How to Invest in Real Estate: 5 Simple Strategies for Beginners
There are many ways to diversify your portfolio by investing in real estate, from owning physical property to online crowd-funding platforms.
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Done right, real estate investing can be lucrative, help diversify your existing investment portfolio, and eventually provide a stream of passive income. However, many investors — especially those new to real estate — understandably don't want the burden of being a landlord or managing a property.
Thankfully, many of the best investments don’t require showing up at a tenant’s every beck and call. Here are some of the best ways to make money in real estate, ranging from low to high maintenance.
5 ways to start investing in real estate
1. REITs
How it works: Real estate investment trusts (REITs) are companies that own commercial real estate such as office buildings, retail spaces, apartments and hotels and generate income from rent collection. Investing in a REIT is similar to investing in a stock or fund: Buying a share allows you to dip your toes into real estate without owning the physical property.
Income generated: REITs pay dividends, which are steady and routine payments made by the company to the investor on a regular schedule. This consistency makes them a common retirement investment. Investors who don’t need or want a regular income can automatically reinvest those dividends to further grow their investment. Importantly, dividends are taxable in the year they're received unless they're held in a tax-advantaged account, such as an IRA.
Considerations: Are REITs a good investment? They can be, but they can also be varied and complex. Some trade on an exchange like a stock, while others don’t. The type of REIT you purchase can be a big factor in the amount of risk you’re taking on, as non-traded REITs aren’t easily sold and might be hard to value. New investors should generally stick to publicly traded REITs that can be purchased via an investment account.
How to get started: If you're interested in REITs, you can purchase them through a brokerage account. Opening an account takes less than 15 minutes. We've curated a list of the best brokerage accounts to get you started. You can also gain exposure to a more diversified selection of real estate investments by buying into a fund with interests in many REITs. You could do this through a real estate ETF or by investing in a mutual fund with multiple REIT shares.
2. Real estate investing platform
How it works: Real estate crowdfunding investment platforms connect developers with investors who want to finance projects in the private market real estate sector, usually through private REITs (aka not exchanged on the stock market). The benefit of leveraging such a platform is the potential to generate returns potentially higher than those investors might receive through a publicly traded REITs, though at a higher risk. Many crowdfunding platforms also offer access to alternative investments such as art and collectibles.
Income generated: Investors hope to receive monthly or quarterly distributions in exchange for taking on significant risks and paying a fee to the platform.
Considerations: Like many real estate investments, these are speculative and illiquid — you can’t easily unload them the way you can trade a stock. This means they may not be a good fit for investors who may need to sell or convert funds quickly.
How to get started: Many of these platforms are open only to accredited investors, which the Securities and Exchange Commission defines as people who've earned income of more than $200,000 ($300,000 with a spouse) in each of the last two years or have a net worth of $1 million or more, not including a primary residence. Alternatives for those who can't meet that requirement include Fundrise and RealtyMogul.
» Ready to start investing? View our list of the best real estate crowdfunding platforms
3. Rental properties
How it works: If you have some capital to spare and don't mind thinking about the various odds and ends that come along with property management, you can also consider purchasing a house, apartment building or another type of physical property (either residential or commercial) for the explicit purpose of renting it out to generate income.
Income generated: Regular rental income. Keep in mind that tax rules can become complicated when you start collecting rent as income, so make sure you talk with an advisor to understand all your obligations, as well as which tax breaks are available for rentals.
Considerations: If you want to buy and rent out an entire investment property, it may be worse to find one with combined expenses that are lower than the amount you can charge in rent. And if you don’t want to be the person who shows up with a toolbelt to fix a leak — or even the person who calls that person — you’ll also need to pay a property manager.
How to get started: Work with a real estate agent and your financial advisor to find a property that fits not only your budget but also your long-term investment goals. Consider location, crunch your potential ROI, understand your legal responsibilities as a landlord, and ensure you have a clear understanding of both your upfront, ongoing, and long-term expenses.
Investor Spotlight
Tiffany Alexy didn’t intend to become a real estate investor when she bought her first rental property at age 21. Then a college senior in Raleigh, North Carolina, she planned to attend grad school locally and figured buying would be better than renting.
