There is no shortage of ways to invest your money in 2022. From traditional stocks to cryptocurrency and everything in between, the possibilities are endless. One strategy that has stood the test of time is investing in real estate.
As the old saying goes, “land is the only thing they aren’t making any more of.” It is a finite resource, so owning or investing in real estate means you have a commodity people want which also happens to be available in limited amounts.. It’s more complicated than that, of course, but this simple principle is a good foundation for understanding why real estate investing is a great idea to consider.Here, we will help you understand what real estate investing is and the best ways to start the process. Understanding how to invest in real estate is a knowledge base anyone can use if they are serious about making their money work for them.
What Is Real Estate Investing?
Real estate investing can take many forms. Flipping houses, which entails buying properties that need some work, fixing them up, and then selling them at a profit, is probably what pops into your mind first. You’ve probably seen more than a few reality tv shows that follow that process.
Real estate investing can also mean buying residential real estate and renting it. It could also mean renting out all or a portion of your primary residence or vacation home. You can alternatively buy land and wait for it to increase in value, divide it to sell smaller lots, or develop it with houses for sale.
The opportunities don't stop at residential real estate either. You can buy, sell, and rent commercial real estate. Commercial real estate is defined as office buildings, warehouses, retail centers, hotels, and residential multi-family buildings.
Industrial real estate is another avenue to consider if you are thinking about becoming a real estate investor. This designation refers to properties used to manufacture, develop, or produce products and goods. It also encompases logistics real estate, which refers to the storage and movement of goods and products.
These are just a few of the ways you can buy, sell and rent real estate, but there are also plenty of real estate investment opportunities that don't involve buying property. For example, you can buy and sell real estate stocks, much like you would any other kind of stock. Or, you can use real estate crowdfunding platforms to invest in a portfolio of properties or one specific piece of real estate.
Anytime you invest your money into something directly or peripherally related to real estate, you are engaging in real estate investing. The possibilities are plentiful, and the opportunities to build wealth are enticing.
Why Invest In Real Estate?
Now you know what real estate investing looks like, but why should you care? Real estate investing can provide financial stability, a new steady income stream, exceptional return on investment (ROI), and lucrative tax breaks, among other things. Investing in real estate can yield returns far greater than traditional stocks. In addition, many real estate investments can be more stable than the stock market, which often comes with volatility.
Real estate investing is varied and accessible to almost everyone. There are many strategies and types of investing that can help you earn money in the real estate market. In addition, the level of financial investment can be as low or as high as you want it to be.
Whether you are considering buying your first rental property or just want to put a few hundred dollars into a real estate crowdfunding endeavor, the ability to get started quickly at any price point is appealing.
Your skill level also doesn’t play a huge role since you can be a novice or a pro. You can own many investment properties or not be a property owner at all. The flexibility and high rate of return make real estate investment a great idea no matter where you are in life.
Best Ways To Start Investing In Real Estate
Now that you know the what and why of real estate investing, let’s dive into the specific areas you can explore. We will cover what these areas are, who they might be a good fit for, why (and why not) they might make sense, and most importantly, how to get started with each. Below are the 12 best different options for investing in real estate.
1. Real Estate Crowdfunding
Relatively new to the industry, real estate crowdfunding offers access to commercial real estate opportunities never before available to most people. Once you sign up on one of the many crowdfunding platforms geared toward real estate, you can begin researching possible deals to invest in.
Commercial property deals like selling and buying apartment complexes, self-storage facilities, medical offices, and hotels involve vast amounts of money to compete. These opportunities were traditionally reserved for investment property companies, real estate developers, or individuals with a very high net worth. Now, real estate investors at all levels can participate.
Once you find a deal you think is appealing, or if the crowdfunding platform you choose recommends a deal, you can invest modestly (sometimes as little as $500) in a large-scale project.
