When looking for places to invest your money, you have a lot of options. No matter how much you know about investing, stocks, bonds, ETFs, mutual funds, and real estate are all good choices. However, forex or cryptocurrencies may be too risky for new investors. How involved you want to be in your investment, how much money you have to start investing, and how much risk you are willing to take will determine which option you choose.
Buying and owning real estate can be a satisfying and profitable way to invest. Unlike investors in stocks and bonds, people who want to buy real estate can use leverage to do so by paying only a portion of the property’s total price up front and then paying off the rest, plus interest, over time.
What makes a good investment in real estate? A good investment has a high chance of working out or giving you a good return on your money. If your investment comes with a lot of risks, it should also come with a lot of potential rewards. Even if you pick investments that have a good chance of working out, that’s not a guarantee. You shouldn’t invest your money in real estate or anything else if you can’t afford to lose it.
Even though a traditional mortgage usually requires a 20% to 25% down payment, sometimes you can buy an entire property with just a 5% down payment. Both real estate flippers and landlords feel more confident because they can control the asset as soon as the papers are signed. In turn, landlords can take out second mortgages on their homes to pay for down payments on more properties. Here are five of the most important ways that real estate investors can make money.
How to Invest in Real Estate in 5 Easy Steps
1. Rental Properties
Owning rental properties can be a great way to make money for people who are good at home repairs and have the patience to deal with tenants. But this strategy does require a lot of money to pay for maintenance costs up front and to cover the months when the business is closed.
Pros
- Offers steady income, and properties can go up in value.
- maximizes capital by using debt.
- Many related costs can be deducted from your taxes.
Cons
- Taking care of renters can be a hassle.
- Tenants could possibly damage property
- Less money coming in from possible vacancies
According to data from the U.S. Census Bureau, the sales prices of new homes (a rough measure of the value of the real estate) went up steadily from the 1960s to 2007 but then went down during the financial crisis. After that, sales prices went back up and even went higher than they were before the crisis.
We still don’t know what the long-term effects of the coronavirus pandemic will be on the prices of homes.
2. Real Estate Investment Groups (REIGs)
People who want to own a rental property but don’t want to deal with running it should join a real estate investment group (REIG). To invest in REIGs, you need a cash cushion and the ability to borrow money.
REIGs are like small mutual funds that invest in rental homes.
In a typical real estate investment group, a company buys or builds a set of apartment buildings or condos and then lets investors buy them through the company and join the group.
A single investor can own one or more self-contained living spaces, but the company that runs the investment group manages all of the units, taking care of maintenance, advertising vacancies, and interviewing potential tenants. In exchange for managing these things, the company takes a certain amount of the monthly rent.
Standard leases for real estate investment groups are in the name of the investor, and all of the units share a portion of the rent to cover occasional vacancies. So, even if your unit is empty, you’ll still get some money from it. As long as the number of empty units in the pool doesn’t go up too much, there should be enough to cover costs.
Pros
- Less work than owning rentals
- Earns money and increases in value
Cons
- Vacancy dangers
- Fees that are like those of mutual funds
- Susceptible to unscrupulous managers
3. House Flipping
People who want to flip houses should have a lot of experience with pricing, selling, and fixing up real estate. To flip houses, you need money and the ability to make or supervise repairs as needed.
This is the “wild side” of real estate investing, as the saying goes. Just as day traders are different from investors who buy and hold, real estate flippers are different from landlords who buy and rent. For example, real estate flippers often try to make money by selling homes they buy for less than they are worth in less than six months.
Most of the time, people who just flip houses don’t put money into fixing them up. So, the investment must already have enough value to make a profit without any changes, or the property will be taken out of the running.
If a flipper can’t sell a property quickly, they may get into trouble because they usually don’t have enough cash on hand to pay the mortgage on a property for the long term. This can cause losses to keep adding up.
Another kind of flipper makes money by buying cheap houses and fixing them up to make them worth more. This can be a long-term investment, and most people can only afford one or two properties at a time.
Pros
- Locks up money for a shorter time.
- Can pay off quickly
Cons
- Needs more market knowledge.
- Unexpectedly, hot markets are cooling down
4. Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) is the best way for investors to get a piece of real estate without doing a traditional real estate deal.
A REIT is formed when a company or trust uses money from investors to buy and run income properties. Like any other stock, REITs are bought and sold on major exchanges.
For a company to keep its REIT status, it must pay out 90% of its taxable profits as dividends. By doing this, REITs don’t have to pay corporate income tax. A regular company, on the other hand, would have to pay taxes on its profits and then decide whether or not to give out dividends from the money left over after taxes.
REITs are a good investment for stock market investors who want a steady income, just like stocks that pay dividends. Compared to the other types of real estate investments listed above, REITs give investors access to non-residential investments, like malls or office buildings, that most individual investors can’t buy directly.
More importantly, because REITs are exchange-traded trusts, they are very liquid. In other words, you won’t need a real estate agent and a title transfer to cash out your investment. In practice, REITs are like real estate investment groups with more rules.
Lastly, when looking at REITs, investors should know the difference between equity REITs, which own buildings, and mortgage REITs, which provide financing for real estate and dabble in mortgage-backed securities (MBS). Both give you a chance to invest in real estate but in different ways. Equity REITs are more traditional because they represent ownership of the real estate. Mortgage REITs, on the other hand, focus on the income from mortgage financing for real estate.
Pros
- Stocks that mostly pay dividends
- Most core holdings are long-term leases that bring in money.
Cons
- Traditional real estate rentals don’t work with leverage.
5. Online Real Estate Platforms
Real estate investing platforms are for people who want to invest in a larger commercial or residential deal with other people. The investment is made through online real estate platforms, which are also called “real estate crowdfunding.” This still requires investing money, but less than if you bought the property outright.
Online platforms bring together real estate developers and investors who want to fund projects. You can sometimes diversify your investments even if you don’t have much money.
Pros
- You can put money into a single project or a group of projects.
- Differences in geography
Cons
- Usually have long periods when they can’t be traded.
- Management fees
Frequently Asked Questions
Why should I put some money into real estate?
Real estate is a separate asset class that many experts agree should be a part of a diversified portfolio. This is because stocks, bonds, and commodities do not usually go together well with real estate. In addition to the possibility of capital gains, real estate investments can also bring in money through rent or mortgage payments.
How is direct real estate investing different from indirect real estate investing?
When you invest directly in real estate, you actually own and manage the properties. Indirect real estate involves investing in REITs or real estate crowdfunding, which are pools of money that own and manage properties.
Is crowdsourcing for real estate risky?
When compared to other ways to invest in real estate, crowdfunding can be riskier. Most of the time, this is because crowdfunding for real estate is still pretty new. Also, some of the projects on these sites may be there because they couldn’t get money through more traditional means. Lastly, many real estate crowdfunding sites require investors to keep their money locked up for a few years, which makes it hard to get at. Still, Investopedia research shows that the best platforms offer annualized returns of between 2% and 20%.
Conclusion:
Whether real estate investors rent out their properties to make money or hold on to them until the right time to sell comes along, they can build a strong investment portfolio by paying a small portion of a property’s total value upfront. And just like any other investment, there is profit and potential in real estate, even when the market as a whole is going down.
