Making real estate investments is one of the primary wealth builders, no matter your tax bracket. Learning how to invest in real estate is a dream for many, and for a good reason. You can secure a piece of the real estate pie if you have $2,000 or $200,000 to invest.
Here are 8 ways to add “real estate investor” to your list of accomplishments and learn how to invest in real estate.
Buy a Home
Let's kick off the list with one option you might not expect. Buying a home can be an investment, but only if you do it right. Here's the best way to use your home as an investment.
- Buy your house at fair market value or less. That means don't overpay.
- Stick to a 30-year pay-off schedule. That means don't refinance your mortgage and start the 30 years over.
- Maintain your property overtime without investing too much in it.
If you follow these steps, you'll own your home in full in 30 years, and your house will increase in value by the time you pay it off. Think about it. You can buy a house for $400,000 today, and 30 years from now, it'll be worth substantially more. Talk about return on investment.
Pros
- You own a home instead of paying rent.
- There are potential tax breaks.
- You have fixed long-term payments (if you choose a fixed APR).
- Your home will appreciate over time.
Cons
- You might have to make a down payment.
- Maintenance can be costly.
How to Get Started
All you have to do is purchase a home as you usually would. Just be sure you pay fair market value or less, so it's a good investment that will pay off.
Rent Out a Room
Once you own a home, consider renting out a room. You may have an extra bedroom or a walkout basement with a mini apartment setup. Either way, if you have extra space and rent it out to a tenant, you're officially a real estate investor. Plus, it typically will cost you little upfront. You must adequately vet the tenant and ensure the space is suitable to live in, and you're good to go.
If you want to avoid committing to a long-term rental agreement you can utilize services like Airbnb. This allows you to secure short-term rental income, so you don't always have someone in your home.
Pros
- There are limited to no start-up costs as long as you own a home.
Cons
- Having someone living in your home can feel uncomfortable.
How to Get Started
Before renting a room, you must take a few steps to protect yourself and prepare your home. First, check your state's landlord-tenant laws and talk to your homeowner's insurance company. Then choose the part of your house you want to rent, set a fair rent to charge, and seek out tenants. Be sure you have potential tenants complete an application, background check, and credit check, and have a lawyer-reviewed rental agreement before you agree to anything.
Flip Investment Properties
House flipping is when you buy, renovate, and resell a home quickly for a profit. An alternative is to buy a home, hold it until the property value increases and then resell it without doing any renovations. It can be lucrative if you have the capital to purchase a home, know how to buy the right property, and manage renovations without going too far over budget (or can afford to sit on the property until the value goes up.)
Doing it right can be a great way to invest in real estate, but it can easily go wrong and drain your money unexpectedly.
Pros
- The right property flip can yield a lot of money quickly
- You can start small to test the concept and work your way up
Cons
- You need a strong knowledge of the market
- Unexpected renovation costs can cut into your profit
How to Get Started
First, you want to determine how much money you have to invest in a real estate flip and how involved you want to be in the process. Do you want to do the renovation work yourself? Can you manage contractors? Do you have the design skills needed? This will determine how much support you have to bring on and will impact your profit. Next, secure financing, purchase your investment property, and flip it.
Real Estate Investment Trusts (REITs)
Investing in REITs is a simple investment method that doesn't require much capital upfront. You can invest for as little as $5. It's truly that accessible.
Real estate investment trusts are public companies that own, operate or finance real estate that produces income like an apartment complex, hotel, or shopping mall. They combine the money of multiple investors. This allows you as an individual to earn dividends from the real estate investment without doing any of the heavy lifting.
Pros
- You don't need a lot of money to invest.
- It's a liquid investment.
- You receive dividends.
- There are deferred taxes on capital gains if the assets are held.
Cons
- You don't have the same leverage available to you as you would through traditional rental real estate.
- Stocks can fluctuate.
How to Get Started
Open a brokerage account, determine what type of REIT you want to invest in, and purchase shares. It's a reasonably straightforward process without much work upfront.
Invest in Rental Properties
This is what you typically think about when you consider real estate investing. You buy and rent a home, making your money off the monthly rental income. The key to a good investment property is ensuring the monthly payment, insurance, and property tax costs less than the total rent. That's because the difference between these numbers will be your profit. This can be a lucrative investment strategy if you do your homework and choose the right property.
One downside is dealing with tenants. There are horror stories about tenants destroying properties and skipping out on paying rent. So you'll want to decide if you're going to manage the property or hire a management service to take over those tasks. Once you take that route, your investment property income leans closer to the passive income side.
Pros
- There are several tax benefits.
- It provides regular income.
- It can be more passive if you hire a management service.
- The home will appreciate over time.
Cons
- Vacancies can reduce your profit.
- Property maintenance can be costly.
- Managing tenants can be challenging.
- Tenants damage property.
How to Get Started
You want to start by securing financing to purchase a home. You can expect your down payment to be higher since it's not an owner-occupied home. Next, you'll determine whether you're self-managing the property. If not, you want to hire a property manager. Then you have to find tenants for your property. Like renting a room in your home, be sure you understand your state landlord-tenant laws and talk to your homeowner's insurance agency. As you vet tenants, make sure they fill out an application and complete a background and credit check.
Real Estate Investment Groups (REIGs)
Investing in a real estate investment group is a way to own a property without being too involved in the day-to-day aspects of ownership.
The most common way this works is for a company to buy or build apartments or condos. They then allow investors to purchase one or multiple apartments or condos through the company. Everyone who purchases a property becomes part of the real estate investment group, but you're not responsible for managing them. The primary company in charge of the investment group will secure tenants, complete building maintenance, and complete other day-to-day management tasks.
Pros
- It's a more hands-off investment strategy
- Your investment will appreciate
Cons
- Vacancies can reduce your profits
- There are fees to participate
How to Get Started
Networking is a great way to get involved in an REIG. The National Real Estate Investors Association is a not-for-profit organization with local chapters nationwide. This is an excellent option for connecting with other investors and learning about legitimate investment opportunities.
Real Estate Crowdfunding
Real estate crowdfunding, also known as online real estate platforms, allows you to invest in major commercial or residential real estate deals by going in with others. The best part about it is you can get into crowdfunding without a lot of upfront capital – some sites allow you to join for as little as $500. Crowdfunding provides you with consistent dividends without putting much work into it upfront.
Pros
- You can invest in one project or multiple projects.
- You can invest less than $1,000, depending on the platform.
Cons
- You must pay fees to participate.
How to Get Started
Many crowdfunding options are available, so you want to do your due diligence. You want to look at various factors regarding the platform, including its credibility, customer service, and site quality. You can Google top real estate crowdfunding sites to learn about the different opportunities on the market.
How To Invest In Real Estate
You now have 8 options to get started investing in real estate. Since each method has its own pros and cons, you should weigh your options to find out which is best for you.