10 Ways to Invest in Real Estate
If you have been thinking about real estate investing but still haven’t put the plan into action, or if you are a seasoned investor looking for more ways to diversify your investments, I want to share a few ways you can invest in real estate. For each method, I will be sharing the advantages and disadvantages, along with the approximate amount of money you need to have.
10 Ways to Invest in Real Estate
There are ways to start investing in real estate, no matter how much capital you have readily available and your level of experience.
#1 – REITs and Real Estate ETFs
The easiest and least capital intensive way to start investing in real estate is through a Real Estate Investment Trust (REIT) or a Real Estate ETF. With these investments, all you have to do is open a brokerage account with a $0 fee firms like TD Ameritrade or M1 Finance, deposit a minimal amount of money (e.g., $100), and buy a REIT or Real Estate ETFs.
For example, in my M1 Finance account, I buy and hold Vanguard Real Estate ETF (VNQ), which “invests in stocks issued by real estate investment trusts (REITs), companies that purchase office buildings, hotels, and other real property.”
Advantages
- You don’t need that much money upfront.
- You don’t have to borrow money.
- You can buy and sell your investments at any time.
- You can choose specific investments, e.g., commercial real estate, residential real estate, self-storage, cell towers, senior living facilities, etc.
Disadvantages
- Not as tax-efficient because the distributions are treated as a regular income.
- Lacks some of the tax benefits of owning a physical real estate.
#2 – Invest in Real Estate Related Companies
If you don’t want to invest in REITs or Real Estate ETFs, you can also invest in companies related to real estate. Many companies are involved in real estate activities, e.g., home builders, holding companies, commercial ventures, realty companies, mortgage-related companies, etc. — it is possible to find companies that operate in the real estate industry.
Advantages
- Similar to advantages to REITs or Real Estate ETFs.
Disadvantages
- Your portfolio is not as well diversified compared to REITs or Real Estate ETFs investing.
#3 – Rent Out Your Space
If you are a homeowner, or a renter (and your lease allows it), you could rent the extra rooms, the basement, parking space, or the garage to make some extra side income. You just have to make sure that you’re not violating any rule or law imposed by the local government or the homeowner’s association.
Advantages
- Zero investment needed, except for a small amount of money to market to renters.
Disadvantages
- You have to live with other people and deal with tenants.
- You might have to deal with bad tenants or non-paying tenants.
#4 – Your Primary Residence
There is a lot of debate about whether or not your primary residence is an investment. Personally, I became a homeowner as soon as I could, and in my experience, being a homeowner is great for my quality of life, and it has been financially rewarding. If you are at a time and place where buying is better than renting, I suggest you try to buy a house as soon as possible.
Advantages
- It is your HOME!
- Home value appreciation. For example, my first house bought in 1998 for $189k is now worth roughly $850k. That’s about a 16% gain per year!
- Forced savings. As you pay down your mortgage, a portion of your mortgage payments pays down the principal balance. This is essentially a forced savings program for you.
- Tax savings. The money you pay toward interest and property taxes are tax-deductible. For many people, this tax deduction is better than the standard deduction.
Disadvantages
- You are responsible for repairs and maintenance.
- You need money to make the purchase. Although it is possible to spend as little as ~$1,000 for a home purchase, most buyers spend between 5% to 25% of the home price. Here is an article on How Much Money Do You Need to Buy a House?
- You lose the flexibility to move around.
- It takes about 5-7 years before you start to break even on your initial investment due to the high costs to buy and sell.
#5 – House Hacking
This is very similar to idea #4, but instead of buying a single-family residence, you’ll be purchasing a multi-family home or a house that can be arranged to rent out rooms and the basement easily. You can buy up to a 4-unit property and still qualify for a standard primary residence loan. The goal is to live in one unit (e.g., a room or a floor) as your primary residence and rent out the other units or areas.
Advantages
- Similar to buying a house, PLUS, you could be living there for free while your tenants pay for your mortgage and more.
Disadvantages
- Similar to buying a house, PLUS
- You have to live with other people and deal with tenants.
- You might have to deal with bad tenants or non-paying tenants.
#6 – Rental Properties
One of the most popular ways to invest in real estate is through the purchase of rental properties. For this method, you buy a condo, a townhouse, a single-family home, or a multi-family apartment building to rent out to tenants. When purchasing a rental property, you want to make sure that your rental payments entirely cover your mortgage payments and HOA fees, plus leave you some cushions for other expenses like repairs, marketing, vacancies, etc. — this is called a positive cash flow property.
Advantages
- Monthly profit IF you’ve done your research and purchased a positive cash flow property
- Home value appreciation.
- Forced savings as you pay down your mortgage balance.
- Tax savings. You can deduct almost all expenses associated with running a rental property. And, if your regular income is below a certain threshold, you can deduct your rental losses against your income.
Disadvantages
- You might have to deal with bad tenants or non-paying tenants.
- You cannot easily buy and sell the property
- Rental properties require 20% to 25% down payment, plus you have to pay at least 2% of the closing costs
#7 – Flipping Properties
If you want to take a more hands-on short-term approach, you could also look for a fixer-upper that sells well below the market value, fix it up, and sell at a profit. However, this approach is not for the faint of heart and does require a deeper pocket.
Advantages
- You can make a quick and substantial profit if everything works out
Disadvantages
- Depending on the condition of the property, you might not be able to use a traditional loan to buy and have to resort to a more expensive hard money loan.
- You might have to use your own money for the renovation or borrow from a hard money lender.
- If you are not good at managing it, the cost overrun can kill your profit.
- Finding a good deal is difficult in most markets; unless you have a lot of experience, good connections, or resort to taking advantage of the homeowner.
#8 – Wholesaling
This is a variation of the flip method above. You start the same way by putting a house under contract at a price that is substantially below its after repair value (ARV). Instead of completing the purchase and renovating it, you find a buyer that is willing to purchase the contract from you at a higher price. The difference between what you promised to pay the homeowner vs. what your buyer promised to pay you is your profit.
Advantages
- You can make a quick and substantial profit if everything works out.
- You do not have to take the risk and pay for the renovation.
- You may not even have to take out a loan because another buyer will assume the contract.
Disadvantages
- You might not be able to find a buyer in time and have to complete the purchase yourself.
#9 – Real Estate Syndication through Crowdfunding or Private Equity Firm
Another fairly common method is to participate in a real estate crowdfunding investment through sites like FundRise or RealtyMogul. You can do this by joining their platform and invest in the available opportunities. Similarly, you can also go through a private equity firm that specializes in real estate investing.
Advantages
- Less work involved since you’re handing money over to an investment platform or firm
- Relatively low starting capital. For example, FundRise minimum investment is $500, and you do not have to be an accredited investor.
Disadvantages
- You might not be able to withdraw your investment for several years.
- For private equity and certain platforms, you may have to be an accredited investor.
- The investment might not be clearly defined or well-regulated
- They may have higher fees and barrier of entry than REITs, real estate ETFs, and real estate stocks.
#10 – Other Creative Real Estate Investing Methods
The list does not end here. There are many other methods to invest in real estate. Since I have not utilized these specifically in my real estate investing career, I will just outline the methods and link them to relevant resources:
Bottom Line
There are many ways to participate in real estate investing. You don’t always have to buy physical property to add real estate to your portfolio. Consider your financial situation and what you can afford to invest in. You need to remember that there are always risks involved when investing and real estate investing is no exception. Never invest what you can’t afford to lose.
