October 3, 2022
best ways to invest in real estate

best ways to invest in real estate

Stocks and fixed-income investments make up the majority of investment portfolios and retirement plans.

However, because real estate is a “hard asset,” it is a great way to diversify a portfolio. Real estate’s long-term investment performance is also difficult to contest.

Long-term investment results can be increased by including real estate in your portfolio.

For many investors, real estate is a terrifying prospect. And it might be if you just consider the possibility of owning a piece of real estate to rent out or fix up and sell.

There are, however, additional real estate investment options. And the best part is that there is a real estate investment strategy that everyone can use, even if they don’t currently have a lot of money to invest.

Here are the 12 ways that I was able to think of:

1. Invest in Fundrise

Many people want to start investing in real estate, but they don’t want to deal with renters, managing repairs and payments, or going through the arduous process of learning how to invest in real estate through trial and error (as I did).

Fortunately, you don’t have to do all of that to invest in real estate alternatives.

You can invest in Real Estate Investment Trusts through Fundrise, an online investment service. Professionals from Fundrise are in charge of them, and you can sit back and watch your money grow.

For what purpose? It’s easy, they have a track record of great returns! They generated an average yearly return of 11.44% in 2017. That’s a LOT better than you’ll find with most other investments, as I’m sure I don’t need to tell you.

Although they cannot promise this kind of return, they have had impressive results over the past four years.

The fact that Fundrise is simple to use is one of the reasons why people adore it. Create your profile and compare accounts instantly. By requesting you to complete a brief questionnaire, they assist you in choosing the finest investments.

Your answers will determine which of their three investment types they recommend:

  • Long-term Growth
  • Balanced Investing
  • Supplemental Income

You can invest in the Fundrise Growth eREIT with as little as $500. Although there are extremely modest fees associated with using the platform to invest, recent returns have been double digits. For accredited investors, they also offer additional investments.

How much are the fees? They’re not too bad, so don’t be alarmed. Fundrise only levies an annual management fee of 0.85%. This is negligible in comparison to other brokerages.

The bottom line is that investing in real estate can yield returns on your capital that are above average. You can earn this money without getting your hands dirty since Fundrise offers REITs.

Here is a video review I made discussing how I opened a Fundrise account:

You can invest in real estate loans through Peerstreet, mostly for fix-and-flip transactions with small investors. However, in order to do so, you must be an accredited investor. You can also invest with as little as $1,000.

Instead of the loans themselves, you will invest in loan “notes,” which are slivers of loans. Loan terms range from six months to two years, with interest rates typically falling between 6% and 12%.

You can invest in either commercial or residential real estate developments through RealtyShares. You can invest in equity or real estate loans with as little as $5,000. You can invest on the platform in a number of various projects and in real estate all around the US.

These may consist of new construction, renovations, and rental properties or loans.

2. Owning Your Own Home

Contrary to popular belief, having a home is not just about sheltering people. The best method to make your first real estate investment, if managed well, may be in your own home.

When I say “if properly managed,” what do I mean?

It denotes purchasing a residence for less than its fair market worth. Additionally, it is preferable to purchase the cheapest house available in a neighborhood as opposed to the most costly.

Your mortgage is also paid off in 30 years or fewer.

Last but not least, it entails keeping the home in marketable shape without over-improving it (spending more on improvements than you will save in increased market value).

There are two ways your home becomes an investment:

  • Amortization of your mortgage. While you’re living in your home and making your mortgage payments faithfully, the loan is gradually amortizing away. At the end of 30 years, you’ll own it mortgage-free. That will give you 100% equity in your home.
  • Price appreciation. A 3% annual appreciation rate means that a home will double in value in the 30 years it takes to pay off the mortgage. The $300,000 home you buy today will be worth $600,000 in 30 years.

Consider that you put down $15,000 to purchase a $300,000 house today. In 30 years, your home’s equity will increase from $15,000 to $600,000.

That is a substantial investment. Additionally, the house not only adds to your wealth but also gives you and your family a place to live.

Owning a home combines two advantages like no other investment does. Now that’s how to make a real estate investment!

A word of caution: the goal will be completely defeated if you renegotiate your mortgage every few years, pushing the loan back to 30 years and taking “a little” cash out each time. The mortgage will never be paid off, and you won’t ever have enough equity to buy a house.

3. Buy Rental Properties to Generate Income

One of the most traditional methods of creating lasting riches is this. Mortgage amortization and real estate appreciation, which make your own home such a terrific investment, also apply to rental properties.

But real estate rental investment also includes an element of revenue.

Rent from an investment property should, at the very least, cover your ownership costs. If nothing else, your tenant will essentially cover the cost of your investment. The property will produce a positive cash flow when the rent is higher than your expenses.

If it does generate a positive cash flow, you may get the income tax-free. This is due to the fact that you can deduct property-related expenses. You may “expense” the upgrades over a long period of time because it is an investment property. Depreciation, however, might reduce your net rental revenue as it is only a paper expense (there is no actual cash outlay).

Your net income will increase when rent prices increase while your monthly payment remains mostly same. The majority of the rental income will be profit once the property is paid off.