Say, for example, a hotel is for sale for $4,000,000. With crowdfunding, many people can pool their resources to make an offer on the property. The more you invest, the more of an ownership stake you have. Unlike real estate investment trusts (more on those later), crowdfunding allows you to invest in a single property. This also means the sponsors of these deals can focus on a single property instead of a portfolio of real estate investments. As you might guess, this means the research and due diligence on the deal is likely to be more comprehensive.
The benefits of this are clear. You don't need to put up all the money yourself to purchase an expensive property, and you don't need to be the single owner responsible for maintenance, leasing, etc. Compared to traditional commercial property purchasing, the risk is significantly reduced, but you can still make money on the transaction.
Real estate crowdfunding is not perfect, though. Like most investment strategies, there are good deals and bad deals. You could make a hefty profit, but you could also lose your entire investment with no return.
For example, let’s say a deal you are considering requires the purchase of an apartment building followed by a renovation and rent increase. If an increase in material or labor costs makes the renovations more expensive, or the rental market softens resulting in rents that can’t be raised, all the investors in the crowdfunded deal could be left with nothing.
Crowdfunding real estate investments aren’t foolproof, but they do provide an excellent opportunity for investors who don't want to buy or sell property on their own and aren't afraid of a bit of risk.
2. Real Estate Investment Trusts (REITs)
Real estate investment trusts, or REITs, are similar to crowdfunded properties because multiple investors pool resources to buy real estate. They are different, however, because the investors buy a portfolio of properties instead of one single piece of real estate.
Real estate investors make money on these portfolios by renting or selling the properties they own at a profit. There are a lot of variables, so understanding the details for each REIT you are considering for real estate investment is essential.
Hundreds of publicly-traded REITs can be found with a quick online search, and they all have different levels of risk and reward. Think of them as you would a traditional stock, weighing your risk tolerance with the potential to enjoy substantial financial gains. In addition to publicly-traded REITs, there are also private REITs for investing. These are closed, private networks of individuals looking to invest in a portfolio of rental properties.
There are a number of advantages to investing in REITs. They are legally required to pay 90 percent of their income in dividends to their investors, for starters. So, if the investment is successful, you know you will benefit financially. REITs deal with real, tangible properties you can investigate and determine if they will increase in value dramatically over time. REITs are also attractive because they spread your investment over multiple properties, so you don't have all your eggs in one basket.
Investing in a real estate investment trust does have some disadvantages. The dividends you make on them are taxed at a higher rate than most investments. They are also very sensitive to interest rates and can drop in value significantly if mortgage rates rise. If you are looking for a quick return on your investment, REITs are probably not the best way to go. Their sensitivity to market conditions like interest rate means they can be volatile as short-term investments. You should be in it for the long haul while their value slowly increases if you invest in REITs.
3. Real Estate Limited Partnerships
A real estate limited partnership (RELP) is similar to a REIT, as investors pool money funds to purchase, sell, develop, or lease property.
What makes a RELP unique is the limited partnership designation, which means a general partner is fully liable for the property and the other partners are limited in their liability. This means they are only liable for the amount they invest in the deal.
The general partner is typically a real estate development company, a property manager, or a corporation. The limited partners are usually individual real estate investors who help fund the project with an initial investment with the hope of getting a return.
A RELP can have one limited investor or many investors. It is usually suited for more experienced investors, as the initial investment is often a substantial amount of money.
4. Become A Landlord
Managing a rental property you own or charging a fee (usually about 10 percent of the rental income each month) to manage someone else’s rental property can provide a nice stream of income. The more rental properties you manage, the more you can make.
However, you need to be sure you want to be a landlord and can handle the responsibilities that come with it. Being on call to help tenants with repairs, collecting rent, and managing the budget for maintenance and other expenses are a few of the tasks that will fall on your plate as a landlord.
If you consider yourself a pretty handy person that can fix minor repairs and find the necessary professionals for more extensive maintenance, being a landlord might be a good job for you. If you get the shakes at the thought of fixing a leaky faucet, not so much.
Saving money on rental properties you own by serving as the landlord instead of paying someone else to do it, or offering to manage someone else’s rental properties, is an excellent way to invest in real estate. However, it only works well if you have the necessary disposition and skill set.
