How to invest in real estate - 6 ways that offer a chance to make money and build long-term wealth
- Investing in real estate can offer individuals both immediate income and longterm appreciation.
- REITs, RELPs, and crowdfunding are indirect ways to invest in real estate, without requiring hands-on management.
- More direct real estate investments include buying your own home, a rental property, or a property to fix up and flip.
Channel-surfing these days will almost certainly lead you into some iteration of real estate, from realtors' million-dollar listings to DIY-ers house-flipping.
While it can be fun to see a dramatic home transformation play out over the course of an hour, it can be more fun to get actively involved. Real estate often proves to be a lucrative investment, offering both income - in the form of rents - and appreciation - when you sell appreciated property at a profit. It's also a good way to diversify your portfolio, as an asset that's subject to different influences than stocks and bonds.
And for the everyday individual, it may be more accessible than you think. Although it requires considerable time, patience, and (of course) cash, almost anyone can invest in real estate.
Here are six ways you can get in on this investment-cum-pop-culture-phenomenon.
1. Real estate crowdfunding
Real estate crowdfunding is a strategy that allows enterprises to raise capital from large groups of individuals. It's done via online platforms that provide a meeting ground/marketplace between real estate developers and interested investors. In exchange for their money, investors receive debt or equity in a development project and, in successful cases, monthly or quarterly distributions.
Not all real estate crowdfunding platforms are available to everyone: Many are reserved for accredited investors - that is, high-net-worth, and/or highly experienced individuals. Still, there are several less exclusive platforms like Fundrise and RealtyMogul that allow newbies to invest as little as $500.
Through these sites, you create an account and either select a portfolio strategy based on your goals, with brokers diversifying your money across a series of investment funds, or browse and select investments yourself, keeping up with their progress through a 24/7 online dashboard.
Despite their convenience, crowdfunding offerings come along with considerable risk. As private investments, they're not as liquid (easily sold) as other publicly traded securities, like stocks. Think of your funds as being tied-up over the long-term. Fundrise recommends investors have a time horizon of at least five years, for example.
2. Real estate investment trusts (REITs)
If you want to wade into real estate, investing in a real estate investment trust (REIT) will provide exposure to the market without the time and cost commitment of buying your own property.
REITs are companies that own, operate, or finance properties and real estate ventures. Like mutual funds or exchange-traded funds, they own not just one, but a basket of assets. Investors purchase shares of a REIT and earn a proportionate share of the income produced by those assets.
Equity REITs, the most common type of REIT, allow investors to pool their money to fund the purchase, development, and management of real estate properties. A REIT focuses on a specific type of real estate, such as apartment complexes, hospitals, hotels, or malls. Ninety percent of its annual earnings must be distributed to the investors as dividends.
One big selling point of REITs: Most of them trade on public stock exchanges. So that means REITs combine the opportunity to own, and profit from, real estate with the ease and liquidity of investing in stocks.
Geared towards generating income, usually from rent and leases, REITs offer regular returns and high dividends. They also appeal to investors because of the unique way that they are taxed: REITs are structured as pass-through entities, meaning they don't pay corporate tax. This effectively means higher returns for their investors.
If you want to keep your investment liquid, stick to publicly traded REITs (a few REITs are private ventures). You can buy shares through a brokerage firm, IRA, or 401(k).
3. Real estate limited partnerships
A real estate limited partnership (RELP) provides investors with a diversified portfolio of real estate investment opportunities, allowing you to merge your funds with other investors' to buy, lease, develop, and sell properties that would be hard to manage or afford independently.
Like REITs, RELPs usually own a pool of properties, but they differ in their structure and organization. Primarily: RELPs are a form of private equity - that is, they are not traded on public exchanges
Instead, they exist for a set term, which typically lasts between seven and 12 years. During this term, RELPs function like small companies, forming a business plan and identifying properties to purchase and/or develop, manage, and finally sell off, with profits distributed along the way. After the holdings are all dispatched, the partnership dissolves.
They're generally more suitable for high-net-worth investors: Most RELPs have an investment minimum of generally $2,000 or above, and often substantially more - some set minimum "buy-ins" anywhere from $100,000 to a few million, depending on the number and size of the property purchases.
