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For most people, buying a home is a major life goal. And once that first home is safely in the rearview mirror, investing in real estate can give you the same adrenaline rush.
We’re willing to admit that investing in real estate may not be as thrilling as bungee jumping, getting a front-row seat at a Jonas Brothers concert or nailing the latest TikTok dance challenge, BUT it does come with its satisfactions – and it can benefit you far into the future.
Buying a property for investment can be a profitable way to plan for your future. Sadly, it’s not as easy as throwing cash at a building.
In many ways, an investment in real estate is a lot like picking a stock for your investment portfolio. The biggest difference is that real estate costs a lot more than your average brokerage-account investment, and it requires a bit more caution.
If you’re nervous about making a big investment, you’re not alone. Let’s keep it 💯 (and add interest) – real estate investing can be a gamble. But with the right information, resources and tools, you’ll be able to confidently dive into the depths of real estate investment without water wings!
What It Means To Invest in Real Estate
When you’re investing in real estate, you’re buying a property to generate income. This can look like buying a property to rent out, buying a property to fix it up and sell or even purchasing shares of a real estate investment trust (REIT).
In most cases, becoming a real estate investor requires a lot of money upfront, and it comes with no profit-making guarantees.
But, despite its risks, real estate investing is a popular option for several reasons:
- Retirement wealth: If you’re pretty savvy when it comes to real estate, it can be a great way to build financial security for the future.
- Passive, side income: Once a rental property is up and running, it can be an excellent passive income stream that generates predictable cash flow.
- Investment portfolio growth and diversification: Ever heard that saying about not putting all your eggs in one basket? That applies to investing, too. If all of your other investments are stocks and bonds, real estate is a savvy way to diversify.
- More money for other big purchases: Some investment opportunities give you small gains over a long period of time. But, under the right circumstances, you could generate big returns relatively quickly with real estate, making it a great way to fund big purchases.
Real estate investing can be an awesome opportunity – but it isn’t a one-size-fits-all kind of deal. Before you partner with a real estate agent, decide if you’re right for real estate investing – and if real estate investing is right for you.
Who Qualifies To Invest in Real Estate?
Before you hit the open-house circuit on your lunch breaks or spend them scrolling endlessly through home buying websites, ask yourself a few questions.
Are you …
- Willing to take some risks? Investing in real estate can be a gamble and, sometimes, investments won’t go as planned. If the prospect of steep losses raises your blood pressure, real estate investing may not be for you.
- Able to secure at least the standard 20% down payment? Most affordable mortgage loans target first-time home buyers or primary residences, not second homes or investment properties. If you’re getting into the investment game, you’ll need enough money to invest. (FYI: You can always refinance your loan for better terms later on.)
- Ready to be a landlord? You can’t be a landlord when it works for your schedule. Different states have different laws and requirements for landlords, and you may find yourself a lot busier than you expected. You’ll need to have a plan in place to deal with the inevitable leak or question about subletting. Otherwise, you could find yourself in a tough spot.
- In possession of very good cash reserves? What if you need to replace the roof on your rental home? What if you missed foundation problems during the home inspection? Real estate can come with huge hidden costs. You need to have your safety net secured so you don’t jeopardize your other sources of income and savings.
If you answered “yes” to all of these questions, you may want to give real estate investment some serious consideration.
7 Key Ways To Invest in Real Estate
There’s no “right way” to get started in real estate investing. Like trying on a new pair of jeans, you’re going to have to try a few options to see what fits your risk tolerance, your finances and your goals.
You can start small to test the waters, or you can dive right in with higher-maintenance or more expensive options and learn on the fly.
There is no one way to get involved in real estate investing, and there are certainly more than seven ways. We chose these seven because we think they’re the most accessible ways to enter the real estate investment game.
1. Join real estate investment groups (REIGs)
Real estate investment groups (or REIGs) are small businesses that take a group approach to real estate investing. Instead of going out there to search for a property and buy it, you’d buy a share of a property from the REIG.
A REIG can be a good entry point into real estate investing because it frees you from the day-to-day responsibilities of being a landlord, and it allows you to assume little personal liability. You’ll experience a loss if an investment goes sideways, of course, but only part of the loss.
🚨: Not all REIGs are created equal. Fully research the REIGs you’re interested in. You’ll want to know things like how earnings are distributed. And you’ll want to make sure that you’re joining a reliable, reputable group.
2. Join real estate limited partnerships (RELPs)
Real estate limited partnerships (or RELPs) have both general and limited partners, which can give investors more ownership over group activities than REIGs.
