The three most common ways people invest in real estate are through homeownership, REITs and ETFs, and direct investment.
How to Invest in Real Estate
There are a ton of different ways to invest in real estate. In fact, I generally say that it’s possible to be successful in ANY niche in real estate.
…Just not all of them.
So, figure out how you want to invest, then focus on that. Don’t try to do everything or you’ll find yourself not doing well at any of them.
Invest in Real Estate With Home Ownership
The true costs of owning a home are often forgotten until after closing on the property. Owners should remember they need to spend anywhere from 1-2% of the value of the property on maintenance and upkeep.
Home ownership definitely has much lower returns than the stock market, in fact, returns are near 0% once inflation and maintenance are taken into consideration.
But there is one way to turn your home into an investment, and it’s called doing a “live in flip” or also “house hacking.”
You start by buying a home that is a bit run down, but it’s in a nice neighborhood. The goal is to do improvements over the next 2-3 years then you can step up to something nicer, or do it again.
Once you’re done with the work and ready to go, you can either sell it and pocket the profits (usually for no tax, as your personal residence is generally not taxed). You can also keep it and use it as a rental property if you’d like.
I started in real estate with the stepping stone approach. My first property was a 3-unit multifamily near my grad school. We rented two units and lived in one for free.
After a couple of years, we moved to a townhouse and rented out all three units. Then, a few years later, we moved out of the townhouse and into something nicer.
Each time we moved, the rent on the previous unit paid most of the cost of the new one. So, we were never coming out of pocket very much to make the transition.
There are a lot of different strategies to use your home to invest, here is another.
Airbnb and Short Term Rentals
Another way to turn your house into a cash machine is to rent out individual rooms. This is an especially useful option for younger people or families without children.
Buy a house with more bedrooms than you really need. You can even convert an attic or basement into a bedroom.
Then, get some roommates and rent out each room. Their rent will most likely cover all of your mortgage and utilities.
Another option is to use Airbnb. If you’re in a good area that people need to visit, you can earn a lot more per month than having a normal roommate.
Crowdfunding Real Estate
This is relatively new, but it’s becoming bigger and bigger every year.
Basically, you are investing a small amount of money into a larger deal and sharing in the risks and the rewards.
While people have been doing this for a hundred years in a more private way, it is very new to the internet.
The benefit is the best crowdfunding platforms do a lot of due diligence for you and that helps weed out the bad deals. Some of the platforms are limited to accredited investors, but others accept both accredited and non-accredited investors.
In case you are wondering, an accredited investor is someone who earned $200,000 ($300k if married) and has a reasonable expectation to continue earning that. Also, a net worth of $1m or more (excluding your primary residence) also qualifies you.
A couple sites let you invest in some deals for as little as $1,000 which is awesome. Most sites require $5,000 – $10,000 which is still good. A few require $20,000 or more which is more in line with what a standard syndication requires.
REITs and ETFs
A REIT, or real estate investment trust includes a huge array of offerings and can include investments in every niche in real estate. The requirement to be a REIT is it must distribute 95% of its earnings to shareholders.
It also has to pass a number of other tests in order to maintain its status as a REIT.
With exchange-traded REITs, you can theoretically buy just 1 share. but there are also private REITs with massive minimum payments which is why the minimum investment has a question mark next to it.
The great thing about a REIT is you can easily get some exposure to real estate in your portfolio. Simply buy into it with your brokerage account just like you would with any other stock or bond.
You’ll find that you could earn better returns if you invested directly into real estate yourself, but there is a tradeoff between time/convenience as well as the effort required.
Though you technically may own a portion of the real estate, you have absolutely no say in how it operates. You can’t decide on what real estate you buy or how it’s managed. You can only vote with your feet and sell your shares and move on.
There are 3 types of REITs – Private REITs, public exchange-traded REITs, and public non-traded REITs.
Directly Invest in Real Estate
People are afraid of this because they don’t want to “fix leaky toilets” or any number of other excuses.
Who wants to fix toilets? I don’t even think plumbers like to fix them.
The reality is direct investments can be as active or passive as you want them to be. You can actively manage your property, or go a more passive route.
So, you can fix toilets if you are hands-on, or you can just hire other people to do it.
The greatest benefit to directly investing in real estate is that you can leverage your returns. Also, you can find way better deals to invest directly in than in any other form of investing.
Additionally, you can choose exactly what you want to invest in and what you don’t want to invest in.
Lastly, you can decide which properties to invest in and which ones to skip. You can also decide how to deal with problems or let someone else figure it out. You have a high degree of control.
The key to this is to first, determine your niche in real estate.
Once you have that figured out, you need to learn the ins and outs of real estate.
Then, it’s time to make offers and buy some property!