Can you really make lots of money with real estate investing?
Real estate investing seems like something that only the wealthy and famous do and for many locals, this type of investing seems like something beyond the scope of what they fiscally can achieve. It’s completely normal to not know where to start. There’s multitude of ways to get your start in investing in real estate, with even as little as $500 and our team at Main Place Real Estate can help educate you.
You’ll find our breakdown of the different types of real estate investments and who they fit best below.
What is real estate investing?
Let’s break it down. Real estate investing is the purchase or sale of land and buildings to earn money. Here’s the different categories of real estate:
- Residential real estate includes houses, apartment buildings, vacation properties, and anywhere else people live. This is the most common type of real estate and the easiest place to begin.
- Commercial real estate (CRE) involves office spaces, retail storefronts, or any building used for business purposes. It’s more expensive and hands on than residential real estate. The best way for individual investors to get into CRE is to buy shares in a real estate investment trust — we’ll cover more about 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. It’s no secret that fixing up a property isn’t easy, and even basic maintenance is a regular task you’ll have to keep up with. It’s common for real estate investors to outsource maintenance to management companies at an extra cost.
Consider talking to a qualified attorney before making your first purchase. If you want to go the less risky route, holding investments through limited liability companies (LLCs). This is not as high-risk as making an investment in your own name. What happens if the investment fails? You will want your assets protected, and you don’t want legal liability if you can avoid it.
Now that we’ve gone through the basics of disclaimers, let’s go through the different options.
Purchase a Rental Property
Have some extra time? Consider buying a property and becoming a landlord. Not only is this a guaranteed monthly income, as long as you can find tenants, but 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. Because of this, it requires both time and money. If you have limited time, consider outsourcing building maintenance to management companies. This is common!
How to purchase a rental property
First things first: get to know your local real estate market. It’s easier to make a smart purchase and offer tenants a price that’s fair to them and competitive to you when you know the neighborhood well. Do your research? What kinds of tenants live in the area? Who’s moving there? How have the prices changed over time?
Our favorite way to get started on this is through Roofstock – the leading marketplace in single-family rental units. They make browsing for a home super easy! Browse through their catalog of homes and click on ones you like. The website gives you important details such as current rent, how highly the neighborhood is rated, and more.
Our favorite part of Roofstock? They sell homes that already have tenants in them! This means you’ll have an income stream as soon as you purchase a rental home.
Real Estate Investment Trusts (REITs)
Investing in a REIT sounds foreign and scary, but it 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.
We highly recommend this for a beginning investor to get into the commercial real estate world. One of the benefits is that it comes with a potentially high yield. Corporations payout at least 90% of their incomes on the property as dividends to investors. Even further, your investment is liquid which means you can sell your shares and cash out without having to deal with selling the building. The best part? The corporation does all the management work for you!
The likelihood of you dealing in publicly-traded REITs is high. 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 much do you invest in REITs?
REITs can be part of a beginner investment portfolio. The great thing about publicly traded REITs is that they only require 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 slowly delve into the real estate market without committing to property management, this is the option for you.
Wanting to buy shares? You’ll go through a brokerage firm just as you would buying other stock.
This option is gaining favor with small-time real estate investors. Crowdfunding platforms are passive investments, similar to REITs. Rather than going through a trust or corporation, investors gather together their assets and match with interested real estate developers or sponsors. There are platforms for commercial and residential real estate.
Because 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. On the flip side, they can also get you dividends on properties you wouldn’t be able to access otherwise. You might have to wait longer for returns, but the returns tend to be pretty high. So the wait is worth it!
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. Thankfully, real estate investing is no longer limited to those who meet that criteria.
Crowdfunding opens opportunities to any interested investor rather than solely accredited investors. If you want to get into the real estate investment market, you have many options.
The first option we recommend is DiversyFund. This is an alternative investment platform with zero management fees, and a commitment to helping their users achieve financial freedom. DiversyFund creates investment funds of private market assets like real estate that are designed for the everyday investor. There are plenty of perks such as no net worth restrictions, and the minimum investment starts at just $500. This makes it an accessible option for investors of all income levels.
Another option is Streitwise, which lets you get started with as little as $1,000. Streitwise removes the go-between – brokers charging pricey fees – and lets you invest directly in their selection of expertly-vetted properties. The company founders have tons of experience in the industry – four decades that is! This leaves you feeling confident that 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 another great option for those who have at least $1,000 to invest. With this option, you contribute to REITs, with properties deliberately chosen 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.”.
