Investing in real estate can be a smart financial move, as it often demands less initial capital compared to other investment options. A home mortgage typically calls for a 20-25% down payment, but in some cases, you can buy an entire rental property with just a 5% down payment. This makes real estate accessible to those with DIY skills and free time.
However, real estate investing extends beyond just buying rental properties. You can also explore options like REITs (real estate investment trusts) and online real estate platforms, which offer more diverse ways to add real estate to your portfolio. Regardless of the approach, the key to a successful real estate investment is finding one with a high likelihood of growth and a solid return on your investment.
Key Takeaways
- Investing in rental property can be a great choice for those who enjoy DIY projects and have the time to manage the property directly.
- Property flippers search for undervalued homes to buy and sell quickly for a profit.
- Real Estate Investment Groups (REIGs) are perfect for those who want to invest in real estate without the hands-on hassle.
- Real Estate Investment Trusts (REITs) are like stocks, offering dividends and the flexibility to be traded on exchanges.
- Online real estate investing platforms provide diverse opportunities, even with a modest investment.
Investing in Rental Properties (Also House Hacking)
Owning rental properties is a great option for those who enjoy DIY projects, have the patience to manage tenants, and can dedicate the time to do the job well.
While you can get financing with a relatively low down payment, you’ll still need a good amount of cash upfront for maintenance and to cover any periods when the property is vacant or tenants miss payments.
The upside is that once the property starts generating income, you can use that cash flow to invest in more properties. Over time, you can build multiple income streams from different properties, which helps offset any unexpected costs or losses.
House hacking, a concept introduced by BiggerPockets, an online resource for real estate investors, involves living in your investment property while renting out rooms or units in a multi-unit building. This strategy allows investors to purchase a property with up to four units and still qualify for a residential loan.
Pros
- Provides regular income and potential for property value growth
- Can increase returns through leveraging
- Many expenses are tax-deductible
Cons
- Managing tenants can be a hassle
- Unexpected costs can eat into your income
- Unpredictable vacancies can reduce your earnings
What are REITs (Real Estate Investment Trusts)?
REITs, or Real Estate Investment Trusts, offer a way to invest in real estate without actually owning physical property. Think of them like mutual funds but for real estate. These companies own commercial properties such as office buildings, retail spaces, apartments, and hotels. One of the appealing features of REITs is that they tend to pay high dividends, which makes them a popular choice for retirement investments. If you don’t need the regular income right away, you can reinvest those dividends to grow your investment even more.
So, are REITs a good investment? They can be, but it’s important to understand that they come in different types and levels of complexity. Some REITs are traded on exchanges like stocks, while others are not. The type of REIT you choose can significantly impact your level of risk. Non-traded REITs, for example, can be difficult to sell and hard to value. For new investors, it’s usually best to stick with publicly traded REITs, which you can easily purchase through a brokerage firm.
How to invest in REITs
To invest in REITs, you’ll need to open a brokerage account. The process is quick and can take less than 15 minutes. Many brokerage firms don’t require an initial investment, though the REIT itself might have a minimum investment requirement.
If you’re looking for a more diversified approach, you can invest in funds that hold a variety of REITs. This can be done through a real estate ETF or a mutual fund that includes multiple REIT shares. This way, you gain exposure to a broader range of real estate investments, spreading out your risk and potential rewards.
Pros
- Pay dividends to investors
- Core holdings are typically long-term, cash-generating assets
- Many are traded on exchanges
Cons
- Risk of real estate market downturns
- Liquidity risk if the REIT is thinly traded or not publicly traded
Explore Opportunities with Online Real Estate Platforms
Real estate investment platforms serve as a bridge between developers and investors looking to finance projects through debt or equity. Investors on these platforms aim to receive monthly or quarterly distributions, though they take on significant risks and pay a fee to the platform for this opportunity. As with many real estate investments, these are speculative and illiquid, meaning you can’t easily sell them like you would a stock.
