How To Invest In Real Estate

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How To Invest In Real Estate


When most people think about real estate investing they likely think of a few things: slumlords in huge cities and rich billionaires. But the average investor should also seriously consider investing in real estate.

If you have no idea where to start – you’re not alone. There are many ways to get started as a real estate investor – some of them require as little at $500!

Below, I’ll break down the different types of real estate investments and who they’re best for. But let’s get started by talking about what the heck real estate investing actually is.

What is real estate investing?

Start Investing In Real Estate - What is real estate investing?

Put simply, real estate investing is the purchase or sale of land and buildings to earn money. There are a few different categories of real estate:

  • Residential real estate includes houses, apartment buildings, vacation properties, and anywhere else people live. This is typically the easiest area of real estate for a beginning investor to enter.
  • Commercial real estate (CRE) involves office spaces, retail storefronts, or any building used for business purposes. It’s more expensive than residential real estate and you’ll manage more property. The best way for individual investors to get into CRE is to buy shares in a real estate investment trust — more on those below.
  • Industrial real estate includes warehouses, storage units, and other large “special purpose” structures like car washes that generate sales.

How do you invest in real estate?

Before you pick your first investment, you should decide how much you’ll want to spend on a down payment. Real estate can be a risky business, so don’t invest any money you can’t afford to lose. Commercial property investors, for instance, should have around $50,000 ready to go. If you don’t have anywhere near that much, there are less pricey ways to invest.

Real estate can also be a significant investment of time. Fixing up a property isn’t easy, and even basic maintenance is a regular task you’ll have to keep up with. Some real estate investors outsource maintenance to management companies at an extra cost.

It’s a good idea to talk to a qualified attorney before making your first purchase. Holding investments through limited liability companies (LLCs) is a lot less risky than making an investment in your own name. If the investment fails, you want your assets protected, and you don’t want legal liability if you can avoid it.

Now that the disclaimers are out of the way, let’s look at your options.

Real estate investment trusts (REITs)

Investing in a REIT isn’t that different from investing in a stock. As an investor, you give money to a trust or corporation which purchases a property. You’ll get a portion of the dividends as the property appreciates. REITs are bought and sold on most major stock exchanges.

This is the easiest way for a beginning investor to get into the commercial real estate world. It comes with a potentially high yield. Corporations payout at least 90% of their incomes on the property as dividends to investors. Plus, your investment is liquid; you can sell your shares and cash out without having to deal with selling the building. And the corporation does all the management work for you.

Most likely you’ll be dealing in publicly-traded REITs. Accredited investors with a high net worth may be able to access private REITs — these trusts aren’t registered with the SEC and the upfront investment required is much higher.

How do you invest in REITs?

REITs can be part of a beginner investment portfolio. A publicly traded REIT only requires a few hundred dollars, and you can sell at any time. You’ll want an equity REIT (the most common kind) as opposed to a mortgage REIT, a more complex trust that deals in mortgages. If you want to wade into the real estate market without committing to property management, this is a good place to start.

To buy shares you’ll go through a brokerage firm, just as you would buying other stock.

Crowdfunding platforms

An increasingly popular option for small-time real estate investors, crowdfunding platforms are passive investments similar to REITs. But instead of going through a trust or corporation, investors pool their assets and match with interested real estate developers or sponsors. There are platforms for commercial and residential real estate.

Since these investments are illiquid — you can’t sell them easily — and depend on the variables of the real estate market, they can be riskier than REITs. But they can also get you dividends on properties you wouldn’t be able to access as an individual. You might have to wait longer for returns, but the returns tend to be pretty high.

How do you invest in crowdfunding platforms?

Many established platforms like Equity Multiple are only available to accredited investors—those with an income over $200,000 or a net worth of over $1 million.

But, for those who don’t have a net worth of at least $1,000,000 (a requirement to be an accredited investor), know that it’s still possible to get into the real estate crowdfunding game, too. Plenty of companies have much more flexible requirements for investors. 

Start with Fundrise and RealtyMogul

, two platforms that don’t require accreditation.

Your initial investment can be as low as $500. But note that dividends aren’t always quick. Both companies highly recommend that investors commit to the long haul (at least five years). Short-term investments are inherently risky, while long-term investments balance out your risk. 

Short-term and vacation rentals

What if you don’t want to go through the stock market or buy a property, but you’d still like to generate some real estate income?

Try renting out a room on a nightly or weekly basis. You can even rent out an entire home for short-term periods. The amount you’ll earn will vary depending on the local rental market. If you live in an area with high tourist traffic, whether the traffic is seasonal or year-round, you can really turn a profit. You don’t need a ton of cash to get started; just the extra space. And you’ll start seeing a cash flow pretty quickly compared to a stock investment.

Think of these rentals as a “side hustle” or part-time gig. You’re responsible for furnishing and maintaining the property and bringing it up to code, as well as communicating with renters.

How to get started in the short-term rental market

Start Investing In Real Estate - Airbnb

Lots of renters find it easier to go through a third-party website. Airbnb is the most well-known.

There’s also VRBO or Vacation Rentals By Owner. The website does lots of the management for you, like finding and screening tenant matches, providing some form of damage protection, and helping handle renter complaints.

If you’d rather handle each aspect of the process yourself, you can advertise locally through websites like Craigslist or go through a network of trusted friends.

