How to Invest in Real Estate
Real estate investing is both lucrative and sustainable for generating long-term wealth. Many of the world’s richest people built their wealth by understanding how to invest in real estate — and you can, too.
Whether you dream of creating a real estate empire or increasing your bank account, this guide will help you learn how to invest in real estate. Read on to learn the different ways to invest in real estate and what opportunities can come from running this type of business.
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Ways to Invest in Real Estate
Real estate investing has become increasingly popular over the last 50 years or so. Whether you want to be hands-on in house flipping or rentals or prefer a hands-off approach, there are several ways for you to start investing in real estate.
Here is a comprehensive list of how to invest in real estate:
- Rental Properties: Offers stable monthly income and can either require hands-on involvement or be completely hands-off with a property manager. Rental properties are excellent for building net worth while generating cash flow.
- House Flipping: Requires knowledge of property values and repair costs to accurately assess and flip a property. House flipping has the potential for large returns in a short period of time.
- Wholesaling Real Estate: Requires little to no upfront investment but requires knowledge of property values and a strong real estate network.
- Note Investing: Involves either functioning as the bank and creating a note, or more commonly, purchasing mortgage notes from another bank or note investor. To make a profit, you’ll ideally purchase the note for less than the outstanding value and then collect interest and loan repayments.
- Commercial Real Estate: Requires greater knowledge and capital investment but generates stable, long-term, and high returns.
- Real Estate Investment Groups (REIGs): A way to invest in a fully managed unit or units within a real estate investment property or properties. It offers a secure, reliable return on investment.
- Real Estate Investment Trusts (REITs): A way to invest in real estate through a trust. This offers greater liquidity and stable returns.
- Real Estate Crowdfunding: A way to join in commercial real estate investing without the large capital investment. Crowdfunding gives you passive real estate investment ownership.
- Real Estate Stocks, Mutual Funds, and ETFs: These are ways to invest in real estate and the typically stable real estate market without having to be involved in property management. They all offer stable long-term returns on investment and good liquidity.
Above all, figuring out how to invest in real estate is only limited by your creativity and drive to make it happen!
Rental Properties
Rental properties are one of the first things most people think of when wondering how to invest in real estate — and for a good reason. Rental properties have the dual advantage of creating cash flow — money in the bank each month — and building net worth over time.
The disadvantages of rental properties are that unless you hire a property manager, you become a landlord. Suddenly whatever goes wrong in the house — such as a heating problem at 2 a.m. — becomes your problem. However, if you pre-screen your tenants carefully, rental properties bring excellent returns and can be an excellent first real estate investment.
The way you’ll make money on the property is three-fold:
- If you purchase the property under market value, then you immediately own a property that could be sold for more than the purchase price.
- If you choose a location where property values are increasing, the value of your property will increase over time.
- Finally, and most importantly, you should be making a net passive income. You need to select a property for which your rental income is greater than the total property expenses, including maintenance, taxes, loan repayment and any other property management.
The primary benefit of a rental property is the positive monthly cash flow.
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House Flipping
The next way most people think of when wondering how to invest in real estate is house flipping. With house flipping, you purchase a property under market value, repair and update it, and sell for a higher price. Purchasing below fair market value is key, because then you will make money up front.
House flipping is just like it sounds. You purchase a house and quickly turn around and re-sell it for a profit. With house flipping is if you haven’t done your research or don’t know your target market, you risk losing your profit margins.
For this reason, the key to house flipping is to select a few target neighborhoods that meet your criteria for a profitable ROI on the house flip. Once you’ve defined your target, you’ll need to carefully check deferred maintenance and major issues with the house before purchase so you don’t find any undesirable real estate investing surprises.
Wholesaling Real Estate
Wholesaling is another less commonly known way to get into real estate investing. Learning how to invest in real estate with wholesaling is simple, but it requires detailed knowledge of the market and networking.
With wholesaling, you will be signing a sale agreement with the owner of a property, with the condition that you have the right to re-assign the sales agreement. You will then locate a buyer for the property, typically a cash investor, who will take your place on the sales agreement and will move forward with executing and buying the property. The investor will pay both the agreed purchase price and your assignment fee.
To be successful in wholesaling, you need to have a wide network of contacts in every area of the real estate industry and an understanding of the market value, zoning, and the differences of the target neighborhoods. With research and understanding, wholesaling is a great way to start investing in real estate without any capital.
Note Investing
Mortgage notes are a reliable source of income that you may be able to buy at discount to the loan’s value. When buying a mortgage note, you buy the note tied to a mortgage and collect payments. For that borrower, you become the bank.
The disadvantage of this type of real estate investing is that low interest rates make the notes less attractive. However, if you buy the mortgage note for less than the outstanding loan value, your actual rate of return is higher.