However, it’s important to note that you often need money to make money in this field. Many of these platforms are available only to accredited investors. According to the Securities and Exchange Commission, accredited investors are individuals who have earned an income of more than $200,000 ($300,000 with a spouse) in each of the last two years or have a net worth of $1 million or more, excluding their primary residence. For those who don’t meet these criteria, there are alternatives like Fundrise and RealtyMogul, which are accessible to non-accredited investors and provide similar opportunities to invest in real estate projects.
Pros
- You can choose to invest in a single project or a variety of projects.
- Offers the chance to diversify your investments across different locations.
Cons
- Investments tend to be illiquid and often have lockup periods.
- Management fees can eat into your profits.
Home Flipping (If you are a Real Estate Guru)
House flipping is ideal for those with solid experience in real estate valuation, marketing, and renovation.
It’s the “wild side” of real estate investing. Similar to how day trading differs from long-term investing, real estate flippers are different from buy-and-rent landlords.
Flippers often aim to sell undervalued properties within six months for a profit. Some flippers don’t invest in renovations. They buy properties they believe already have the value needed to make a profit without any changes.
However, flippers who can’t quickly sell a property may run into trouble, as they often don’t have enough extra cash to cover the mortgage long-term. This can lead to growing losses.
Pros
- Offers potential for significant returns.
- Provides an opportunity to profit within a short time frame.
Cons
- Requires a good understanding of the market.
- Markets that are hot can unexpectedly cool down.
Have extra rooms? Get roommates (Also Airbnb Room Hustle)
Consider renting out part of your home as a gentle introduction to real estate involvement. This arrangement can significantly reduce housing expenses, allowing homeowners to benefit from property appreciation while remaining in their own space.
Adding roommates can also help younger individuals manage mortgage payments more comfortably. For those hesitant about long-term commitments, platforms like Airbnb offer a flexible option akin to “house hacking.” With Airbnb, hosts benefit from pre-screened guests and the company’s host guarantee against damages.
Renting out a spare room feels more approachable than traditional real estate investments. It’s a practical way to generate extra income if you have unused space.
The Bottom Line
When considering real estate investments, remember to prioritize what suits your circumstances best. Assess your available time, willingness to invest capital, and whether you’re prepared to handle household responsibilities that may arise. If DIY maintenance isn’t your forte, alternatives like REITs or crowdfunding platforms may offer a more suitable path into real estate investment than owning property directly.
Regardless of the method chosen, real estate investing requires careful research and due diligence. It’s important to assess the market conditions, property locations, and financial projections. Consulting with real estate professionals and financial advisors can provide valuable insights and help mitigate risks.
Real estate investing can be a powerful tool for generating passive income. By leveraging rental properties, REITs, or online platforms, investors can build a diverse portfolio that not only provides steady income but also appreciates in value over time. With thoughtful planning and strategic investment, real estate can be a cornerstone of a robust passive income strategy.
Want to learn more? Dive deeper here!
- Real Estate Investing QuickStart Guide – THE ULTIMATE BEGINNER’S GUIDE TO REAL ESTATE INVESTING IN 2024
- Financial Freedom with Real Estate Investing – The Blueprint To Quitting Your Job With Real Estate – Even Without Experience Or Cash
- The Only Real Estate Investing Book For Beginners You’ll Ever Need – Close Your First Deal in 7 Simple Steps Even If You’re Broke & Have Zero Experience (Start A Business)
- Getting Rich with REIT Investing – A Beginner’s Guide to Getting Started with Low Capital to Generate Wealth From Real Estate Without Owning Physical Property
- Buy, Rehab, Rent, Refinance, Repeat – The BRRRR Rental Property Investment Strategy Made Simple
- The Book on Rental Property Investing – How to Create Wealth With Intelligent Buy and Hold Real Estate Investing (BiggerPockets Rental Kit, 2)
- Retire Rich with Rentals – How to Enjoy Ongoing Cash Flow From Real Estate…So You Don’t Have to Work Forever
