When most people think about real estate investing they likely think of a few things: slumlords in huge cities and rich billionaires.
But the average investor should also seriously consider investing in real estate.
If you have no idea where to start – you’re not alone. There are many ways to get started as a real estate investor – some of them require as little at $500!
Below, I’ll break down the different types of real estate investments and who they’re best for. But let’s get started by talking about what the heck real estate investing actually is.
What is real estate investing?
Put simply, real estate investing is the purchase or sale of land and buildings to earn money. There are a few different categories of real estate:
- Residential real estate includes houses, apartment buildings, vacation properties, and anywhere else people live. This is typically the easiest area of real estate for a beginning investor to enter.
- Commercial real estate (CRE) involves office spaces, retail storefronts, or any building used for business purposes. It’s more expensive than residential real estate and you’ll manage more property. The best way for individual investors to get into CRE is to buy shares in a real estate investment trust — more on those below.
- Industrial real estate includes warehouses, storage units, and other large “special purpose” structures like car washes that generate sales.
How do you invest in real estate?
Before you pick your first investment, you should decide how much you’ll want to spend on a down payment. Real estate can be a risky business, so don’t invest any money you can’t afford to lose. Commercial property investors, for instance, should have around $50,000 ready to go. If you don’t have anywhere near that much, there are less pricey ways to invest.
Real estate can also be a significant investment of time. Fixing up a property isn’t easy, and even basic maintenance is a regular task you’ll have to keep up with. Some real estate investors outsource maintenance to management companies at an extra cost.
It’s a good idea to talk to a qualified attorney before making your first purchase. Holding investments through limited liability companies (LLCs) is a lot less risky than making an investment in your own name. If the investment fails, you want your assets protected, and you don’t want legal liability if you can avoid it.
Now that the disclaimers are out of the way, let’s look at your options.
Purchase a rental property
The residential real estate investor with time to commit can buy a property and become a landlord. This is a guaranteed monthly income, as long as you can find tenants, and it’s one of the most common ways to make consistent money in real estate. (You can buy and rent out a commercial or industrial property, too, but the upfront cost is higher and the management is more complex).
Residential properties may technically be passive investments but they require pretty active involvement. So make sure you’ve got the time as well as the money. Many landlords outsource building maintenance to management companies; others handle repairs themselves.
How to purchase a rental property
First, get to know your local real estate market. The better you know the neighborhood, the more likely you are to make a smart purchase and offer tenants a price that’s fair for them and competitive for you. Learn what kinds of tenants live in the area, who’s moving there, and how prices have changed over time.
You can get started by going through Roofstok – the leading marketplace in single-family rental units. They make browsing for a home ridiculously easy. You can look through their catalog of homes and click on ones you like. You’ll be given important details like current rent, how highly the neighborhood is rated, and more.
The best part of Roofstock is that they sell homes that already have tenants in them. That means you’ll have an income stream as soon as you purchase a rental home.
Real estate investment trusts (REITs)
Investing in a REIT isn’t that different from investing in a stock. As an investor, you give money to a trust or corporation which purchases a property. You’ll get a portion of the dividends as the property appreciates. REITs are bought and sold on most major stock exchanges.
This is the easiest way for a beginning investor to get into the commercial real estate world. It comes with a potentially high yield. Corporations payout at least 90% of their incomes on the property as dividends to investors. Plus, your investment is liquid; you can sell your shares and cash out without having to deal with selling the building. And the corporation does all the management work for you.
Most likely you’ll be dealing in publicly-traded REITs. Accredited investors with a high net worth may be able to access private REITs — these trusts aren’t registered with the SEC and the upfront investment required is much higher.
How do you invest in REITs?
REITs can be part of a beginner investment portfolio. A publicly traded REIT only requires a few hundred dollars, and you can sell at any time. You’ll want an equity REIT (the most common kind) as opposed to a mortgage REIT, a more complex trust that deals in mortgages. If you want to wade into the real estate market without committing to property management, this is a good place to start.
To buy shares, you’ll go through a brokerage firm just as you would buying other stock.
You Invest by J.P. Morgan is a great option to start investing in REITs. There is no initial investment requirements or fees. And once you have an account, you’ll be able to build your portfolio and manage your assets without fees too. If you have at least $500 to invest and want more advice about REITS, you can have experts create and manage your portfolio for you; this option comes with a 0.35% advisory fee.
An increasingly popular option for small-time real estate investors, crowdfunding platforms are passive investments similar to REITs. But instead of going through a trust or corporation, investors pool their assets and match with interested real estate developers or sponsors. There are platforms for commercial and residential real estate.
