Real estate can be a great investment for creating passive income, building wealth, and diversifying your portfolio. But how much to invest in real estate depends on your financial situation, risk tolerance, and goals. To determine how much to invest in real estate, it’s important to consider the initial costs and ongoing management expenses of a property.

The most common way to invest in real estate is by becoming a landlord. This involves buying residential or commercial property and renting it out to tenants. Ideally, the rent from tenants will cover the mortgage and taxes and provide some extra income. The other common way to invest in real estate is by purchasing rental properties through crowdfunding platforms or Real Estate Investment Trusts (REITs). These platforms and REITs allow smaller investors to invest in commercial or residential property. Check for more info.

In addition to the cost of buying and maintaining a property, real estate investors also have to factor in operating expenses, such as mortgage interest, insurance, landscaping, utilities, cleaning, and tenant management. This can add up quickly, especially if you have several properties.

To make the most of your real estate investments, it’s essential to manage expenses carefully and minimize borrowing, if at all possible. Using leverage to finance a large portion of your purchase price can magnify your returns if the property appreciates, but it can also magnify your losses if the value declines or you default on your loan payments.

It’s also important to know how much to invest in real estate based on the current state of your local market. Each real estate market goes through cycles, and you want to invest in areas that are experiencing expansion, or growth, as opposed to contraction, or stagnation.

One rule of thumb is to invest 25% to 40% of your net worth in real estate, including your home. This can help ensure that you’re adequately diversifying your portfolio and have sufficient assets to cover your debt in case of a market downturn.

Investing in real estate isn’t easy, and there are plenty of risks to consider. But if you’re willing to take the time and do your homework, you can find opportunities that offer a strong return on investment.

Many real estate investors use the 1% rule to assess the profitability of a property: The idea is that a property’s monthly rental income should be at least 1% of its purchase price. But there are other formulas that can be used to calculate ROI, such as the internal rate of return (IRR).

Before you decide how much to invest in real estate, it’s a good idea to get a clear picture of your financial situation. You can do this by calculating your net worth: your total assets minus your total liabilities. BiggerPockets has a free net worth calculator that can help you get started.