At some point on your journey through passive income and financial independence, you'll think about investing in real estate.
Most people dream of real estate investing but never take any concrete steps to achieve it. Most people never invest in real estate because of a few things:
- It's time-consuming to manage a rental property (or do flips).
- A lot of capital is needed to get started.
- The perceived risk of real estate doesn't outweigh the returns.
What if I told you there are ways to invest in real estate without spending all day working on them, needing a ton of cash, and without taking huge risks?
This isn't a "get rich with real estate with no experience and no money" type article. But, instead we're going to talk about real estate as a side hustle business rather than as a full-time gig..
If we can overcome those 3 objections, most people would actually invest in real estate, which is a good thing because real estate historically beats the stock market.
Real Estate Business vs Investment
The first thing to realize is that real estate is an investment, but it's also a business. I explain this in a lot more detail in this article. So, we need to differentiate these two things.
The business side of things include:
As you can see, each one of those items is actually part of a business for someone else. That's why people find real estate to be time-consuming, because they're actually running 4 or 5 different businesses related to it!
The investment side of real estate is a little different. Investing includes the following:
Investing in the stock market isn't much different. The steps to investing in the stock market is almost identical.
So, the actual investment part of real estate is just as time-consuming as investing in stocks. Since time should not really be a factor in your decision to invest in real estate, let's move on to the next one - capital requirements.
Part-Time Real Estate Investing
There are a ton of ways to invest in real estate, and each will have different time requirements and minimum amount of money required. From easiest to hardest:
Let's go through each type of investing, from least involved to most involved.
Crowdfunding Real Estate
(minimum Investment $500)
Real estate crowdfunding is a great way to invest in real estate without being directly involved. It's also the newest game in town which makes me like it a lot.
A super quick explanation is that real estate crowdfunding allows a group of investors to pool their money in a project and share the profits. This has existed in different forms for centuries, but crowdfunding is a bit different.
For the last 100 years, it was illegal for developers to openly solicit investors for their funds. The developer needed to have a "substantive relationship" with the investor, whatever that means.
Also, deals were mostly excluded to accredited investors - people earning over $200k ($300k if married filing jointly) or who have over $1 million in net work (excluding their personal residence). So, the average person was not even allowed to invest!
In 2012 with the passing of the JOBS act, these lucrative deals were made available to average investors for the first time.
A Little More Detail on Crowdfunding
a 506(c) offering allows the capital raiser to openly solicit their real estate deals, but they are limited to accredited investors only. Additionally, there is an additional level of diligence required to verify the accreditation status of the individual.
Regulation A+ allows the capital raiser to generally solicit funds from non-accredited investors, but it is much more expensive than a 506(c) offering. So, these offerings tend to be similar to real estate funds or REITs where they pool a large amount of capital and buy a lot of different properties under the fund.
Here is a more detailed explanation of how real estate crowdfunding works.
Different crowdfunding platforms specialize in different types of offerings, but here are my favorites.
Fundrise is Great for Non-Accredited Investors
As we defined above, you must earn $200,000 (or $300k if married) for the last couple years OR have over $1m in net worth (excluding your primary residence) to be considered accredited.
Most crowdfunding sites require you to be accredited in order to use them because a 506(c) offering is much cheaper.
Fundrise was one of (if not THE) first to use Reg A+ to create a pooled investment platform for non-accredited investors. It means you can invest as little as $500 into real estate with less risk than buying into a private REIT.
EquityMultiple is Better for Accredited Investors
On the other hand, if you have the capital or income to be considered accredited, I'd rather put my money in Equity Multiple.
It's a bit different because you actually select the project to invest in rather than investing in a REIT. The minimum investment is higher (usually around $5k or $10k) but the return potential is higher as well.
So, if you're looking to choose the specific project and can afford the higher minimums, Equity Multiple is a great option.
RealtyMogul Has it All
Realty Mogul really takes the best from both worlds. They have funds for non-accredited investors as well as the ability for accredited investors to put their money directly into specific assets.
You can invest for as little as $1,000. They do have a little higher fees, but their average returns appear to be higher than either Equity Multiple or Fundrise.
Real Estate Investment Trusts (REITs)
(minimum Investment $10/share?)
A REIT, or real estate investment trust, is a word for an amazingly diverse type of investment. A REIT is required to distribute 90% or more of its earnings to shareholders and also pass a number of other tests in order to maintain its status as a REIT.
They invest in everything from multifamily to industrial property.
There are some exchange-traded REITs where you can theoretically buy just 1 share but these have lower returns than you could get privately. But, some private REITs have very large minimum investments and some have exorbitant fees if you don't watch out.
The great thing is you can simply use your brokerage account to buy an exchange traded REIT. So, in theory you can buy any REIT, even as low as $10 per share or less. But, like I said, the returns are a bit lower because of all the costs associated with being publicly listed.
Either way, it does help increase diversity and decrease volatility in your portfolio.
There are 3 types of REITs – Private REITs, public exchange-traded REITs, and public non-traded REITs.
Public Exchange Traded REITs
These meet all the SEC requirements to be listed on a stock exchange, but they are still a REIT.
The benefits of these are they are highly liquid (a rare quality in real estate). The drawback is they have higher fees and most likely have lower returns due to the SEC regulations.
These are the most popular and least risky form of REITs.
Private REITs are not listed on an exchange. They also don’t need to meet the burdensome requirements of the SEC.
In theory, the returns can be much higher due to the reduced regulatory burdens, but there are a lot of bad private REITs out there with massive fees.
The lack of liquidity can also make it very difficult for many investors to get their money out of a
Public Non-Traded REIT
These REITs meet the same regulatory requirements of their exchange-traded brethren, but they are not traded on an exchange.
