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Investing for some people means simply putting money in an account with some mutual funds and merely leaving it alone for 40 years.
However, there are other avenues to invest and make higher returns if one is willing to put in a bit of extra effort.
Real estate investing is an excellent way to engage with a market with plenty of opportunities, especially in our current low-interest-rate environment.
Let’s get in-depth with some details about real estate investing so you can decide for yourself whether investing in real estate is for you, the methods available to invest in real estate, and tips and tricks to prepare you.
After all, going out to buy the first house you see without any knowledge is a recipe for disaster.
What Is Real Estate Investing?
To start at the very base, real estate investing is simply investing your money in physical real estate assets.
The goal is to realize returns on those assets either in the form of capital value increase or in the form of cash flow from rents paid by tenants.
Let’s get into a few more specifics about those two last points.
How Does Real Estate Investing Work?
When you invest in real estate, you want your investment to grow one way or another. There are two primary methods for making money from real estate.
Both have specific benefits and drawbacks, but most importantly, each can come with a different risk profile.
The first method is investing for the purpose of realizing gains from the sale of properties. The simple term for this is to buy low, sell high.
Like stocks, those interested in this method of real estate investing buy real estate assets, upgrade them and then sell them at the appropriate time at a higher price than the combined initial sale price and cost of upgrades for a profit.
The second method is to invest in properties to receive cash flow.
Cash flow comes from tenants who pay rent to the landlord. A well-built portfolio of real estate can maintain a relatively high amount of cash flow, especially if you are the sole landlord.
This method requires enormous capital and risk upfront if you’re investing on your own.
There are certainly risks involved, as with any investment.
However, real estate has become more accessible in recent years, so that individuals are not required to do all the legwork.
We’ll get into all of the types of real estate investments in the next section, but just know that you can now invest in real estate for as little as the price of a stock!
How to Invest in Real Estate (8 Easy & Quick Ways)
#1. Buy and Hold REITs
A REIT is a Real Estate Investment Trust. These are heavily regulated companies that manage a portfolio or portfolios of real estate assets.
Many of these are publicly traded companies which you can invest in for the price of a single share. Some are more complex and require a bit of research and more capital to invest.
There are also index funds and mutual funds for REITs only, which can easily be found on the major investment firms’ lists of funds to invest.
#2. Use an Online Real Estate Investing Platform
Real estate recently experienced a boost thanks to the JOBS Act of 2012, which, among other things, allowed real estate to be crowdfunded online.
Since then, these online crowdfunding platforms have become huge draws from anyone from REIT-only investors to discerning and experienced real estate investors.
We’ll discuss a few of the companies, and each has different offerings and specialties.
Touting the lowest account minimums and fees, DiversyFund is revolutionizing the way Americans invest in real estate.
By simplifying the process, this platform offers one straightforward REIT that packs a punch, beats the average market returns, and is easy to invest in.
>> Learn More:DiversyFund Review
Fundrise offers investors the opportunity to invest in REITs and eFunds, which are not publicly available.
Their funds include properties from single-family, multi-family, and/or commercial categories.
Fundrise places investors in tiers based on a minimum investment at each of four tiers. Higher minimum investments result in more customization options.
>> Learn More: Full Fundrise Review
Crowdstreet caters to investors specifically interested in commercial real estate. They also have one of the highest initial buy-ins at $25,000 minimum to become an investor.
Not only that, but investors must also be accredited investors ($200,000 minimum annual income or net worth of $1 million).
Investors have the ability to pick the investments from any category, including retail, office, industrial, mixed-use, or multi-family.
They also offer private REITs, but the minimum investment is still $25,000.
RealtyMogul is what you might call the best of both worlds. They have two REITs available, each with a minimum investment of $5,000.
One REIT offers a relatively stable 6% annualized return for those interested in cash flow.
The other REIT offers a lower annualized return of 4.5%, including property investments intended for capital appreciation (buy low, sell high).