5. House Flipping
This refers to buying residential properties, fixing them up, and selling them for a profit. Sounds pretty simple, right? Well, don’t let the glorified reality shows fool you. Flipping houses can be a great way to invest in real estate, but it’s not easy. Understanding the right area to buy in, the right house, the right improvements to make, and the best way to get top dollar when you sell takes time, patience, and expertise.
Successful house flipping starts with finding the right location. Look in cities and neighborhoods that have steadily increasing home values year over year that are above the national average. If you don't, you may end up putting time, money, and sweat equity into the home that you won’t get back.
Once you find a location that shows increasing value each year, don't buy the nicest house on the block. The potential to add features that increase the value just won't be there. Instead, look for that diamond in the rough that you can turn into the nicest house on the block.
When you walk through it, take a contractor that understands what various renovations will cost. You can start a rough budget in your head while walking through the house and contemplating what features could be updated to increase value.
When it comes to renovations, it's all about getting the biggest return on investment (ROI) possible. That means looking at the cost of each improvement in relation to how much it will raise the final sales price.
Take a bathroom remodel, for example. It’s a pretty significant investment, with expenses for materials and labor ranging between $38,000 and $75,000, but the return can be as high as 87% for midrange remodels. Conversely, a less impactful renovation - like adding closet organizers - will get you an ROI of only 40%.
Once you have determined and executed the renovations that will give you the most value, it’s time to sell that home. Obviously, you want the highest sales price possible. To determine what that is, have a real estate agent review comparable recent sales in the same area. How does your investment property compare in terms of size, number of bedrooms, number of bathrooms, and the quality of the finishes? By the time you are done renovating, the home should be “turn-key,” which means a buyer can move in immediately without fixing or updating anything. Ideally, you have taken the least expensive home in the neighborhood and transformed it into the most expensive one.
6. Invest In Your Home
The benefits of making improvements to your primary residence are two-fold. First, it improves the space you and your family share your daily lives in. Second, it increases the sales price you can get for your home when it’s time to sell.
The trick is striking a balance between your tastes and the tastes of the majority of prospective buyers. Sorry, but if you like neon pink paint in the living room, don’t do it. Most potential home buyers will find that a bit off-putting.
Similar to flipping houses, it’s essential to do your homework for each renovation you are considering to determine the best ROI for each. Installing or refinishing hardwood floors, for example, is a great way to improve your home in a way that almost every buyer will appreciate. More specifically, refinishing your hardwood floor costs around $2,600 and has an ROI of about 100%.
The biggest remodel and the most critical room buyers look at when they evaluate a home is the kitchen. This can be a major selling point as you and your real estate agent market the house when it comes time to sell. This renovation can be as big or small as you want. For example, sometimes simply replacing cabinet hardware and painting can really change the look and feel of the space. Or, you can do a complete remodel with new appliances, new stone countertops, new cabinets, and hardwood or tile floors. If you decide to redo your kitchen, it will cost you between $26,000 and $149,000, with the average ROI being in the range of 53 – 72%.
Don’t forget that when you transform that kitchen (or other spaces in your home) into a modern marvel of design and fashion, it's not just about ROI when you sell. You get to enjoy that space for the rest of the time you are in the home!
The only downside to investing in your home is if you don't make the right choices or if external market factors have a negative impact. If you overpay for renovations that don't add value, you may not be able to recoup the cost when you sell the home. If the market tanks and home values plummet, you may not get the price you need for the house to make a profit.
7. Real Estate Investment Groups (REIGs)
A business that focuses its human and financial resources on real estate to make a profit is a real estate investment group (REIG). Limited partnerships, as we covered earlier, are a type of REIG. REITs, which we also covered previously, are also a form of REIGs.
REIGs tend to purchase, renovate, or sell multi-unit properties. So, in contrast to flipping houses where you work on a single-family home, this type of investment usually involves property like an apartment building with many units.
The REIG will often buy a large property with many units and then sell individual units to investors. The REIG usually handles things like maintenance, rent collection, and other property management functions instead of putting those tasks on the individual investors.
