6 Simple Ways to Invest in Real Estate
There are countless reasons to invest in real estate. This form of investing is considered low-risk because there will always be demand for people who need housing. You can hold on to your real estate investments for several decades or sell your investment for a profit within a few years. And, unlike stocks and bonds, you can live in your investment if you need to.
There are multiple ways to invest in real estate – regardless of your budget and financial know-how. Here are a few options to consider if you want to start growing your wealth.
Long-Term Rental Properties
When most people think about real estate investing, they picture rental properties. In this case, you purchase a house, townhome, or condo and then rent it out to long-term tenants who agree to a lease. The rental will provide a form of passive income and you can eventually sell the property for a larger payout in the long run.
While this seems like an easy investment option, rental properties aren’t hands-off projects. You will need to set aside time and money to maintain your rental. This could mean stopping by to mow the lawn or collecting rent and vetting potential tenants. If there are disputes between your tenants and the neighbors, you will be called to settle the issue.
Additionally, just because you are earning passive income in the form of rent doesn’t mean you can quit your day job. Many investment property owners use rental income to cover basic expenses. For example, the majority of the rent you collect will cover the mortgage payments and property taxes you owe on the property. You also might have to pay a rental management firm if you hire one and set aside funds each month to cover repairs and “dead periods” when you are in-between tenants.
This information isn’t meant to scare you, but rather to help you get a clear picture of your investment. In 1992, the median home price was $121,500. In 2022, the median home price was $454,900. This is a $333,400 increase over 30 years. Understand the work and financials behind rental properties before you buy one.
Short-Term Vacation Rentals
Another popular way to invest in real estate is to buy property in a desirable area and then turn it into a vacation rental. If you have the ability to buy a vacation home, you can visit the beach or lake whenever you want. When you aren’t there, you can rent out the house on websites like Airbnb and VRBO.
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This is another example of how you need a clear personal finance picture before you move forward with a real estate investment. You will need to understand the cost of managing the vacation home and the fees associated with renting it out. For example, you might need to pay a property manager and cleaning company to visit the house the day after any guests check out. You also need to know if these homes are legal in your desired area.
Fortunately, there are many online guides and tools to set a budget for your vacation home to learn whether it will be profitable. The main risk is that something will happen to your rental property where you cannot accept tenants and need to pay for all of the costs yourself.
This is another hands-on option for real estate investing. Many HGTV shows make home flipping seem glamorous. You can spend your day picking out paint colors and cabinet fixtures in order to turn a drab house into a desirable home. However, there is a lot of strategic planning and financial math that go into this type of real estate investment.
First, you need to find a property that you think is a good investment. Flippers look for undervalued properties that they can buy for low prices and resell quickly. Then you need to track exactly how much work needs to be done and what the cost will be. Once the house is fixed up, you can try to sell it for a profit.
This investment can fail if you spend more money buying and repairing the property than you can sell it for. Even if you turn a small profit, you might get hit with a capital gains tax that eats into your returns.
Fortunately, there are options to turn a profit if you aren’t sure your flipping project will work out. You can always turn the house into a rental property until the residential real estate market becomes more competitive. The monthly payments from tenants can help you cover your costs until you sell the house for a profit.
Real Estate Investment Trusts (REITs)
Not everyone has the budget or the time to buy a second home and turn it into a rental property. Fortunately, it is possible to get into real estate investing with only a couple hundred dollars (or less) in your pocket.
Real estate investment trusts pool money from investors and use the funds to buy real estate. For example, one real estate investment trust might specialize in buying and managing apartment complexes across the United States. Another one might buy commercial properties. The trust collects rental income from the properties it owns and collects profits from the sale of specific locations. These profits are then shared with the real estate investors.
REITs that buy and manage properties are usually called Equity REITs but there are also mREITs (mortgage REITs) that you can invest in. These investment trusts provide backing for mortgages and work closely with lenders to provide financing. They profit from the interest on the loans.
REITs are one of the easiest ways to get into real estate investing because you can easily buy into them on the stock market. They are often considered a low-risk form of investment because a single REIT might have a diverse portfolio of properties that each have different values and opportunities.
Real Estate Mutual Funds
Another way to invest in real estate is through mutual funds. A mutual fund is a portfolio of potential investments developed by financial experts. In the stock market, investors might buy into a mutual fund that consists of companies from the energy, retail, automotive, and technology sectors. These funds are considered low-risk because it is unlikely that every company across a variety of industries would be affected negatively by market forces.
Real estate mutual funds are similar. They are funds that consist of several different types of real estate investment trusts and companies. In fact, many mutual funds in real estate buy into several different REITs. This way, if a REIT that focuses on commercial real estate has a poor-performing quarter, another REIT in the portfolio can pick up the slack and the fund will still provide dividends to investors.
If you are interested in REITs and real estate mutual funds, talk to a financial advisor. They can learn about your risk levels (whether you prefer safer or more aggressive options) and your long-term goals. They might be able to recommend a few funds that meet your real estate investing needs.
Real Estate Syndication
There are a few lesser-known ways to invest in real estate that might be a good way to build wealth. With syndication, a group of people works together to buy land and build a property that can be used to collect rental income and drive future profits. Syndication is often used to build commercial real estate and multifamily properties.
For example, a group of 10 people might split the cost to buy land and build an apartment building with 20 units. If the project costs $800,000 then each person would contribute around $80,000. (Some might buy in more than others depending on what they can afford.) As tenants move in and start paying rent, the profits are distributed to the investors, who can start earning their money back. Eventually, if the apartment complex sells for $2 million, the investors will all collect their returns on the sale.
Entering the real estate market with multiple partners can reduce your overall risk. However, there are still drawbacks to this form of real estate investing. First, all of your investment is in one physical property. Even if insurance covers the development, there still could be problems with the building that delay or eliminate your profits in the short run.
Next, it is hard to liquidate your investment into a syndicated property. You will either need to be bought out by the other investors or find someone to take your place.
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On a small scale, you might be able to get into syndication through crowdfunding. There are multiple online real estate platforms that allow you to buy into projects for a few hundred dollars. You can also receive dividends within a short period of time.
Decide Which Real Estate Investing Options Are Best for You
You don’t have to buy rental properties and office buildings to become a real estate investor. It is possible to buy into real estate investment trusts (REITs) and use online real estate platforms to grow your wealth. There are a variety of real estate investments you can choose based on your budget, risk tolerance, and timeline.
First, talk to a financial advisor. They can go over your potential real estate investments and even put you in contact with qualified real estate investors. If you want to start investing in physical properties (as opposed to funds) contact a real estate agent. A Realtor can help you find potential properties that could work for you.
To find a Realtor in your area, turn to the professionals at FastExpert. You can find top real estate agents who know how to work with investors. Our free service can put you on the path toward reaching your real estate goals.