>> Learn More: Full Realty Mogul Review
#3. Purchase Rental Properties
If you have a bit of experience with houses, you may consider simply buying a house and renting it out. There are a few methods that can be used.
The first is fairly straightforward – you buy other properties with either cash or a mortgage and put them on the market to bring in tenants.
This can be exhausting upfront because of the cost of getting the house itself, getting the house ready to sell, marketing it, and eventually maintenance and upkeep.
Some companies will manage the rental for you for a percentage of the rents, but this is usually not worth it for portfolios of one or two houses.
Another method is to buy your first house, pay it off, then move into another house without selling the previous one.
The previous house would get fixed up and put on the rental market. Since this mortgage is completely paid off, the rental income would be pure cash flow.
You can repeat this process with some determination and good research until you have several houses fully paid off and bringing monthly cash.
#4. Rent Out a Spare Room
If you’re an empty-nester or simply have a house with too many rooms, you can always rent out a room in your home.
This method obviously comes with its fair share of risks.
However, perhaps you have a friend who’s looking to move to your city and can’t find a place to live?
While you would need to set up some ground rules and contracts to make sure the rent is paid, the room is kept clean, and so forth, it can at least give you enough cash flow to pay off your mortgage faster or put together a fund for another real estate investment.
#5. Rent Out Your Garage or Closet
You might be thinking, “…closet?” But don’t knock it! In places like New York and San Francisco, renting out a closet that’s close to an office can be enough for some people, and it only helps you with your own expenses.
Turning a garage into an apartment has also been fairly popular. With the right eye for interior design, you can turn an old garage into a perfect studio apartment for someone who’s just moved to the area.
Check out our review of Neighbor Storage to get started.
#6. Start Flipping Investment Properties
This method comes with perhaps the most risk and requires the most work. You’ve seen the shows on HGTV – if you’re willing to do a bit of manual labor and have a contractor, you trust to get the job done, flipping a house can be both fulfilling and profitable.
However, flipping requires an acute understanding of the neighborhood you’re buying in and where the market is in its cycle.
Flipping houses in the June 2021 market might be incredibly lucrative. However, those who were flipping houses in 2008 and 2009 might not have been so happy.
#7. Real Estate Limited Partnerships
Real estate limited partnerships (RELPs) are a bit like REITs, but the organization is different, setting up the liability so that those who contribute the share in liability but only up to the amount they contribute.
There are tax benefits to RELPs not shared by REITs also. RELPs are treated as pass-through entities, so the partnership itself does not pay tax, but individuals invested pay on their own tax return.
#8. Invest In Your Own Home
Last but not least, upgrade your own house! It may seem straightforward to just go all in and put everything you can into your house, but not so fast.
Take a few days to look at your neighborhood to see what other neighbors are doing with their houses, which houses are going up for sale and getting sold the fastest, and what the price point for your neighborhood is.
Let’s say your house is worth $250,000, and you put $150,000 worth of upgrades into it. If your neighborhood is really only seeing houses go for around $300,000 max, then you may be in a situation where you won’t get the return on your house for some time.
Tips for Successful Real Estate Investing
#1. Keep It Simple
Invest in what you know. If you don’t know anything about real estate, that doesn’t mean don’t invest in real estate.
Keep it within your level of understanding. You can start with REIT stocks and follow their quarterly reports to see what they do.
If you’re already chock full of real estate knowledge, then stick with what you know.
#2. Plan Ahead
You shouldn’t be running to your bank and getting pre-qualified for the first loan you can get so you can buy a house with the dream of never-ending cash flow.
Real estate doesn’t work like that.
Figure out your risk tolerance, get an idea of whether cash flow or capital appreciation is your goal, and then dive into market research.
#3. Be Financially Prepared
Going back to the guy running to the mortgage brokers above, investing in real estate is not about diving in and hoping for the best.
You have to figure out where you are financially, what you can reasonably afford to lose (because that’s how investing works), and decide which investment vehicle is the best fit once you’ve figured that out.
