Investing in real estate involves purchasing a property with the intention of renting it out to tenants. This is a popular method of investing in the real estate industry. However, many people may not aspire to become landlords due to the various responsibilities and inconveniences that come with it. Dealing with issues like pest infestations and plumbing problems may not be seen as a glamorous job.
It is common for investors, particularly those new to the real estate market, to be unaware of alternative investment options. However, it is important to note that some of the most profitable real estate investments do not involve constant involvement with tenants.
When approached correctly, real estate investing can be a lucrative venture that diversifies your investment portfolio and generates passive income over time. Here are several effective methods for earning money in real estate, varying in terms of required maintenance levels.
6 ways to start investing in real estate
1. Buy REITs (real estate investment trusts)
Investing in real estate can be done through Real Estate Investment Trusts (REITs), which provide the opportunity to invest in commercial real estate assets without owning the physical properties themselves.
Similar to mutual funds, REITs are companies that own various types of commercial properties including office buildings, retail spaces, apartments, and hotels. One of the advantages of investing in REITs is that they typically offer high dividends, which makes them an attractive option for retirement investments.
Is investing in REITs a wise decision? It can be, but it can also be quite diverse and intricate. While some REITs are traded on an exchange similar to stocks, others are not. The type of REIT you choose to invest in can significantly impact the level of risk you are exposed to.
Non-traded REITs, for example, are not easily sold and may be challenging to evaluate. Therefore, novice investors are advised to focus on publicly traded REITs, which can be acquired through brokerage firms.
To invest in real estate, it is important to have a brokerage account. The process of opening a brokerage account is quick and can be done in less than 15 minutes. Some companies even allow you to open an account without any initial investment, although there may be a minimum investment requirement for the REIT (Real Estate Investment Trust) you plan to invest in.
Alternatively, you can broaden your real estate investment options by investing in a fund that holds interests in multiple REITs. This can be done through a real estate ETF (Exchange-Traded Fund) or by investing in a mutual fund that includes shares of various REITs.
2. Real Estate Investment Groups (REIGs)
For individuals who have some funds available and are interested in owning rental real estate without the difficulties of hands-on management, real estate investment groups (REIGs) can be an ideal option.
These groups consist of a collective pool of money from multiple investors, functioning similar to a small mutual fund, which is then invested in rental properties. In a typical scenario, a company within the real estate investment group purchases or constructs a group of apartment blocks or condominiums.
Investing in real estate involves the ownership of one or more self-contained living spaces by an individual investor. However, in the case of an investment group, the management of all these units is collectively handled by the company.
This includes responsibilities such as maintenance, advertising vacant spaces, and conducting tenant interviews. In return for performing these management tasks, the company receives a percentage of the monthly rental income.
Investing in real estate can be done through a real estate investment group lease, where the lease is under the investor’s name and the rental income from all the units is pooled together to cover any vacancies.
This arrangement ensures that you will still receive some income even if your specific unit is empty. As long as the vacancy rate for the pooled units remains within a manageable range, the rental income should be sufficient to cover the associated costs.
3. Use an online real estate investing platform
Investing in real estate involves connecting developers with investors through online platforms. These platforms allow investors to finance projects either through debt or equity. In return for taking on substantial risks and paying a fee to the platform, investors anticipate receiving regular monthly or quarterly distributions.
It is important to note that real estate investments, similar to other forms of investment, are speculative and not easily liquidated like stocks.
Investing in real estate may require some initial capital. Certain investment platforms are only accessible to accredited investors, which are individuals who have earned an income of over $200,000 (or $300,000 if filing jointly with a spouse) in the past two years or possess a net worth exceeding $1 million, excluding their primary residence.
However, there are alternatives available for individuals who do not meet these requirements, such as Fundrise and RealtyMogul.
4. Rental Properties
Investing in real estate can be a lucrative option for those who possess DIY skills, are patient enough to handle tenants, and have sufficient time to dedicate to the responsibilities. While it is possible to secure financing with a low down payment, it is important to have a considerable amount of cash available to cover upfront maintenance expenses and to handle situations when the property is vacant or tenants fail to pay the rent.
Investing in real estate offers the advantage of being able to use the income generated by a property to purchase additional properties. Over time, an investor can accumulate multiple sources of income from various properties, which can help balance out any unanticipated expenses or financial setbacks with the influx of new income.
The U.S. Census Bureau data reveals that the prices of new homes, which can be seen as an indication of real estate values, have shown a consistent increase from the 1960s to 2007. However, during the financial crisis, there was a dip in these prices.
Fortunately, after the crisis, the prices started to rise again and even exceeded the pre-crisis levels. As of the end of 2023, the average sale price of homes in the U.S. reached $498,300, slightly below the previous record highs achieved earlier in the year.
5. House Flipping
Investing in real estate requires a deep understanding of property valuation, marketing strategies, and the renovation process. House flipping, in particular, is considered the more adventurous side of real estate investment. It is comparable to day trading in the stock market, as it involves buying properties with the intention of quickly renovating and selling them for a profit.
Investing in real estate involves the practice of purchasing undervalued properties with the intention of selling them at a profit within a relatively short period of time, typically less than six months. While some real estate flippers choose to enhance the properties they buy, others opt for properties that they believe already possess the necessary intrinsic value to generate a profit without requiring any modifications.
Investors who engage in property flipping may encounter difficulties if they are unable to quickly sell a property. This is because they usually do not have enough readily available cash to cover the mortgage payments over an extended period. As a result, they may experience increasing losses.
However, there is a different type of investor who earns profits by purchasing affordable properties and enhancing their value through renovation. This approach requires a longer-term commitment, and investors may only be capable of handling a limited number of properties simultaneously.
Why Should I Add Real Estate to My Portfolio?
Investing in real estate is highly recommended by experts as it provides a unique asset class that can contribute to a diversified investment portfolio. Unlike stocks, bonds, or commodities, real estate tends to have a low correlation with these traditional investments.
One of the advantages of real estate investments is the potential for generating income through rental payments or mortgage payments, in addition to the possibility of capital appreciation.
What Is Direct vs. Indirect Real Estate Investing?
Investing in real estate can be done through direct or indirect methods. Direct investments involve the ownership and management of properties, while indirect investments involve investing in a collective fund that is used to purchase and manage properties.
Is Real Estate Crowdfunding Risky?
When it comes to investing in real estate, crowdfunding can be seen as a riskier option compared to other methods. This is because some of the projects that are listed on crowdfunding sites may have struggled to secure financing through more conventional channels.
Additionally, many real estate crowdfunding platforms require investors to keep their money invested for a number of years, which can limit liquidity. However, it is worth noting that top crowdfunding platforms have reported annualized returns ranging from 2% to 20%, as stated by research from Investopedia.
The Bottom line
For individuals interested in entering the real estate industry, there are numerous opportunities available that cater to different budget ranges.
Investing in real estate can be a profitable venture; however, it is essential for investors to align their investment type with their capacity and readiness to handle it, taking into consideration the time commitments involved.
If your goal is to generate income post-retirement, investing in real estate can be a viable option to achieve that.