Since these investments are illiquid — you can’t sell them easily — and depend on the variables of the real estate market, they can be riskier than REITs. But they can also get you dividends on properties you wouldn’t be able to access as an individual. You might have to wait longer for returns, but the returns tend to be pretty high.
How do you invest in crowdfunding platforms?
Many established platforms like Equity Multiple are only available to accredited investors—those with an income over $200,000 or a net worth of over $1 million. But real estate investing is no longer limited to those who meet that criteria.
Crowdfunding opens opportunities to any interested investor. If you want to get into the real estate investment market, there are plenty of options.
One of those options is Streitwise, which lets you get started with as little as $1,000. Streitwise removes the middleman–brokers charging pricey fees–and lets you invest directly in their selection of expertly-vetted properties. The company founders have more than four decades in the industry, so you’ll know your investments are in good hands.
If you want to keep your initial investment low, Fundrise is a great option. You can build a starter portfolio for only $500, then upgrade to a core plan once you’ve spent $1,000. Fundrise’s investment strategy is based on real estate investment trusts (REITs), which are bundled investments in commercial properties.
RealtyMogul is a great option for those who have at least $1,000 to invest. With RealtyMogul, you contribute to REITs, with properties carefully selected for their earning potential. Non-accredited investors are limited to properties that have been made available to them, while accredited investors can choose from a wide range of REITS and individual properties, referred to as “private placements.”.
Note that dividends on crowdfunded properties aren’t always quick. Both companies highly recommend that investors commit to the long haul (at least five years). Short-term investments are inherently risky, while long-term investments balance out your risk.
Short-term and vacation rentals
What if you don’t want to go through the stock market or buy a property, but you’d still like to generate some real estate income?
Try renting out a room on a nightly or weekly basis. You can even rent out an entire home for short-term periods. The amount you’ll earn will vary depending on the local rental market. If you live in an area with high tourist traffic, whether the traffic is seasonal or year-round, you can really turn a profit. You don’t need a ton of cash to get started; just the extra space. And you’ll start seeing a cash flow pretty quickly compared to a stock investment.
Think of these rentals as a “side hustle” or part-time gig. You’re responsible for furnishing and maintaining the property and bringing it up to code, as well as communicating with renters.
How to get started in the short-term rental market
Lots of renters find it easier to go through a third-party website. Airbnb is the most well-known.
There’s also VRBO or Vacation Rentals By Owner. The website does lots of the management for you, like finding and screening tenant matches, providing some form of damage protection, and helping handle renter complaints.
If you’d rather handle each aspect of the process yourself, you can advertise locally through websites like Craigslist or go through a network of trusted friends.
Don’t forget to check your local laws to see what regulations you need to meet. Many cities and states are cracking down on the short-term rental market in response to rising housing costs. Laws may limit the amount of time guests can stay, for instance.
Join a real estate investment group
Investment groups are one way to get into the residential real estate market without the hassle of active landlording. Like-minded investors pool their resources and buy residential properties, like apartment buildings or condos, through a larger company. In return for taking a cut of the rental income, the company handles maintenance and tenant management. Think of these investments as small-scale mutual funds.
Single investors can own individual units within multifamily housing. (The group itself becomes a legal entity with each member as a joint owner.) Since vacancy is always a risk with rental properties, many groups “pool” a portion of the rent so investors still earn some income even when their unit is empty.
Trade or “flip” real estate
After you’ve been in the real estate investment game for a while, you get to know what you’re doing. For investors ambitious enough to embark on construction projects, trading or flipping real estate can bring in big returns in just a few months.
Here’s how it works: an investor buys an undervalued residential property, renovates it, then sells it at a higher price. It’s possible to be a pure “property flipper” who leaves their purchase unrenovated and waits for the market to improve. Properties should already be in good condition for this to work.
Selling isn’t guaranteed, of course, and you’re still on the hook for the mortgage if you can’t get tenants or buyers. “House flipping” is best for seasoned real estate investors who know how to hedge their bets with the local market.
How to trade or flip real estate
First, get familiar with the construction and design basics and local building codes. Even if you aren’t doing the work yourself you’ll be managing the process as the owner. Then get busy estimating a renovation timeline, pricing materials, etc…it’s an active investment. Professionals suggest working with a partner, ideally, someone with a skill set you don’t have.
Be aware this type of investment comes with a pretty big risk. You can make lots of money in a short amount of time, but you might lose money if the market doesn’t go your way.