Real estate can boost your net worth, and you may also qualify for tax advantages if you itemize your deductions. But this investment type isn’t guaranteed to make you money, and it comes with a lot of time commitment and risk. Here’s how to know whether or not it’s the right fit for you.

The most common way people invest in real estate is by buying their own primary residence with a mortgage and building equity over time. But there are other ways to invest in real estate and generate income, too. These options range from active, hands-on strategies to more passive, low-effort investments. Each strategy has different pros and cons, but all have unique return potential over the long term and can diversify your portfolio. Also read

In the most active, hands-on way to invest in real estate, you can buy a house and renovate it so that it sells at a higher value than what you paid for it. This is known as house-flipping, and it’s a very competitive market where profits are not always guaranteed. It’s best to work with a licensed real estate agent to assess the potential for house-flipping in your local area and determine if it’s a good option for you.

If you’d prefer a hands-off approach, you can purchase an existing rental property and lease it out to tenants for a steady stream of income. But it’s important to remember that rental properties are sensitive to economic changes, and rent demand can fluctuate. This means that your property might have some vacancies from time to time, and you’ll need to save a financial cushion to cover any necessary repairs or maintenance.

Another option is to buy a REIT or real estate investment trust, which is a passive investment that offers the benefits of diversifying your portfolio with a non-correlated asset class and collecting regular dividends. REITs typically offer lower returns than investing directly in property, but they can be a great way to get started in the real estate investment industry.

One final way to invest in real estate is through crowdfunding, which allows you to buy shares of individual properties or even entire apartment buildings. This is a fairly new investment strategy and it’s not yet available everywhere, but it can be an excellent way to diversify your investment portfolio and potentially earn lucrative returns without taking on much risk.

The best way to invest in real estate is to pay cash, but that’s not always possible for all investors. Even if you can afford to invest in property, it’s still wise to put 15% of your income toward tax-advantaged retirement accounts like 401(k) and Roth IRAs. This will help you build wealth over time and protect against unexpected expenses like high interest rates or a drop in home prices that could impact your bottom line. And if you’re considering taking on debt to finance your real estate investments, be sure to shop around and compare loan terms to find the best deal.