Simple Ways To Invest in Real Estate
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Real estate investing is a great way to make extra money and build wealth over time.
Although the real estate market might seem complex, you can choose your time horizon and how much effort you want to put in. Read on to find out how to invest in real estate, plus some key considerations on how to make a good investment decision.
What are the easiest ways to invest in real estate?
If you're wondering how you can invest in real estate, you've come to the right place. Below, you will learn more about:
- Real Estate Investment Groups (REIGs)
- Real Estate Investment Trusts (REITs)
- Real estate crowdfunding platforms
- House-flipping investments
- Rental homes
- Rental units
Without further ado, here are some of the top ways you can begin investing in real estate regardless of your budget.
Real Estate Investment Groups (REIGs)
A real estate investment group, or REIG, is a business that engages in real estate transactions and leasing. You can have family homes, apartment rentals, condos and commercial real estate in an REIG investment portfolio.
Getting involved with an REIG means working with other real estate investors. There is no limit to how many shareholders or partners can join an REIG. Depending on its size, an REIG could manage a few — or many — real estate properties. When investors pool more capital together, it opens up more attractive opportunities.
REIGs are ideal for high net-worth individuals who can dedicate a large portion of their wealth toward real estate opportunities. The returns can be good — it will vary depending on strategy, but there are also potential downsides.
REIGs are highly illiquid, meaning you can't easily access the money you invest. It will also take time to find an REIG with a solid track record of good management that matches your investment property goals.
Fees can also eat into an investor’s bottom line, and the distributed profits can be less than expected in certain cases. The Securities and Exchange Commission (SEC) does not regulate REIGs, so this type of investment is best for those with real estate experience.
Large REIG investors can contribute several million dollars to pooled capital, but there are opportunities where investors can invest smaller amounts of capital. Most guidelines for smaller REIGs suggest an initial investment of between $5,000 and $50,000.
- Potential for great returns with the right management
- Wide variety of specialized REIGs
- Highly illiquid
- Not regulated by SEC
Real Estate Investment Trusts (REITs)
What is an REIT? REITs are companies that own, manage and finance real estate properties.
The main difference between REITs and other real estate investments is that REITs are highly liquid. A REIT can be bought and sold on the stock market and traded in the same way as mutual funds or individual stocks. You can simply log into your brokerage and choose the REIT you want to invest in. After that, you can buy and sell whenever you like.
REITs usually focus on a specific area, such as commercial buildings in central locations, data center operations or wind farms, for example. As such, you can choose whichever type of exposure best suits your risk tolerance. You also get full access to existing and historical finances that publicly traded companies must publish so that you can get a reasonable understanding of valuation, risks and its management’s track record.
They can also act as a solid entry point for investors who want to start investing in commercial real estate at a relatively low cost.
REITs are probably one of the best ways to get exposure to the real estate sector if you intend to invest a smaller sum. In fact, returns from REITs can be higher than other forms of real estate investment.
REITs, on average, have produced an annual return of 11.8% when taking growth and dividends into account, whereas commercial properties and residential properties have typically yielded lower amounts — 9.5% and 10.6%, respectively.
One factor you should note, however, is that short-term trading of REITs could result in having to pay higher capital gains tax.
- Highly liquid
- Low entry costs
- High average returns
- Short-term capital gains tax
Real estate crowdfunding platforms
Real estate crowdfunding works similarly to REIGs and REITs. It pools investors' money into a pot, giving each contributor an ownership stake in the dedicated real estate venture. Real estate crowdfunding platforms operate different structures, but there are two main methods to pay investors, which are:
- One-time payments
- Recurring payments
The main benefit of real estate crowdfunding platforms is the cost of entry. It doesn't require a significant investment, and you can start with as little as $100. This type of crowdfunding makes real estate investing accessible to the average individual and doesn’t require investors to take an active role.
You can also choose which proposals and trends you want to get involved in, such as sustainable infrastructure investments that have a strong economic, social and governance (ESG) score.
While all investments carry risk, real estate crowdfunding platforms take measures to mitigate risk where possible. They take responsibility for investor funds and act as intermediaries between individual investors and the real estate company. The crowdfunding platform will vet proposals and then present opportunities to you. In most cases, you will receive a certificate of ownership from the crowdfunding platform once you invest.
Here again, though, there are certain risks tied to real estate crowdfunding. It’s highly illiquid (like most real estate). Some platforms will also charge fees which could diminish your profits. Ideally, it would be best to shop around to see which structure best fits your needs and investment values — fee-free platforms also exist.
- Low cost of entry
- The platform completes due diligence
- Dependable opportunities can be limited
House flipping is the process of buying run-down properties to repair and sell for profit. Many investors love home flipping because the property can be purchased for little money, and the price increase from renovations tends to be much higher than the amount invested.
But house flipping definitely isn’t for everyone. In fact, it’s probably one of the riskiest real estate investments to make. This is due to the high initial entry costs, unexpected renovation costs and the need for expertise in particular geographic markets.
As a result, you could dig yourself into a hole that’s difficult to get out of. Plus, if a property market downturn begins, you could wait a long time before you profit from your investment.