4. Become a landlord
One classic way to invest in real estate is to buy a property and lease it, or part of it. Being a landlord can come in many forms.
The first is to buy a single-family home and rent it out, a strategy that will only generate income if overhead costs are low. If your tenant's rental payment doesn't cover the mortgage, insurance, taxes, and maintenance, you're effectively losing money. Ideally, your monthly mortgage payment will be relatively fixed, while rent prices rise, increasing the amount of money you pocket over time.
Nowadays, you can shop for rental properties online through a site like Roofstock, which allows sellers of vacant homes primed for renters to list their properties, facilitates the buying process, and assigns a property manager to the new buyer.
Another option is "house-hacking," which is when you purchase a multi-unit building and live in one of the units while renting out the others. This strategy decreases your living expenses while simultaneously generating income that can cover mortgage payments, taxes, and insurance.
A low commitment version of house-hacking is to rent part of your home via a site like Airbnb, which would allow you some extra monthly cash without having to commit to taking on a long-term tenant.
On the opposite, more ambitious end, you could aim for a condo conversion, in which you buy a multifamily building, rent out the units, and then later turn the units into condos and sell them off individually, says Boston-based realtor and real estate investor Dana Bull. "So the idea is, you buy the building for a little bit of a discount, and then eventually you're able to sell for top dollar," she says.
5. House flipping
Some people take it a step further, buying homes to renovate and resell. Though those TV shows often make it look easy, "flipping" remains one of the most time-consuming and costly ways to invest in real estate. But it also has the potential to produce the biggest gains.
To be a successful flipper, you should always be prepared for unexpected problems, budget increases, time-inducing mistakes, a longer renovation timeline, and issues selling on the market.
It's especially important to build a team of experts - contractors, interior designers, attorneys, and accountants - you can trust. And make sure you have the cash reserves to troubleshoot. Even experienced flippers find a project inevitably takes longer and costs more than they think.
6. Invest in your own home
Finally, if you want to invest in real estate, look closer to home - your own home. Homeownership is a goal many Americans strive to achieve, and rightfully so. Residential real estate has had its ups and downs over the years, but it generally appreciates in the long-term.
Most folks don't buy a home outright, but take out a mortgage. Working to paying it off, and owning your home outright, is a long-term investment that can protect against the volatility of the real estate market. It's often seen as the step that precedes investing in other types of real estate and has the added benefit of boosting your net worth, since you now own a major asset.
Strategies for successful real estate investing
Whatever form your real estate investment takes, certain strategies will stand you in good stead.
Be financially prepared: Real estate is a particularly expensive investment, so you need to have cash on hand for a down payment, partnership share, or to buy a property outright. You'll also need a reserve to dip into if and when something needs fixing, which should be entirely separate from your everyday emergency fund. Before getting started, establish an emergency fund, pay off consumer debt, and automate your retirement savings.
- Get to know the local market: There's an old saying: "The three most important factors in real estate are location, location, location." Start by getting to know the local market. Talk to real estate agents and locals; find out who lives in the area, who is moving to the area, and why; and analyze the history of property prices. In short: Do your research and "focus on building relationships with people - because that's what real estate is, it's a relationship-based business," Dana Bull says.
Keep it simple: A simple strategy can go a long way in real estate investing. If your goal is to generate passive income, don't be fooled into believing you need to go big to make it happen. It's best to start small and keep your expenses low, says real estate investor Chad Carson of CoachCarson.com.
The financial takeaway
Real estate investing may be more accessible than you think, and there are multiple ways to get involved in this often lucrative asset.
Pure investment plays - which don't involve hands-on management from you - include real estate crowdfunding, investing in real estate limited partnerships, and buying into real estate investment trusts. Each of these mitigates the risk of investing in a major project alone or without guidance.
More direct investments, like buying your own home, a rental property, or a property to fix up and flip, are also valuable strategies. However, it's best to do your homework before settling on one of these ownership methods, ensuring that you're financially secure enough to take on some risk and familiarizing yourself with the local real estate market.
Bear in mind real estate as a whole is a relatively illiquid asset. Projects can take a while to execute and to pay off. So whenever you think real estate, you almost always have to think of it as a long-term investment.