Many investors like the idea of investing in real estate. Real estate has the allure of being considered a tangible asset, and there is the potential for regular income with real estate. Additionally, many investors aren’t comfortable with the traditional makeup of cash, bonds, and stocks, and want to branch out a little — real estate can make a nice addition to a well-diversified investment portfolio.
Ways to Invest in Real Estate
There are ways to start investing in real estate, no matter how much capital you have readily available and your level of experience.
1. Real Estate Investment Trusts (REITs)
The easiest way to start investing in real estate is through a Real Estate Investment Trust (REIT). If you don’t have the capital to buy a property, don’t want to borrow a large sum of money, or aren’t interested in tying up a large portion of your net worth in real estate, you can still get exposure to real estate investing through REITs.
REITs are traded on exchanges, much like regular stocks. However, they invest most of their assets in real estate, and the income is mostly derived from real estate. You can access different types of REITs, focusing on commercial properties or residential properties, or even investments related to real estate (such as in self-storage, cell towers, etc.).
On top of the possibility of capital appreciation as the value of the REIT increases, you also have access to dividends. Since REITs must pay out 90% of taxable income to shareholders, you receive a regular income stream on top of the possibility of capital appreciation. It doesn’t take very much money to invest in REITs and they are easily accessible through most brokerages.
2. Invest in Real Estate Related Companies
If you don’t want to invest in a REIT or buy your own rental property, it’s possible to choose companies related to real estate for your investing dollars. There are a number of companies that are involved in real estate activities, e.g., home builders, holding companies, commercial ventures, realty companies, mortgage-related companies, etc. — it is possible to find companies that operate in the real estate industry.
When investing in these companies, you usually don’t need very much capital at all. Just open a brokerage account, and you can start buying some shares. Many real estate companies also pay dividends, which means it’s possible for you to receive regular income on top of the capital appreciation you might enjoy.
Alternatively, you can also buy a Real Estate Mutual Fund (or an ETF) and hold a portfolio of real estate companies and related business in one shot.
3. Your Primary Residence
In know there is a lot of debate about whether or not your primary residence is an investment. I agree that it is not the best investment when compared to purpose-made investments like the Stock Market or full-fledged rental properties, BUT being a homeowner is more financially rewarding than renting AND you have to live somewhere right?
That said, owning your own home is a perfectly acceptable way to start your real estate investing career.
4. Rent Out Your Space
If you’re a homeowner (or a renter and your lease allows it), you could rent extra room, the basement, parking space, or the garage to make some extra side income. You just have to make sure that you’re not violating any rule or law imposed by the local government or the homeowner’s association.
5. House Hacking
This is very similar to idea #3, but instead of buying a single family residence, you’ll be buying a multi-family residence. You can buy up to a 4-unit property and still qualify for a standard primary residence loan. The goal is to live in one of the units as your primary residence and rent the other units. If done right, you could be living there for free while your renters pay for your mortgage and then some.
6. Rental Properties
One of the most popular ways to invest in real estate is through the purchase of rental properties. You can buy a piece of property and then rent it out.
Although you might be able to buy a rental property with cash, it is far better and more common option to buy it with a mortgage. However, you want to make sure that your income will be able to cover the cost of your mortgage, plus other expenses that come with running a rental property business, i.e, you want to have a positive cash flow (or a cash flowing rental property).
For a more in depth discussion about cash vs mortgage purchase, read Should You Finance Your Rental Property Purchase or Pay Cash?
It’s also possible to join with others in a partnership to buy rental property. With the right approach, it’s possible to build up passive income with rental property, without the need for you to take on all the expenses yourself.
7. Flipping Properties
If you want to take a more hands-on short-term approach, you could also look for fixer upper that sells well below market value, fix it up, and sell at a profit. However, this approach is not for the faint of heart and does require a deeper pocket. Depending on the condition of the property, you might not be able to use a more traditional loan to buy and may have to resort to a more expensive hard money loan to go through with your plan.
Secondly, you might have to come up with your own money for the costs of renovation, or borrow from a hard money lender. And just like any renovation projects, if you are not good at managing it, the cost overrun can kill your profit.
Thirdly, finding a good deal is difficult in most markets. Unless you have substantial experience or connections, or resort to taking advantage of the current homeowner, finding a great deal is difficult.
That said, many real estate investors make good money flipping homes.
8. Real Estate Syndication through Crowdfunding or Private Equity Firm
Another fairly common method is to participate in a real estate crowdfunding investment through sites like FundRise or RealtyMogul. You can do this by joining their platform and invest in the available opportunities.
Similarly, if you prefer to know your partner a little more intimately, you could go through a private placement with groups that specialize in real estate investing. For example, I am currently a proud owner of a tiny percentage of a $8 million apartment complex in Mesa, Arizona by investing through a Capital Partners group.
One caveat with these methods is that you most likely has to be an Accredited Investor in order to participate.
Other Creative Real Estate Investing Methods
The list does not end here, there are many other methods. Since I have not utilize these specifically in my real estate investing career, I will just outline the methods and link them to relevant resources:
There are ways to benefit from real estate investing. You don’t always have to buy a property in order to add real estate to your portfolio. Consider your financial situation, and what you can afford to lose. Remember that there’s always risk with any investment — including real estate. Never invest what you can’t afford to lose.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.
I love real estate investing because it is one of the few investments where you can leverage your down payment! You invest 20% and borrow the rest as a mortgage at a low rate of interest. Despite the leverage, you can still have positive cash flow. It seems like a win/win!