Investing in and owning real estate can be both satisfying and profitable. Prospective real estate owners, unlike stock and bond investors, can use leverage to buy a property by paying off a portion of the total cost upfront, then repaying the balance plus interest over time.
In some cases, a 5% down payment is all it takes to purchase an entire property, despite traditional mortgages generally requiring a 20% to 25% down payment. Flippers and landlords benefit from the ability to control the asset the instant papers are signed, enabling them to take out second mortgages on their homes in order to make down payments on additional properties.
How To Make Money From Real Estate
Here are five key ways investors can make money on real estate.
1. Rental Properties
If you are skilled in DIY renovations and have the patience to manage tenants, then owning rental properties can be a great investment. In order to cover vacant months and finance upfront maintenance costs, this strategy does require substantial capital.
From the 1960s through 2006, the value of new homes (a rough indicator of real estate values) consistently increased, before slumping during the financial crisis. As a result, sales prices began to rise again, surpassing pre-crisis levels. It remains to be seen how the Coronavirus pandemic affects real estate values in the long run.
2. Real Estate Investment Groups (REIGs)
Investors who want to own rental properties without having to run them should consider real estate investment groups (REIGs). To invest in REIGs, one must have access to capital as well as financing. A REIG is like a small mutual fund that invests in rental properties.
Most real estate investment groups consist of a company that buys or builds apartment blocks or condos, then allows investors to buy them through the company, thus joining the group. Owners of self-contained living space can own one or more units, but the investment group as a whole manages all of them, handling maintenance, advertising vacancies, and interviewing renters.
The company charges a percentage of the rent for performing these management tasks. Typically, real estate investment groups lease their properties in the investor’s name, and all the units pool a portion of the rent to guard against vacancies.
Therefore, even if your unit is empty, you’ll receive some income. The pooled units should be able to cover costs as long as the vacancy rate doesn’t spike too high.
3. House Flipping
Flipping houses requires experience in valuation, marketing, and renovation. Flipping houses requires capital and the ability to oversee or do repairs. Real estate investing is the proverbial “wild side.” Real estate flippers are distinct from buy-and-hold investors in the same way as day traders are.
Real estate flippers are often looking to profitably sell their undervalued properties within six months of buying them. Property flippers tend not to improve properties. The investment must therefore have the intrinsic value required to turn a profit without any changes, or it will be eliminated from contention.
The problem with flippers who are unable to quickly sell a property is that they typically do not have enough cash on hand to cover long-term mortgage payments on a property.
Losses can snowball as a result. Flippers who buy affordable properties and renovate them to add value are another kind of flipper. In a longer-term investment, investors can only take on one or two properties at a time.
Learn more about how to make money flipping houses.
4. Real Estate Investment Trusts (REITs)
If you’re looking to invest in real estate but don’t want to deal with the hassle of owning physical property, investing in a Real Estate Investment Trust (REIT) might be the way to go.
REITs are companies that own and manage commercial real estate properties such as office buildings, retail spaces, apartments, and hotels. Investing in REITs is similar to investing in mutual funds, as they tend to pay high dividends and can be a good addition to a retirement portfolio. You can choose to receive regular income or reinvest the dividends to further grow your investment.
As with any investment, there are risks involved. The type of REIT you choose to invest in can greatly impact the level of risk you’re taking on. Publicly traded REITs are more easily sold and valued, making them a better choice for new investors. Non-traded REITs, on the other hand, can be harder to sell and value, and may not be suitable for everyone.
To invest in REITs, you’ll need a brokerage account. You can open one in less than 15 minutes, and many companies don’t require an initial investment. However, the REIT you choose to invest in will likely have its own investment minimum.
Another option is to invest in a fund that holds interests in multiple REITs. You could do this through a real estate exchange-traded fund (ETF) or by investing in a mutual fund that holds shares of several REITs. This can help diversify your investment and reduce your overall risk.
Overall, investing in real estate through REITs can be a good way to diversify your investment portfolio and potentially earn high dividends. If you’re unsure about which type of REIT to invest in or how to get started, consider speaking with a financial advisor.
5. Online Real Estate Platforms
Real estate investment platforms are a new way for investors to connect with real estate developers to finance projects. They connect real estate developers to investors who want to finance projects, either through debt or equity. Investors hope to receive monthly or quarterly distributions in exchange for taking on a significant amount of risk and paying a fee to the platform.
Like many real estate investments, these platforms are speculative and illiquid, meaning you can’t easily unload them the way you can trade a stock. However, they also offer the potential for high returns.
The catch is that many of these platforms are open only to accredited investors. Accredited investors are defined by the Securities and Exchange Commission as people who’ve earned income of more than $200,000 ($300,000 with a spouse) in each of the last two years or have a net worth of $1 million or more, not including a primary residence. If you don’t meet those requirements, there are alternatives available such as Fundrise and RealtyMogul.
Overall, real estate investment platforms offer a unique way to invest in real estate, but they come with a significant amount of risk and are usually only available to accredited investors.
Why Should You Invest in Real Estate?
If you own real estate or REIT (real estate investment trust) shares, you can add a steady source of income to your budget. In general, real estate assets generate steady, reliable income, primarily through rent payments.
Retirement investors can eventually replace their salary with this stream of income; other commonly held retirement investments (like stocks) cannot offer the same security.
Portfolio investments bring in cash flow from multiple sources, so you’re less likely to fall short if any one investment fails.
You can build out a robust investment program by paying a relatively small part of a property’s total value upfront, whether you use your properties to generate rental income or to wait for the perfect selling opportunity to present itself. Regardless of the market’s overall condition, there is potential for profit and growth in real estate.