Real estate investing is an exciting way to earn passive income. It allows you to invest in properties while living elsewhere, enabling you to build wealth and live life on your terms. However, if you want to get started, you might be wondering where to start.
Real estate can be a great investment strategy and a way to diversify your investment portfolio. There are different ways to invest in real estate, and all have their pros and cons. Depending on your risk tolerance and desire for active involvement, you have options.
How to Invest in Real Estate (4 Ways to Earn with Property)
There are many different ways to invest in real estate. In this article, I outline four types of investments, their pros & cons, and how to choose the best option.
1. Invest in Your Own Home
Investing in a home is how most people become real estate investors. A home is a long-term investment that can appreciate and provide a solid return. But, a home isn’t a “real” investment in the sense that you can’t sell the house without having another place to live.
However, you can turn your home into an income-producing property. There are many ways to rent spaces in your house to help you earn extra income to reach financial goals like paying off the mortgage faster (read about house hacking).
How to turn your home into an investment
Consider the following ways to have your home generate rental income:
- Rent spare bedroom. List unused rooms on Airbnb and other sites for travelers on a short-term basis. This is best for those who enjoy the company of others and meeting new people.
- Rent garage space. Offer your garage to store other people’s stuff. Neighbors.com is a site that can help.
- Rent parking spots. If you’re located near city centers or large entertainment or sporting venues, you can list your driveway for cash. Neighbor.com and SpotHero are options.
- Rent backyard. Depending on the size of your backyard, you may be able to rent it for income.
2. Invest in Rental Properties
Another way to become a real estate investor is by owning renting property. It’s a common strategy for buy-and-hold investors and a good source of passive income. You can buy and hold different investment properties, such as single-family homes, duplexes, triplexes, multi-units, commercial buildings, land, etc.
The great thing about rental property is the recurring cash payments and capital appreciation along with multiple tax advantages.
Although it leads to rental income, the process can be time and work-intensive. You might find yourself with more work as a landlord. Hiring a property manager can reduce your workload, but they will take a percentage of the monthly rent. It’ll impact your monthly cash flow revenues, but the cost may be worth it for those who want to own property, not landlord them.
How to invest in rental properties
Owning rental property is as straightforward as owning your home. The only difference may be how investment properties are financed compared to primary residences. It often requires a higher down payment and goes through stricter mortgage underwriting.
There are two ways you can make money with rental properties.
- Short-term rentals. With short-term rentals, you are choosing to earn income with short stays. Many consider placing their rentals on Airbnb or Vrbo. It requires a bit more management, but you can also hire a manager to do the work for you. One thing to consider is the location for short-stay rentals. Are you close to an airport or a venue? Does the city attract tourists?
- Long-term rentals. These properties are designed to be rented for 6 to 12 months with a long-term tenant. The goal is to provide consistent and regular income.
Before you jump into real estate rentals, be sure to research all of the rules and regulations regarding the area where you plan to invest. Some locations restrict short-term rentals, and other areas may offer a high premium for long-term rentals.
3. Buy Real Estate Investment Trusts (REITs)
REITs are real estate investment trust firms that pool investor funds into a portfolio of properties. It’s a good option for individual investors who don’t want to manage real estate properties.
If you want to get into investing right now without having to spend a lot of cash upfront, consider buying shares in real estate investment trusts (REITs) instead. With REITs, the trust manages the property. All you need to do is collect your dividends which can often be higher than many stock-based dividend payouts.
Real estate investment trusts (REIT) make their money from owning real estate assets such as office buildings, shopping centers, hotels, and apartment complexes. REITs will either lease, rent or sell the properties for profit. As a trust, there are rules on what assets they can own and how they return capital to shareholders through dividends. Most real estate investment trusts (REITs) focus on one type of property — residential, industrial, commercial property, multi-unit building, healthcare facilities, or infrastructure.
How to buy REITs
Investing in publically traded real estate investment trusts (REITs) is similar to investing in shares of stock, exchange-traded funds (ETFs), or mutual funds. You can buy and sell REITs through a brokerage account similar to trading company stocks. It makes owning them more liquid than owning real property. There are over 200 publicly-traded REITs available in the stock market, according to Nareit, the National Association of Real Estate Investment Trusts.
Read our list of the best online brokerages.
There are also non-traded REITs registered with the SEC (Securities Exchange Commission), but you cannot buy them through an online brokerage. Instead, they can be purchased directly through a real estate brokerage firm like Fundrise and RealtyMogul. There will almost certainly be a required minimum investment.
Additionally, private REITs are available to accredited investors who have at least $1 million in net worth or at least $200,000 in annual income for the previous two years. Private REIT opportunities are available through real estate crowdfunding platforms. These real estate deals are not correlated to stock market performance.
4. Flipping Houses
Instead of owning property, consider becoming a real estate flipper. House flipping is another strategy that involves buying properties in good locations, making renovations, and reselling them for a profit. It requires expertise in valuation and renovation to find the best opportunities. There are high costs to flipping homes, from remodeling expenses to real estate commissions to taxes on capital gains.
The goal with real estate flipping is to hold the house for the least amount of time. The ideal is finding undervalued properties in hot markets and up-and-coming neighborhoods.
How to Flip Houses
It’s vital to understand the real estate market before investing your money in a flip. And equally important to assess the total cost of renovation. Some homes may have significant issues to be addressed and can add to the expense.
Flipping property requires a good relationship with a real estate agent, funding to pay for the renovation, and a list of trusted builders, electricians, and plumbers. Additionally, project management skills are a must and a knack for navigating city hall for permits and inspections.
How to Invest in Real Estate Books
I hope this article was a great introduction to real estate investing. But I also understand you may need a more thorough step-by-step guide. For more knowledge, you can read the following real estate investing books:
Is real estate a good investment?
Whether you are a newbie or an experienced investor, real estate opens the doors to new investment opportunities. When considering which strategy is best, get your financial house in order first. Investing in a property (outside of real estate stocks) can come with a great deal of time commitment and capital expense. You want to start with the low-cost way, so you’re moving closer to financial freedom, not increasing monthly expenses or debt obligations.