For example, if you buy a note on a mortgage with an outstanding value of $100,000 and 2% interest for $80,000, you will be making not only the 2% interest rate but also the difference of $20,000 over the lifetime of the note.
Commercial Real Estate
Commercial real estate is where the big investors like to put their money. These properties are typically non-residential commercial buildings like offices, hotels, retail centers, or warehouses. Sometimes residential real estate with more than five units is also considered commercial real estate.
Learning how to invest in real estate in a commercial capacity requires gaining extensive knowledge of zoning and building codes, unique rental contracts, and legal requirements. It also requires a much more substantial initial investment of capital.
For these reasons, if you are interested in investing in commercial real estate, we recommend partnering with an experienced real estate investor before trying to invest in commercial real estate on your own.
REIGs
Real estate investment groups, commonly called REIGs, are small investment groups, like mutual funds, for rental properties. This is great for investors who would like to invest in rental properties but don’t want the hassle of managing them.
With an REIG, a company will buy one or more properties, usually apartments, and allow investors to buy them, thus buying into the group. Each investor can buy one or more individual units.
The company that operates REIGs takes care of all the maintenance, as well as advertising and finding tenants. In exchange for this service, it takes a percentage of the monthly rent. Some companies pay individual owners when their unit is rented, while others pay all owners a proportionate share of the total rental income, thereby guaranteeing income even in the case of a vacancy.
While this might seem like an easy way to invest in real estate, you’ll want to research the company you plan to invest with carefully. If you avoid high fees that can eat up a big chunk of your profit, REIGs can be a safe and easy way to start investing in real estate.
REITs
Real estate investment trusts, commonly abbreviated as REITs, are formed to use investor money to invest in real estate. This is through income-producing properties that can be purchased, operated, or sold. These typically include malls, hospitals, office buildings, and mortgages.
To qualify as a REIT, the foundation or trust must pay 90% of its profits as dividends to shareholders. This is great because it means when investing in real estate through REITs, you will receive regular dividends.
REITs are bought and sold on major stock exchanges, so you don’t have to know anyone to get into a REIT. The advantage of REITs is that they are highly liquid. This means you can sell them quickly and easily. They are also a low-cost starting point for real estate investors.
Real Estate Crowdfunding
Real estate crowdfunding is a way to invest in commercial real estate that is normally only available to very high-net-worth investors. This is passive ownership of a portfolio of properties or a single property.
Platforms such as Prosper, LendingClub, Fundrise, and RealtyMogul connect real estate investors who want to finance projects with borrowers looking to fund real estate investing.
Each platform has different requirements to join. Some require $1 million or more in net worth, while some have lower or no requirements. This can be great if you are looking to diversify your investments and participate in larger real estate investment projects without taking on all of the responsibility.
Real Estate Stocks, Mutual Funds, and ETFs
Real estate stocks, mutual funds, and exchange-traded funds (ETFs) invest primarily in REITs. How you choose to invest in real estate stocks, mutual funds, and EFTs can vary widely—they cover everything from home builders and real estate agencies to construction companies and home improvement suppliers. These types of real estate investments can all be purchased through a brokerage account or tax-advantaged account.
Investing in real estate, real estate stocks, mutual funds, and ETFs provides liquid assets and competitive returns with a low cost of entry. In general, the real estate market has low volatility, which means that the value of these stocks or mutual funds will not go up and down dramatically.
For this reason, investing in real estate through stocks, mutual funds, and EFTs can be a good way to diversify your investment profile and dip your toes into the world of real estate investing.
Other Real Estate Investing Opportunities
Figuring out how to invest in real estate goes far beyond the hands-on methods of rental properties, house flipping, or wholesaling. You can join real estate investment groups or trusts, invest in mortgage notes, buy real estate stocks or participate in real estate crowdfunding.
All of these methods give you the stable returns of real estate investing but often with greater liquidity and without hands-on involvement.
Looking for more information on the types of loans available to business owners? Be sure to read our mortgage guides for LLC owners:
Frequently Asked Questions
Yes, but it requires time, dedication, and continued learning. Whether you choose a more indirect route like real estate stocks and mutual funds or consider purchasing a property to rent, real estate investing offers an excellent return on investment at every level of investment.
Learning how to invest in real estate means you have more options to try out different types of real estate investments and build your wealth portfolio.
The best first real estate investment depends on your goals, your time, and how much you have to invest. REITs or crowdfunding might be best to start with $500, or perhaps you want to start house flipping and secure investors.
With millions of real estate investors all over the world, there is no official average income. If you have even a small amount of money to invest, you can start investing in real estate. Learning how to invest in real estate means that whether you have millions of dollars to invest or $100, there are ways to make your money work for you and enjoy the stable returns of the real estate market.
