properties and 27.5 for residential ones. Although you can’t depreciate the value of land, you can depreciate the value of the structures.
You’re also running a business with these investments. That makes the cost of improvements and maintenance, advertising and marketing, labor and management, and other expenses deductible. Especially in the beginning, these deductions can be significant if you invest in a property that needs work.
Just remember that capital gains tax can reduce your investment income if you aren’t careful when you sell the property. But you can defer it if you swap out one property to invest in another. In this way, you can always be on the lookout for a more lucrative real estate investment without paying an immediate penalty on the sale of an existing one.
You can invest in real estate in many ways to build financial resources for the future. All you need to do is figure out which works best for you and your goals. Once you do, 2024 will allow you to grow your existing portfolio or begin one.