“I went on Craigslist and found a four-bedroom, four-bathroom condo that was set up student-housing style. I bought it, lived in one bedroom and rented out the other three,” Alexy says.
The setup covered all of her expenses and brought in an extra $100 per month in cash, far from chump change for a grad student, and enough that Alexy caught the real estate bug.
Alexy entered the market using a strategy sometimes referred to as "house hacking," a term coined by BiggerPockets, an online resource for real estate investors. It essentially means you’re occupying your investment property either by renting out rooms, as Alexy did, or renting out units in a multi-unit building.
David Meyer, head of real estate investing at BiggerPockets, says that house hacking allows investors to buy a property with up to four units and still qualify for a residential loan.
“If you manage it yourself, you’ll learn a lot about the industry, and if you buy future properties, you’ll go into it with more experience,” says Meyer.
4. Flipping investment properties
How it works: You invest in an underpriced home in need of a bit of help, renovate it as inexpensively as possible and then resell it for a higher value. This strategy — more commonly known as "house flipping" — can allow you to make a profit if you're able to sell the renovated property for more than what you paid for it.
Income generated: Profit from the sale, defined as the sale price of the house minus your total all-in costs to purchase, renovate and subsequently sell the property.
Considerations: It can be a bit harder than it looks on TV. It's also more expensive than it used to be, given the higher cost of building materials and mortgage interest rates. Many house flippers aim to pay for the homes in cash. The other risk of flipping is that the longer you hold the property, the less money you make because you may be paying a mortgage without bringing in any income. You can lower that risk by living in the house as you fix it up if the updates are cosmetic and you don’t mind a little dust.
How to get started: Do your market research to understand what constitutes a "good deal" within your budget and how to eventually price the property for sale. Ensure you have the necessary funds (either in cash or through financing) to secure the deal. Consider working with a partner or contractor to assess the potential cost of repairs and to gain a projected timeline (more on this below).
Expert Insight
“There is a big element of risk, because so much of the math behind flipping requires a very accurate estimate of how much repairs are going to cost, which is not an easy thing to do,” says Meyer.
Meyer's suggestion? Find an experienced partner.
“Maybe you have capital or time to contribute, but you find a contractor who is good at estimating expenses or managing the project,” he says.
5. Renting out a room
How it works: Renting out a room feels a lot more accessible than the fancy concept of real estate investing. If you've got a spare room, you can rent it. Such an arrangement can substantially reduce housing costs, allowing you to stay in your home while continuing to benefit from price appreciation on your property. If you're not sure you're ready, you could try a site like Airbnb. It’s house hacking for the commitment-phobe: You don’t have to take on a long-term tenant, Airbnb at least somewhat prescreens potential renters, and the company’s host guarantee protects against damages.
Type of income generated: Rental income. Adding roommates can also make a mortgage payment more attainable.
Considerations: Be sure to keep up with any applicable regulations. For example, some cooperative apartments don't permit renting to outside parties or may only permit it after the owner has held the apartment for several years. Some properties may also be located in districts where zoning laws disallow leasing or renting.
This is also not a great strategy for renters who happen to have an extra bedroom. The ethics of overcharging for a room in an apartment you do not own to pocket the additional funds could get dicey very quickly. Renting out a room as a renter may also be considered subleasing, which could grant the roommate rights to the apartment. It may also be against the terms of your lease to sublet if you're living in a rent-stabilized or rent-controlled unit.
How to get started: Crunch the numbers to see how much you may need to charge to help offset your mortgage or to work towards your investment goal. Then, check if there are any laws or regulations that would restrict you from renting out a room in your home. Additionally, ensure you understand how to vet a tenant, charge rent, create a lease agreement, and that you understand your tenant's legal rights regarding eviction, payment, and other aspects of renting.
» Real estate not for you? Consider investing in stocks instead.
Bottom line
Like all investment decisions, the best real estate investments are the ones that best serve you, the investor. Think about how much time you have, how much capital you're willing to invest and whether you want to be the one who deals with household issues when they inevitably come up. If you don't have DIY skills, consider investing in real estate through a REIT or a crowdfunding platform rather than directly in a property.
5 ways to invest in real estate
5 ways to invest in real estate