Depending on the state of the property, you could also be looking at months or years of renovations. Cheaper properties may look attractive, but the labor costs for renovations can add up quickly.
Then again, house flipping has paid off for many investors. The average net profit can be as much as $30,000 and up to $100,000 or more in best-case scenarios.
Typical homes that you can flip include:
- New homes
If you want to start house flipping, the best place to look is on property sales and foreclosure websites. By doing this research, you can figure out what homes are suitable for your goals.
Choosing homes that require less work in order to resell can mitigate your risk somewhat. The less time you spend holding onto the property, the less risk you carry if property prices begin to decline.
Location is vital in house flipping, so you'll want to do your research on housing demand trends wherever you're looking. It's also beneficial to have connections to affordable labor, as this helps to reduce repair and renovation costs. For this reason, staying local might be your best bet.
- Opportunity for high returns over short periods of time
- Starting capital requirements can be relatively high
- High risk
- Unpredictable costs associated with renovations
Buying a home to rent it out allows you to focus on something simple, like a single-family home in emerging housing markets. You can choose to use it as a short-term rental (such as an Airbnb) or find tenants for fixed-term leases.
The advantage of renting out a property to a tenant is that you have a predictable income each month. Letting out your apartment for shorter-term stays may not be as reliable, but can yield higher profits in some cases.
- Recurring income
- Full autonomy
- Maintenance expenses
- It can take time to find good tenants
- Mortgage payments can be costly
Rental units are usually smaller than rental homes. A rental unit can be a commercial property, a single-family unit or an apartment in a multi-unit complex, for instance.
Purchasing a rental unit can be a good way to earn passive income, but there are definitely some caveats. Buying a this type of property isn't cheap, but if you have the capital and are in it for the long haul, you could turn it into a source of regular income. As long as market conditions are good, the property you've purchased will appreciate in value.
The thing about rental units, though, is that the down payment required is significantly higher for investment properties that will be rented. While the average down payment for people buying their own homes is usually about 6% or 7%, for rental properties, it can be as high as 25%.
Another thing to think about is monthly mortgage payments. First, the interest payments on the property you buy will be determined by your credit score. Secondly, investors taking out a variable-rate mortgage can be impacted by rising interest rates, which make mortgage payments more expensive.
You should also factor in labor costs when managing a rental unit. You have two choices; you can hire a full-time property manager, or you can take on the role of landlord yourself. You should weigh which option is more cost-effective to get the investment returns you want.
- Regular stream of cash
- Full autonomy
- Costs associated with the upkeep
- Can be a time-intensive role
- Mortgage payments
The differences between direct and indirect real estate investments
The difference between direct and indirect real estate investing comes down to the degree of involvement you’ll need to have.
Direct real estate investments give you complete autonomy over how you run your properties. You get all the profit, and you hold the asset. But you also have to face the risks, the costs and the problems you’ll inevitably run into.
Indirect real estate investments offer a hands-off approach with similar exposure, but you have little to no say in decision-making and how the properties are managed. You’ll still get your cut when it’s all said and done, as long as everything goes well.
What does a good real estate investment look like?
The best way to start investing in real estate is to get clear about your priorities. If you're looking for diversification of your stock portfolio, REITs are the obvious way to go. With REITs, you can get all the financial information you need to ensure you aren't overpaying, and it's a more liquid real estate investment than other options.
Buying physical real estate, on the other hand, gives you control over decision-making, and you can also get tax breaks for depreciation. When it comes to physical real estate, you’ll want to look at two main factors:
- Location: Find out what the typical yield or rental income is for the area
- Cost: Consider how much you'll need to invest in renovations, cleaning and maintenance
If you're new to the real estate market, you may want to consider speaking to a real estate agent to help you find the best investment opportunities. If you're unsure if a real estate agent is worth it, consider what your information gaps are and how much this might cost you in the long run.
What are the advantages of investing in real estate?
Real estate can provide excellent investment returns, shown to be 8.6% on average. When you buy real estate, you’re also getting an appreciating asset. Over the long term, it tends to perform well, particularly when factoring in inflation.
Even as the cost of materials, wages and land rise, rental yields also tend to match any price hikes. Real estate tends to keep up or outperform inflation historically.
On top of that, you can take advantage of tax legislation as a real estate owner. You can make tax deductions and depreciation deductions on your properties. This reduces your total gross income and, as a result, the amount of tax you will owe. Property taxes will still need to be paid, however, and rates will vary by location.
What are the risks for real estate investors?
When you're purchasing a home, unit or commercial property, it's your dime on the line. If you buy at a bad time, underestimate the time and costs needed for renovations or overpay for a property, all of that risk falls on you.
If you don't have significant capital to dedicate to managing your real estate properties, you can quickly be underwater on your investment and be forced to sell at a loss. So proper planning, financial management and property management expertise will all play a crucial role in how successful you can become in this business.
Consider your options
Taking stock of all the real estate investment options above, there are more than enough places to put your money to work in the property sector. You may have inherited a lump sum that you want to invest, or you might want to grow your current property portfolio. Regardless of age or income, almost anyone can start investing in real estate.