How to Invest in Real Estate: 5 Ways to Get Started
Real estate investments can add diversification to your portfolio – and getting into the market can be as easy as buying a mutual fund.
If you’ve ever had a landlord, you probably don’t dream of becoming one: Responding to calls about oversized bugs and overflowing toilets doesn’t seem like the most glamorous job.
But done right, real estate investing can be lucrative, even flashy. It can help you diversify your existing investment portfolio and provide an additional source of income. And many of the best real estate investments don’t require showing up for every tenant viewing.
The problem is that many new investors don’t know where or how to invest in real estate. Here are some of the best ways to make money in real estate, ranging from low to high maintenance.
The best ways to invest in real estate
- Buy REITs (Real Estate Investment Trusts)
REITs allow you to invest in real estate without the physical assets. Often compared to mutual funds, these are companies that own commercial real estate such as office buildings, retail spaces, apartments, and hotels. REITs tend to pay high dividends, making them a common retirement investment. Investors who do not need or want regular income can automatically reinvest these dividends to grow their investment.
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New investors may want to stick to publicly traded REITs, which you can purchase through an online brokerage.
Are REITs a good investment? They can be, but they can also be varied and complex. Some are traded on the stock exchange like a stock, others are not listed on the stock exchange. The type of REIT you buy can be a big factor in the risk you take, because non-publicly traded REITs don’t sell easily and can be difficult to value. New investors should generally stick to publicly traded REITs, which you can purchase through brokerage firms.
For this, you will need a brokerage account. If you don’t already have one, opening an account takes less than 15 minutes and many companies require no initial investment (although the REIT itself likely has a minimum investment).
» Do you want to get started? Check out our guide to opening a brokerage account
- Use an online real estate investment platform
If you’re familiar with companies like Prosper and LendingClub, which connect borrowers with investors willing to lend them money for various personal needs, like a wedding or home renovation, you’ll understand real estate investing online.
These platforms connect real estate developers and investors who wish to finance projects, either through debt or equity. Investors hope to receive monthly or quarterly distributions in exchange for taking significant risk and paying a fee to the platform. Like many real estate investments, these are speculative and illiquid – you can’t easily unload them like you can a stock.
The catch is that you may need money to make money. Many of these platforms are only open to accredited investors, defined by the Securities and Exchange Commission as people who have earned more than $200,000 ($300,000 with a spouse) in each of the last two years or have a net worth of $1 million or more, not including their primary residence. Alternatives for those who cannot meet this requirement include Fundrise and RealtyMogul.
» Ready to invest? The best real estate financing platforms
- Consider investing in rental properties
Tiffany Alexy didn’t intend to become a real estate investor when she purchased her first rental property at age 21. As a senior in college in Raleigh, North Carolina, she planned to attend graduate school in the area and figured buying would be better than renting.
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Real estate hacking allows you to live in your investment property while renting out rooms or units. ”
“I went on Craigslist and found a four-bedroom, four-bathroom apartment that was set up like student housing. I bought it, lived in one room and rented the other three,” says Alexy.
The setup covered all her expenses and earned her an extra $100 a month in cash—far from a pittance for a grad student, and enough for Alexy to catch the real estate bug. Now 27, she has five rentals and is a broker and owner of Alexy Realty Group in Raleigh.
Alexy entered the market using a strategy sometimes called “house hacking,” a term coined by BiggerPockets, an online resource for real estate investors. This essentially means that you occupy your investment property, either by renting out rooms, like Alexy did, or by renting out units in a multi-unit building. David Meyer, the site’s vice president of growth and marketing, says property hacking allows investors to purchase a property with up to four units while still receiving a home loan.
Of course, you can also buy and rent an entire investment property. Find one whose combined expenses are less than the amount you can charge in rent. And if you don’t want to be the person who shows up with a tool belt to fix a leak — or even the person who calls that person — you’ll also need to pay a property manager.
“If you run it yourself, you’ll learn a lot about the industry, and if you buy new properties, you’ll have more experience,” Meyer says.
» Related: Understanding the Different Types of Real Estate Investments
- Consider flipping investment goods
It’s HGTV come to life: You invest in a cheap house that needs a little love, renovate it at minimal cost, and resell it for a profit. Called “house flipping,” this strategy is a little more difficult than it looks on TV.
“The risk is greater because a lot of the calculations behind house flipping require a very precise estimate of the cost of repairs, which is not easy to do,” Meyer says.
His suggestion: Find an experienced partner. “You may have capital or time to contribute, but you find a contractor who is good at estimating expenses or managing the project,” he says.
The other tipping risk is that the longer you hold the property, the less money you make because you’re paying a mortgage without bringing in any income. You can reduce this risk by living in the house as you renovate it. This works as long as most updates are superficial and you don’t mind a little dust.
» Which is best? Real estate vs. actions
- Rent a room
Finally, to dip your toe into the real estate waters, you could rent out part of your home through a site like Airbnb. It’s house hacking for the commitment-phobe: You don’t have to take on a long-term tenant, potential renters are at least somewhat pre-screened by Airbnb, and the company’s welcome guarantee provides protection against damage.
Renting a room seems much more accessible than the fanciful concept of real estate investing. If you have a free room, you can rent it.
Like any investment decision, the best real estate investments are those that best serve you, the investor. Think about how much time you have, how much capital you’re willing to invest, and whether you want to be the one to take care of household problems when they inevitably arise. If you don’t know how to DIY, consider investing in real estate through a REIT or community financing platform rather than directly in real estate.
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