Investors are more confident in them because they have to meet a higher regulatory and disclosure burden, but they are also stuck with a non-liquid investment. The benefit is that they may be less volatile since the value is not in any way related to the broader stock market.
Disclaimer on REITs
FINRA has a pretty big disclaimer about private and non-traded REITs and I need to make sure all the readers are aware of it. Non-traded REITs come with significant risk because they are illiquid, often have a lot of fees buried in their 150+ page offering curricula, and are very complicated investments for normal investors.
The biggest drawback of non-traded REITs is they don’t have a specified selling period like most syndications do. Once the money is in, you don't know when you will get it back.
Make sure you understand what you’re getting into before buying into a REIT.
We discussed crowdfunding in the first section and syndications are very similar.
Syndications are how people "crowdfunding" for the last 100 years, but you had to have a good relationship with the person and generally they needed to be accredited.
A syndication generally provides better returns than a crowdfunding platform because you are cutting out the middle man. But, you need to spend a lot of time networking, doing diligence on the deal sponsors, and doing diligence on the deal.
Additionally, the minimum investments are generally $50,000 or more. So, you need a substantial amount of money to get into the game. Many deal sponsors set minimums at $100,000, but some are as low as $25k (I've personally done a syndication with a $25k minimum).
Syndications are a great way to invest in real estate on a part-time basis, earn higher returns, and still do less work than buying it yourself.
Syndications as an Active Investment
Alternatively, if you are an experienced investor you can sponsor a syndication. While some of the money you earn can be considered investment income, most of it will be considered business income.
So, if you are looking to grow a side hustle business in real estate without a massive capital investment, syndications are a way to get there.
Buying Real Estate Directly
(minimum Investment $10,000+)
Buying Your Own Real Estate
Minimum Investment - $10,000+?
It's hard to put a dollar amount on it, because it depends on your loan, property price, and how much you have to put down. In generally, probably around $10k or more.
There are a ton of strategies to getting started in real estate, but one of the most popular is doing a live-in flip.
The goal of this strategy is to buy a home that is livable (and therefore can be financed) but one that requires a lot of work to update and bring into the modern decade. Work could include upgrading the kitchen/bathrooms, adding hardwood floors, finishing a basement/attic, or building an addition.
This isn’t for the faint of heart because you’ll essentially live in a construction zone for a while. However, the potential for tax-free profit is huge.
Approach a live-in flip exactly the same way as a standard flip.
The next thing is to estimate your rehab budget. Do the work yourself to earn some sweat equity, if you have the skills. If not, get a good contractor in there to give you a price.
The offer you make should account for some profit. Take the ARV and subtract your profit goal and also subtract the repair costs. The total is your best offer.
Tax Benefits of Flipping
The great benefit of this strategy is the tax advantages. A typical flip is subject to all kinds of taxes on the profits. After 3 years of residency at the home, you’ll get most or all of the taxes wiped out since profits on homes are not taxed up to a certain amount. I’m not a tax professional, so please consult one before buying or making offers.
This strategy is great because it’s pretty low-risk. If the numbers don’t work and you can’t sell for a profit, simply stay in the home! You need a place to live in anyhow.
If you can sell for a nice profit, sell it and buy your next live-in flip. You could put more money down and have a lower mortgage or you could invest the money into the stock market or other investment.
If you decide to purchase a rental property, the only way to keep it passive is to use some sort of management.
I hate the idea of giving away 10% of the rent to a property manager, so I recommend using a service such as Avail.
Avail.co is totally free to start and it's perfect for new landlords. Basically, it automates rent collection, work-orders, screening, and a bunch of other stuff that is very time consuming.
You'll still have to call the electrician or plumber whenever there is a problem, but it's a great middle ground instead of paying all the money for a property manager.
But, Real Estate is Risky, Right?
Yes, it's true. All investments are risky and real estate has its share of risks. There is no way to sugarcoat it, and anyone who does is doing a disservice.
Stocks, real estate, and any other investment are risky and you can lose some or even all of your investment.
Investment is all about balancing risk and reward. The key is to accept well thought out risk then mitigate those risks to maximize your profit potential.
To reduce risk in the stock market you may diversify across 4 or 5 sectors, invest in reputable companies with a track record, and dollar cost average.
Real estate is no different.
Invest in Different Types of Real Estate in Different Markets
Most people think about investing near wherever they live, this may not actually make much sense. The best thing to do is find a market where it makes sense to invest, then start investing there.
You should also pick more than one niche to invest in. The fact is, there are around 800 different niches in real estate, which means there is no reason you should be focused on just one kind of real estate.
Invest With Reputable Companies
Not only will you get that diversification, but you'll get some peace of mind knowing you're working with someone really experienced.
Alternatively, if you want to invest more passively with someone local, make sure they are very experienced and have a track record of doing these kinds of deals and handling investor funds.
It's Never The Right Time to Invest in Real Estate
Back in 2009, 10, and 11, everyone said the economy was crap, bad time to invest. For the last several years I've been hearing the economy is too hot, bad time to invest.
So, apparently, it's never the right time to invest in real estate!
I think the opposite is true. Since the time is never right, the time is always right. But, only if you do it right.
Focus on investing smaller sums of money every year rather than spending all of your money up front. By doing this, you are not as exposed to massive swings in the market.
You can put a few hundred bucks per month into something like Fundrise. If you do it continuously for years, you'll have a huge amount of money invested in real estate without even trying.
Alternatively, if you had a lot of money to invest, try to resist the urge to dive in.
If you had enough money to invest in 5 deals, maybe you investing in one deal every 6 months to average it out.
Regardless of how you do it, if you apply the principle of dollar cost averaging to real estate, you should do better than if you just dump all your money in randomly.
What's Holding You Back?
Please leave your comments below. I'd love to know what else is holding you back from investing in real estate!