Don’t forget to check your local laws to see what regulations you need to meet. Many cities and states are cracking down on the short-term rental market in response to rising housing costs. Laws may limit the amount of time guests can stay, for instance.

Purchase a rental property

Start Investing In Real Estate - Purchase a rental property

The residential real estate investor with time to commit can buy a property and become a landlord. This is a guaranteed monthly income, as long as you can find tenants, and it’s one of the most common ways to make consistent money in real estate. (You can buy and rent out a commercial or industrial property, too, but the upfront cost is higher and the management is more complex).

Residential properties may technically be passive investments but they require pretty active involvement. So make sure you’ve got the time as well as the money. Many landlords outsource building maintenance to management companies; others handle repairs themselves.

How to purchase a rental property

First, get to know your local real estate market. The better you know the neighborhood, the more likely you are to make a smart purchase and offer tenants a price that’s fair for them and competitive for you. Learn what kinds of tenants live in the area, who’s moving there, and how prices have changed over time.

How To Invest In Real Estate - Smart Way To Get Started - Roofstock

You can get started by going through Roofstock – the leading marketplace in single-family rental units. They make browsing for a home ridiculously easy. You can look through their catalog of homes and click on ones you like. You’ll be given important details like current rent, how highly the neighborhood is rated, and more.

The best part of Roofstock is that they sell homes that already have tenants in them. That means you’ll have an income stream as soon as you purchase a rental home.

Join a real estate investment group

Investment groups are one way to get into the residential real estate market without the hassle of active landlording. Like-minded investors pool their resources and buy residential properties, like apartment buildings or condos, through a larger company. In return for taking a cut of the rental income, the company handles maintenance and tenant management. Think of these investments as small-scale mutual funds.

Single investors can own individual units within multifamily housing. (The group itself becomes a legal entity with each member as a joint owner.) Since vacancy is always a risk with rental properties, many groups “pool” a portion of the rent so investors still earn some income even when their unit is empty.

Trade or “flip” real estate

Start Investing In Real Estate - Trade or "flip" real estate

After you’ve been in the real estate investment game for a while, you get to know what you’re doing. For investors ambitious enough to embark on construction projects, trading or flipping real estate can bring in big returns in just a few months.

Here’s how it works: an investor buys an undervalued residential property, renovates it, then sells it at a higher price. It’s possible to be a pure “property flipper” who leaves their purchase unrenovated and waits for the market to improve. Properties should already be in good condition for this to work.

Selling isn’t guaranteed, of course, and you’re still on the hook for the mortgage if you can’t get tenants or buyers. “House flipping” is best for seasoned real estate investors who know how to hedge their bets with the local market.

How to trade or flip real estate

First, get familiar with the construction and design basics and local building codes. Even if you aren’t doing the work yourself you’ll be managing the process as the owner. Then get busy estimating a renovation timeline, pricing materials, etc…it’s an active investment. Professionals suggest working with a partner, ideally, someone with a skill set you don’t have.

Be aware this type of investment comes with a pretty big risk. You can make lots of money in a short amount of time, but you might lose money if the market doesn’t go your way.

Real estate investing FAQs

The biggest bonus of real estate investment is the cash flow, or the monthly income investors make from rental properties after meeting all their expenses. Ideally your cash flow will increase over time, since rents rise with inflation but your mortgage payment stays the same.

Real estate is also a good way for a savvy investor to diversify their portfolio. The real estate market has its own whims, so it might perform well when the rest of the stock market isn’t.

You earn money from real estate in three ways: rent, appreciation, and loans.

Rent is where you’ll see most of your real estate earnings, whether you invest in commercial or residential property. How much cash you collect depends on many factors (local market, property type, whether you’re paying a management company or contractors, etc.).

Loans are passive investments where you (the investor/the REIT you buy shares in/the investment group you join) lend money to a real estate developer, then earn cash on interest payments. This is called “debt investing” in real estate lingo.

Appreciation is the increase in a property’s value over time. If and when you sell your investment, appreciation ensures you sell for more than what you originally paid. Investors who focus on appreciation profit, like property flippers, should be comfortable with risk – unlike with cash flow, there’s no guarantees.

Since investment options are diverse, there’s no specific sum to aim for; you can buy shares in some REITs for just a few hundred dollars. But real estate investment is best for people in good financial health who have the basics covered—retirement, emergency savings, debt management, and more.

Plan to put aside more money than you think you’ll need, especially if you’re going to be involved in property management and maintenance.

They’ll make your taxes more complicated for sure. Any money you earn from real estate gets taxed like other earned income. In 2018 the tax rate was around 39.6 percent for active investors and 43.4 percent for passive investors. If you profit from property appreciation, these profits are considered capital gains, and you’ll pay a capital gains tax. 

Deductions are where you really save. You can deduct certain real estate-related expenses like repair costs or property taxes. You’ll also want to take a deduction for depreciation – the process the IRS uses to determine the cost of a rental property over time. These deductions come with pretty strict regulations. The property should have a “determinable useful life” (which just means it will wear out eventually) and be expected to last more than a year.

Summary

Real estate investment can be exciting and lucrative, but it takes practice and a lot of money.

There are tons of options when it comes to real estate, so you’ll need to think through which investment would be best for you before signing on the dotted line.

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