5 Simple Ways to Invest in Real Estate

Here’s how—from buying rental property to REITs and more

Reviewed by Lea D. UraduFact checked by Jared EckerReviewed by Lea D. UraduFact checked by Jared Ecker

What makes a good real estate investment? Any good investment has a high chance of success and a solid return on your investment. One of the factors in favor of real estate investing is the relatively small stake needed to get started, compared to investing in many other assets.

A home mortgage generally requires a 20% to 25% down payment, but, in some cases, a 5% down payment is all it takes to purchase an entire property as a rental opportunity. That’s great for those with do-it-yourself skills and plenty of spare time, but it’s only one of several ways to make money in real estate without an outsized investment up front.

Key Takeaways

• Buying and managing rental property is an option for investors with do-it-yourself skills and the time to manage the property hands-on.
• “Flippers” look for undervalued properties and look to sell them quickly for a profit.
• REIGs are an option for passive investing in real estate.
• REITs pay dividends and can be bought and sold on exchanges, like stocks.
• Online real estate investing platforms offer diverse opportunities for a relatively modest stake.

1. Rental Properties

Owning rental properties is a good choice for individuals who have do-it-yourself (DIY) skills, the patience to manage tenants, and the time to do the job properly.

Although financing can be obtained with a relatively low down payment, it does require substantial cash on hand to finance upfront maintenance and to cover periods when the property is empty or tenants do not pay their rent.

On the plus side, once the property starts bringing in cash it can be leveraged to acquire more property. Gradually, the investor can acquire a number of income streams from multiple properties, offsetting unexpected costs and losses with new income.

Pros

• Provides regular income and potential appreciation

• Can be maximized through leverage

• Many expenses are tax-deductible

Cons

• Managing tenants can be tedious

• Unexpected costs can eat up income

• Unpredictable vacancies can reduce income

According to U.S. Census Bureau data, the sales prices of new homes (a rough indicator for real estate values) consistently increased in value from the 1960s to 2007, before dipping during the financial crisis. Subsequently, sales prices resumed their ascent, even surpassing pre-crisis levels.

By the end of 2023, the average home sale price in the U.S. hit $498,300, slightly off record highs recorded earlier in the year.

Warning

Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).

2. Real Estate Investment Groups (REIGs)

Real estate investment groups (REIGs) are ideal for people who have some capital and want to own rental real estate without the hassles of managing it hands-on.

REIGs are a pool of money from a number of investors, similar to a small mutual fund, that is invested in rental properties. In a typical real estate investment group, a company buys or builds a set of apartment blocks or condos.

A single investor can own one or multiple units of self-contained living space, but the company operating the investment group collectively manages all of the units, handling maintenance, advertising vacancies, and interviewing tenants.

In exchange for conducting these management tasks, the company takes a percentage of the monthly rent.

A standard real estate investment group lease is in the investor’s name, and all of the units pool a portion of the rent to cover vacancies. This means you’ll receive some income even if your unit is empty. As long as the vacancy rate for the pooled units doesn’t spike too high, there should be enough to cover costs.

Pros

• More hands-off than owning rentals

• Provides income and appreciation

Cons

• Vacancy risks

• Fees similar to those associated with mutual funds

• Susceptible to unscrupulous managers

3. House Flipping

House flipping is for people with significant experience in real estate valuation, marketing, and renovation.

This is the proverbial “wild side” of real estate investing. Just as day trading is different from buy-and-hold investing, real estate flippers are distinct from buy-and-rent landlords.

Real estate flippers often aim to profitably sell the undervalued properties they buy in less than six months.

Some property flippers don’t invest in improving properties. They pick properties they hope have the intrinsic value needed to turn a profit without any alterations.

Flippers who are unable to swiftly unload a property may find themselves in trouble because they typically don’t keep enough uncommitted cash on hand to pay the mortgage on a property over the long term. This can lead to snowballing losses.

There is another kind of flipper who makes money by buying reasonably priced properties and adding value by renovating them. This is a longer-term investment, and investors may only be able to take on one or two properties at a time.

House Flipping

• Ties up capital for a short time period

• Can offer significant returns

Cons

• Requires deep market knowledge

• Hot markets can cool unexpectedly

4. Real Estate Investment Trusts (REITs)

A real estate investment trust (REIT) is best for investors who want portfolio exposure to real estate without making a traditional real estate transaction.

A REIT is created when a corporation (or trust) uses investors’ money to purchase and operate income properties. REITs are bought and sold on the major exchanges like any other stock.

A corporation must pay out 90% of its taxable profits in the form of dividends to maintain its REIT status. By doing this, REITs avoid paying corporate income tax, whereas other companies are taxed on profits and then determine whether and how to distribute after-tax profits as dividends.

Like regular dividend-paying stocks, REITs are a solid investment for investors who seek regular income.

REITs can afford investors entry into nonresidential investments such as malls or office buildings, that are generally not feasible for individual investors to purchase directly.

More importantly, some (though not all) REITs are highly liquid because they are exchange-traded trusts. In practice, REITs are a more formalized version of a real estate investment group.

When looking at REITs, investors should distinguish between equity REITs that own buildings and mortgage REITs that provide financing for real estate and may also invest in mortgage-backed securities (MBS).

Both offer exposure to real estate, but the nature of the exposure is different. An equity REIT represents ownership in real estate, while a mortgage REIT focuses on the income from real estate mortgage financing.

Pros

• Pay dividends to investors

• Core holdings tend to be long-term, cash-producing assets

• Many trade on exchanges

Cons

• Risk of real estate market downturn

• Liquidity risk if the REIT is thinly traded or not publicly traded

5. Online Real Estate Platforms

Real estate investing platforms are for those who want to join others in investing in a relatively large commercial or residential deal. The investment is made via online real estate platforms, which are also known as real estate crowdfunding.

The best real estate crowdfunding platforms pool resources of investors looking for opportunities with other investors looking for financial backing for real estate projects. That gives the investor an opportunity for diversifying into real estate without putting up a large stake.

Pros

• Can invest in a single project or a portfolio of projects

• Can diversify geographically

Cons

• Tend to be illiquid with lockup periods

• Management fees reduce profits

Why Should I Add Real Estate to My Portfolio?

Real estate is a distinct asset class that many experts agree should be a part of a well-diversified portfolio. This is because real estate does not usually closely correlate with stocks, bonds, or commodities.

Real estate investments can also produce income from rents or mortgage payments in addition to the potential for capital gains.

What Is Direct vs. Indirect Real Estate Investing?

Direct real estate investments involve owning and managing properties. Indirect real estate involves investing in a pool of money that is used to buy and manage properties. REITs and real estate crowdfunding are examples.

Is Real Estate Crowdfunding Risky?

Compared to other forms of real estate investing, crowdfunding can be riskier. Some of the projects available may appear on crowdfunding sites because they were unable to source financing from more traditional means. Moreover, many real estate crowdfunding platforms require investors’ money to be locked up for several years, making it an illiquid investment.

Still, the top platforms boast annualized returns of between 2% and 20%, according to Investopedia research.

The Bottom Line

Whether real estate investors use their properties to generate rental income or to bide their time until the perfect selling opportunity arises, it’s possible to build out a robust investment program by paying a relatively small part of a property’s total value upfront.

As with any investment, there is profit and risk with real estate investing and markets can go up as well as down.

Read the original article on Investopedia.