Real estate investing can add diversification to your portfolio, and getting into the market can be as easy as buying a mutual fund.
If you've ever had a landlord, you probably don't dream of being one. answering calls about oversized bugs and overflowing toilets doesn't sound like the most glamorous job.
But if done right, real estate investing can be profitable, if not brilliant. It can help diversify your existing investment portfolio and be an additional income stream. And many of the best real estate investments don't require showing up to every tenant call.
The problem is that many new investors don't know where or how to invest in real estate. Here are some of the best ways to make money in real estate, from low maintenance to high maintenance.
Best ways to invest in real estate
1. Buy REITs (Real Estate Investment Trusts)
REITs allow you to invest in real estate without owning physical real estate. Often compared to mutual funds, these are companies that own commercial real estate such as office buildings, retail space, apartments, and hotels. REITs tend to pay high dividends, making them a common retirement investment. Investors who don't need or want regular income can automatically reinvest those dividends to grow their investments even further.
“New investors may want to stick to publicly traded REITs, which you can buy through an online broker.”
Are REITs a good investment? They can be, but they can also be varied and complex. Some are traded on an exchange like stocks; others are not publicly traded. The type of REIT you buy can be an important factor in the amount of risk you take, as non-tradable REITs are not readily traded and can be difficult to value. New investors should generally stick to publicly traded REITs, which you can buy through brokerage firms.
For that you will need a brokerage account. If you don't already have one, it takes less than 15 minutes to open one, and most businesses don't require an initial investment (although the REIT itself will likely have a minimal investment).
You can also gain exposure to a more diverse selection of real estate investments by purchasing a fund that holds interests in multiple REITs. You can do this through an ETF or by investing in a mutual fund that holds shares of many REITs.
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2. Use an online real estate investing platform
If you're familiar with companies like Prosper and LendingClub, which connect borrowers with investors who want to lend them money for various personal needs like a wedding or home renovation, you'll understand online real estate investing.
These platforms connect real estate developers with investors who want to fund projects, either through debt or equity. Investors expect to receive monthly or quarterly distributions in exchange for assuming significant risks and paying a fee to the platform. Like most real estate investments, they are speculative and illiquid; you can't get rid of them as easily as you can trade stocks.
The problem is, you may need to make money. Many of these platforms are open only to accredited investors, defined by the Securities and Exchange Commission as individuals who have earned more than $200,000 ($300,000 with a spouse) in the past two years, or have $1 million or $1 million. more than including principal residence. Alternatives for those who can't meet that requirement include Fundrise and RealtyMogul.
» Are you ready to invest? The best real estate crowdfunding platforms
3. Think about investing in rental properties
Tiffany Alexi had no intention of becoming a real estate investor when she bought her first rental property at age 21. Then a senior at Raleigh College in North Carolina, he planned to attend a local graduate school and thought buying would be better than renting.
Home hacking allows you to live in your investment property while renting out rooms or units. »
“I went on Craigslist and found a four-bedroom, four-bathroom apartment that was set up in the style of a student apartment. I bought it, lived in one bedroom and rented out the other three,” says Alexi.
The settlement covered all his expenses and brought in an extra $100 a month in cash, far from chump change for a graduate student, and enough to get Alexi a real estate deal.
Alexi entered the market using a strategy sometimes called home hacking, a term coined by BiggerPockets, an online resource for real estate investors. This essentially means that you occupy your investment property by either renting out rooms, as Alex did, or renting out units in an apartment building. David Meyer, the site's vice president of data and analytics, says home hacks allow investors to buy up to four units of real estate and still qualify for a home loan.
Of course, you can also buy and rent out an entire investment property. Find one whose total costs are less than what you can charge in rent. And if you don't want to be the person who shows up with a tool belt to fix the leak, or even the person who calls that person, you have to pay the property manager, too.
“If you run it yourself, you'll learn a lot about the industry, and if you buy future real estate, you'll come away with more experience,” Meyer says.
Related. Understanding the Different Types of Real Estate Investments
4. Consider flipping investment properties
This is HGTV reality. Invest in a cheap house that needs a little TLC, fix it up as cheaply as possible, then resell it for a profit. The strategy, called house swapping, is a little more complicated than it sounds on TV.
“There's a greater element of risk because a lot of the math behind the investment requires a very precise estimate of how much the renovation will cost, which is not an easy thing to do,” Meyer says.
His suggestion: find an experienced partner. “Maybe you have the capital or the time to invest, but find a contractor who is good at estimating costs or managing the project,” he says.
The other risk of investing is that the longer you own the property, the less money you will make because you are paying the mortgage without generating any income. You can reduce that risk by living in the home while you renovate it. This works as long as most of the updates are cosmetic and you don't mind a little dust.
“Which is better: real estate vs. stocks?
5. Rent out a room
Finally, to dive headfirst into the real estate waters, you can rent out a portion of your home. Such an arrangement could significantly reduce housing costs, allowing people to stay in their homes while benefiting from higher property prices.
This can be especially important for older people. Harvard University's Joint Center for Housing Studies reported that a quarter of people over 65 who lived alone in 2016 spent more than half of their income on housing. That number dropped to 12.9% for seniors living with roommates.
Adding rooms can also make mortgage payments more affordable for young people. But if you're not sure you're ready, you can try a site like Airbnb. It's a home hack for commitment phobics. you don't have to take on a long-term renter, potential renters are at least somewhat pre-vetted by Airbnb, and the company's host guarantee protects against damages.
Renting a room seems much more affordable than the luxury concept of investing in real estate. If you have a free room, you can rent it.
Like all investment decisions, the best real estate investments are those that best serve you, the investor. Consider how much time you have, how much capital you're willing to invest, and whether you want to be the one dealing with household problems when they inevitably arise. If you don't have DIY skills, consider investing in real estate through a REIT or crowdfunding platform rather than directly in the property.