RELPs usually invest in expensive properties. So, this kind of opportunity is usually best for high net worth investors with a healthy tolerance for risk. Like the REIG, you likely won’t be doing any day-to-day property management – most RELPs outsource those responsibilities – but you’ll have a louder voice at the table.
Before handing over any money, make sure the groups you’re considering are responsible, informed and in tune with the local market. The last thing you want to do is join a RELP run by armchair investors with no strategy.
3. Buy REITs (real estate investment trusts)
Want all of the fun of real estate investing without the stress of dealing with property? A real estate investment trust might be the right choice for you. REITs are more like mutual funds than property purchases. You purchase shares in a REIT, sit back, relax and let the fund manager do all the dirty work.
REITs are a great option for anyone who wants to diversify their investment portfolio with real estate but doesn’t want to deal with traditional real estate transactions. Unlike some REIGs and RELPs, there are minimal hoops to jump through with REITs.
Many REITs are openly traded on the stock market, and shares can be purchased through your broker. In this scenario, you’ll be a small fish in a huge pond, with virtually no say in how the REIT does business, but you’ll shoulder 0% of the work.
4. Try out an online real estate investing platform
Crowdfunding can be a great way to fund a new product idea or raise money for medical bills. But did you know that it’s also a gateway into real estate investing?
Many online real estate investing platforms allow users to crowdfund property buys or development projects. These platforms let you open an investment account, buy into funds, invest directly into individual projects and create a portfolio based on your financial goals.
If your interests trend toward commercial real estate, this is the best available option out there. You’d finally get your chance to build a skyscraper!
Like REITs, you won’t be directly involved in real estate decisions. But, if you prefer watching profits roll in over hiring a general contractor for a fix and flip, that might not be a bad thing.
5. Flip a house
If HGTV ratings are any real measure, flipping houses is pretty popular – which makes it an obvious option in the real estate investing game. Unfortunately, it’s not always as seamless and as easy as it looks on “Property Brothers.”
Fixing and flipping requires buying a house, making necessary repairs and upgrades and then selling the house (hopefully at a profit). But there’s a lot more to it.
You need to know how to properly value a home, determine which property improvements are best on both functional and aesthetic levels, estimate the cost of planned improvements and find the right resources to get the project turned around pronto. If any of your estimates are off, you could find yourself investing time and money for minimal profit. Or, worse yet, no profit at all.
This option is best for investors with some real estate and home-improvement know-how, high risk tolerance and a willingness to get down and dirty.
Many home flippers buy property as their primary residence and live in the home while they’re rehabbing. You’d be roughing it while you were making serious improvements, but this is a good option for people who can’t afford the two mortgages that would come with the purchase of a second home.
6. Rent out a room in your home
Not sure about buying a property, but you’ve got an extra room in your home or in the home you’re fixing up? Well, why not start there?
For those of you with a lot of house and minimal property demands, renting out a room or suite can be a great way to get started in the rental market and start generating some rental income.
You’ll get hands-on experience with a single renter in a space you know well, which can be a good way to ease right into the landlord game.
Before putting a “for rent” sign in the window, get familiar with the area’s tenant laws – and commit to following them. Once you hand over the keys to your new renter, you can’t randomly decide to kick them out after a few months because being a quasi-landlord wasn’t as much fun as you hoped it would be.
7. Go big and rent out an entire property
If you’re a “go big or go home” kind of person, buying a second property to rent out could be an option. This option requires a large upfront money investment, and lenders don’t always offer the same mortgage terms for a second home.
As the landlord, all the upkeep and property maintenance will be your responsibility. And the same thing goes for any evictions or other potential headaches if your tenants turn out to be a bad fit. Renting out an entire property can take a lot more day-to-day work than most people realize. Again, renting out a property is a lot of work. Be sure that you’re up to it before you take the plunge.
If you’re ready to be a landlord and you’re connected to a skilled network of professionals and resources, you could end up with a steady stream of passive income.
Invest in Research and Grow Future Profits
There are lots of ways to invest in real estate and many of them don’t involve buying property. No matter which path you choose, invest plenty of time in doing your research. Grow your knowledge into profits that will make your present and future financial life flourish.
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The Short Version
- Real estate investing can be an accessible and fun way to build a portfolio for the future
- From buying a property to rent out to buying a fixer-upper to flip for a profit – there are multiple ways to win in the real estate investment game
- There's no “right way” to invest in real estate. Do your research and identify your ideal investment style before you get started