Keep in mind that dividends on crowdfunded properties aren’t always the fastest. Both companies highly recommend that investors commit to the long haul (at least five years). Short-term investments are pretty risky, but long-term investments balance out that risk.
Short-term and vacation rentals
What happens if you don’t want to go through the stock market or buy a property, but you still want to create 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. Do you live in an area with high tourist traffic? Whether the traffic is seasonal or year-round, there’s an opportunity for you to turn a profit. This doesn’t require 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
The easiest way to do it is by going through a third-party website. Airbnb is the most popular.
Other examples includes VRBO or Vacation Rentals By Owner. Their website does most of the management for you, such as finding and screening tenant matches, providing some form of damage protection, and helping handle renter complaints.
Wanting to handle each aspect of the process yourself? No problem! You can advertise locally through websites like Craigslist or go through a network of trusted friends.
Keep in mind that you need to check your local laws to see what regulations you need to meet. Tons of cities and states are regulating the short-term rental market harsher in response to rising housing costs. One example is that laws may limit the amount of time guests can stay. Don’t forget that every city and state has different laws!
Join a real estate investment group
Investment groups are one way to get into the residential real estate market without the troubles of active landlording. Like-minded investors pool their resources and buy residential properties, such as 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
The saying “practice makes perfect” is no exception to real estate. The longer you’re in the industry, the more you get to know what you’re doing. For investors determined enough to jump on construction projects, trading or flipping real estate can bring in big returns in just a few months.
Here’s the breakdown: 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.
The downfalls are great, unfortunately. Because selling isn’t guaranteed, you’re still on the hook for the mortgage if you can’t get tenants or buyers. We recommend “house flipping” for experienced real estate investors who know how to hedge their bets with the local market.
How to trade or flip real estate
The first step is to research 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. Next, you should start 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.
Note that 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.
Real Estate Investing FAQs
- Why invest in real estate?
- The major plus of real estate investment is the cash flow, also known as the monthly income investors make from rental properties after meeting all their expenses. In a perfect world, your cash flow will increase over time, (since rents rise with inflation) but your mortgage payment stays the same. Real estate is also a good way for a savvy investor to diversify their portfolio. The real estate market has its own whims, so it might perform well when the rest of the stock market isn’t. 2020 is the perfect example of this! When the stock market wasn’t doing too well, real estate was booming.
- How do you earn money from real estate?
- There are three ways you can earn money from real estate: rent, appreciation, and loans. Rent is where you’ll see most of your real estate earnings, regardless of whether you invest in commercial or residential property. The amount of cash you collect is dependent upon many factors (local market, property type, whether you’re paying a management company or contractors, etc.). Loans are passive investments where you (the investor/the REIT you buy shares in/the investment group you join) lend money to a real estate developer, then earn cash on interest payments. The real estate lingo for this is “debt investing”. Appreciation is the increase in a property’s value over time. If and when you sell your investment, appreciation ensures you sell for more than what you originally paid. Investors who focus on appreciation profit, like property flippers, should be comfortable with risk – unlike with cash flow, there’s no guarantees.
- How much money do you need to invest in real estate?
- Because investment options are diverse, there’s no specific sum to aim for. This means that you can buy shares in some REITs for just a few hundred dollars. Though this is true, real estate investment is best suited for people in good financial health who have the basics covered—retirement, emergency savings, debt management, and more. Plan to put aside more money than you think you’ll need, especially if you’re going to be involved in property management and maintenance.
- How do real estate investments affect your taxes?
- The short answer is that they’ll definitely make your taxes more complicated. Any money you earn from real estate gets taxed like other earned income. In 2018 the tax rate was around 39.6 percent for active investors and 43.4 percent for passive investors. If you profit from property appreciation, these profits are considered capital gains, and you’ll pay a capital gains tax. There are ways to save and the main one is through deductions. You can deduct certain real estate-related expenses such as repair costs or property taxes. Consider taking a deduction for depreciation – the process the IRS uses to determine the cost of a rental property over time. These deductions come with some strict regulations, though. The property should have a “determinable useful life” (which just means it will wear out eventually) and be expected to last more than a year.
Real estate investment can be exciting and profitable, but it takes practice and a lot of money.
There are endless options when it comes to real estate, so it’s important to think through which investment best suits you before signing on the dotted line.