The multitude of ways REIGs can create real estate income through investment strategy is attractive to many investors. Beyond apartment buildings, they can acquire commercial properties and industrial complexes. They can even make money through mortgage lending opportunities. The ideal candidate to join a REIG is a high-net-worth individual who wants to invest directly in real estate but isn't interested in managing properties.
The downside of REIGs is that you trust other people or corporations with your money. If they miscalculate the potential value of a property, you may not make a good return on your investment or even no return at all.
8. Rental Properties
Acquiring rental properties or using your primary residence as a rental property is a great way to start investing in real estate. This can take many forms, but the opportunities to make money by collecting monthly rent from tenants can be a great sustainable form of income.
If you aren't looking to spend a lot of capital, look at distressed properties that can be fixed up. Once you complete the renovations, you will likely have a larger pool of rental applicants, and you can charge a higher monthly rent for the new and improved living spaces.
Regardless of whether you want to buy a high-end rental property or shop the bargain bin, work with a real estate agent who knows the local rental market. They will help you find the right areas to consider.
For example, if a property is located near a university, the likelihood of having a large number of potential tenants is high. Houses on the water can also be an excellent opportunity for securing seasonal renters looking for vacation properties.
If you aren’t looking to purchase a property, you can still make money off rentals. Consider renting out your primary residence for short periods. For example, if you live in a highly desirable area near a major tourist attraction, you might be able to pay your mortgage just by renting out your home for a few weekends throughout the year.
Depending on the level of investment, earning income from rentals might appeal to both the novice investor and a seasoned investing professional.
9. Online Real Estate Platforms
Speaking of rentals, online real estate platforms have made them more accessible than ever. Airbnb, VRBO, and Vacasa are just a few examples of sites where potential renters can go to look for places to stay. This means promoting your rental isn't something you need to pay a real estate agent, or anyone else, to do.
Online real estate platforms are ideal for tech-savvy investors. On the other hand, if you like seeing the property, inspecting every square foot, and meeting all the investors you are working with, these might not be right for you.
10. Invest In Real Estate Mutual Funds (REMFS)
A mutual fund is an investment tool that pools money from various investors to invest in stocks and bonds to make money. Real Estate Mutual Funds (REMFS) invest in the stocks and bonds of real estate companies.
There are hundreds of REMFs to choose from that can offer a nice return for investors. They also require no management of any properties involved.
However, one drawback is that you don't have a vote in the direction of the fund, like when you directly own stock in a company. If you invest in a REMF, you won't have any say regarding what properties are purchased or sold.
11. Wholesaling Houses
Wholesaling houses is another way to use real estate to make profits. First, you sign a contract with a homeowner to buy their house for a certain amount. Next, you find a buyer for the house willing to pay more than what you have offered the seller. You keep the difference to make a profit. Essentially, it’s similar to flipping a house, except you don't make any renovations or improvements before selling.
This usually means finding a distressed or foreclosed property where the seller is willing to accept a purchase price well below market value. This can be a lucrative endeavor for investors with an understanding of the process and capital to put down on the house. However, it can end up being a mess if you agree to buy a home and then can’t find a buyer.
12. Start A Brokerage And Become A Real Estate Agent
Possibly the most straightforward way to make money in the real estate business is to start a real estate brokerage and become a real estate agent. This entails helping people sell and buy homes and taking a commission upon completion of the sale.
First, you will need to learn how to become a real estate agent and how to start a real estate business. Once you get started, there are several ways to grow a real estate business, and that’s when you can really start to see significant returns.
If you are a self-starter that doesn't mind working for commission, becoming a real estate agent might be a great move. If you like to have a consistent flow of income each month no matter how hard you work, it might not be the profession for you.
Investing in real estate can bring new income, financial independence, and a wealth of knowledge across several different investing tools and strategies. Success comes from studying the various opportunities available to you and finding those that make sense for your financial situation and skill set. The more you do it, the better you will become at it and the more money you will make.