#4. Research All Opportunities
You can probably get away with investing in the first or second REIT mutual fund you see because they’re designed to be relatively safe additions to retirement funds.
However, if you’re looking for higher returns, you should be willing to look at each and every investment opportunity that fits into your plan and your finances.
Whether that’s every REIT available or every property on Zillow, you should be deeply involved in research.
#5. Join Real Estate Investing Masterminds
If you’re already well and truly engaged in your real estate investing, you may want to consider a mastermind group.
These are groups of investors that typically have strict minimum requirements to join.
If you meet them, though, you’ll find a group of like-minded individuals who are generally interested in making sure that each member succeeds.
#6. Find a Mentor
This can be the hardest thing in any endeavor. Successful people sort of know they’re successful, and they also know that many people want to learn what they know and learn to do what they do.
They’re not just going to give it away for a cup of coffee and a promise.
You may have to do a bit of groveling, but a mentor can also be someone who works for a larger real estate company, broker, agency, etc., who is willing to offer a few tips.
If you’re serious about learning everything there is to know about real estate, you’ll get the most credence if you work full-time for a company specializing in real estate.
You might have the best chance of finding a mentor there.
Pros and Cons of Real Estate Investing
- Wide range of accessibility to investors with anything from a few hundred to a few million
- Offers an additional layer of diversification to your portfolio separate from other markets
- Some types of real estate investing have tax benefits
- Can offer a steady cash flow in certain assets.
- Offers some protection against high or rising inflation
- Mortgages provide investors with leverage.
- Lowest tier investments even require higher minimum investment than other asset classes
- Generally, takes more time to not only research but also manage portfolios
- Real estate benefits don’t apply to all types of real estate
- Some methods involving individual properties involve far more risk than most other investment vehicles.
- Cash flow is not guaranteed because it depends on consistent tenant occupancy.
How Much Money Do You Need to Start Investing in Real Estate?
That varies….hugely. You can buy a single share of a publicly traded REIT company for less than $40, or you can go out and build several hundred million dollars worth of office space.
What Are the Risks of Real Estate Investing?
Every investment comes with risks, and while real estate comes with quite a few benefits, the downside could be bigger than any other investment.
Whether you over-upgrade your house or your buy several properties at the peak of the market, your portfolio can decrease rapidly.
Real estate is exposed to interest rate risk as well. All real estate assets become more expensive when interest rates increase.
Is Real Estate Investing Safe?
As long as you research your options well, real estate can be very safe, especially as inflation increases.
However, if you drown yourself in 5 mortgages in a neighborhood that’s overheated, you can quickly find yourself on the wrong side of leveraged assets.
Real Estate Investing vs. Stock Investing
Stocks are generally only leveraged up to 50% for most brokerages.
However, they are liquid assets, and they provide plenty of historic data for investors to research where a company stands.
Real estate is very illiquid, and historical data is there, but it’s not listed on a candlestick chart.
However, real estate provides more tax benefits, better cashflow opportunities than dividends (generally speaking), and potentially higher returns than stocks.
Can You Invest $1,000 in Real Estate?
Absolutely! There is a very good eREIT option with Fundrise, the real estate crowdfunding company.
You can also open a simple brokerage account and buy $1,000 worth of a REIT index fund, REIT mutual fund, or put together your own portfolio of well-researched REIT stocks.
Who Should Invest in Real Estate?
These days, anyone can invest in real estate. In fact, it’s probably a very good idea for you to invest in real estate since interest rates are low.
While they might rise, having real estate in your portfolio can provide you with much-needed diversification.
Bottom Line: How to Invest in Real Estate
Real estate investing has been around since the dark ages – nobles in Europe were essentially landlords in charge of large portions of the country.
Now, even the average citizen can invest in real estate and enjoy several benefits. There are several investing methods in real estate, but prospective real estate investors would do well to put together a well-laid plan before jumping in.
There is a real estate asset, method, and price point for every investor, but you should only chase the returns that you can safely handle in your portfolio.