Because of this, purchasing rental property is among the best ways to invest in real estate.

There are some things that you need to be aware of with rental properties:

  • Large down payments are needed; typically 20% or more of the purchasing price.
  • Mortgage approval is more challenging for investment property than for a primary residence.
  • There exist vacancy factors, or the gaps in occupancy where there is no rent collection.
  • After each tenant vacates the property, repairs and maintenance such as painting, carpet replacement, etc. must be done.

Although each of these obstacles is surmountable, you should be aware that owning rental property isn’t always easy. Rental homes might not be the best real estate investment for you if you want a lower risk profile and a less hands-on approach. There are still a ton more to come, so don’t worry!

4. Invest in Real Estate through Online P2P Platforms

Real estate investing-based P2P investment platforms are emerging. Crowdfunding is a common name for the procedure. A group of investors will gather in this location to pool funds for particular real estate-related investments.

These platforms give you the option to invest in real estate online using various real estate types and methods. Although it’s less confusing than real estate LPs, your money isn’t as liquid as it would be if you bought mutual funds or ETFs.

They are probably the most similar to REITs, but you have greater discretion over the investments you make. A P2P platform lets you pick the deals in which to invest.

Additionally, it allows you to spread a relatively little sum of money across a variety of transactions.

P2P crowdfunding sites for real estate have only recently come into existence. However, there are already a lot of platforms available that allow you to pick how and where you wish to invest.

In the meantime, new platforms are constantly going live.

These next possibilities are definitely worth a quick Google search if you’re unsure of what is the ideal strategy for you to invest in real estate.

Here are 3 of the best ways to invest in real estate online:

  • RealtyShares
  • Lending Club
  • PeerStreet

You can invest in either commercial or residential real estate developments through RealtyShares. RealtyShares has really been dubbed the “Lending Club of Real Estate” by several investors.

You can invest as low as $5,000 in real estate loans or equity (there are other investments you can get involved with just $1,000). You can invest on the platform in a number of various projects and in real estate all around the US.

The amount of labor RealtyShares does for you is one factor in its popularity. When a potential investment opportunity arises, they will examine the real estate company’s leaders as well as the title reports and inspections.

They’re going to learn as much as they can about real estate.

On to the costs now. You will be required to pay a 1% annual fee to RealtyShares. This is comparable to many other P2P businesses out there.

These could include loans, income properties, renovations, or new construction.

Another top P2P lending resource is Lending Club. You’ve probably heard of Lending Club by this point. Despite being one of the most well-known P2P networks, many individuals don’t consider them for lending on real estate.

The annual returns on average for Lending Club range from 5.06% to 8.74%. It’s vital to keep in mind that these figures also take into account defaults, which makes the returns even more astounding.

Compared to other P2P websites, the investment limitations at Lending Club are a little more lax. It is simple to open an account and begin investing with them.

You can browse the countless number of investment alternatives once you have been given the go-ahead to begin investing with Lending Club. Want to quickly diversify your investment portfolio? Look nowhere else.

You can invest in real estate loans through Peerstreet, mostly for fix-and-flip transactions with small investors. However, in order to do so, you must be an accredited investor. You can also invest with as little as $1,000.

5. Investing in Commercial Real Estate

You can invest in office, retail, or warehouse/storage property in this type of rental property. It adheres to the same basic structure. You buy a house, then rent it to tenants who, ideally, pay your mortgage and make a profit.

Generally speaking, investing in commercial real estate is more difficult and expensive than investing in residential real estate rentals.

So why would one invest in commercial real estate?

Thus, commercial assets are more profitable according to the risk vs. reward criterion. It can be highly expensive to learn how to invest in real estate, especially on a commercial basis.

Given the impressive returns that can be realized if done properly, investing in commercial real estate is one of the finest methods to buy real estate for someone with knowledge and money.

On the plus side, long-term leases are typical in commercial real estate. They’ll want a long-term lease because a business is renting the property. The continuation of their business will be guaranteed by this.

A lease might easily last ten years or longer. Because you won’t be switching renters every year or two, the cash flow will be more consistent.

The property’s appreciation may also be more generous than it is for residential properties. This is particularly true if the property generates sizable yearly earnings. With commercial property, it is more likely to occur because the renter frequently pays for building maintenance in addition to the monthly rent.

It is also possible to design leases so that the landlord receives a share of the company’s revenues.

On the negative side, the business cycle frequently affects commercial real estate. As a result of decreased business profits, your renter can struggle to make rent payments during a recession.

You can even end up with an empty building if the renter leaves. Finding a new renter for your property may take months or years because commercial tenants come in all different shapes and sizes.

Commercial real estate investing is best left to more seasoned investors with bigger risk appetites. It’s an investment with genuine high risk/high payoff.

6. As Seen on TV: Fix-and-Flip

These abound on HGTV. The most famous ones are Flip or Flop and Fixer Upper, which make it seem simple.

Is it?

No and yes. If you know how to invest in real estate, it’s simple; if not, it could turn out disastrously.

Why buy property merely to sell it later?

The main concept is to purchase a home that requires significant renovations. As a result, you ought to be able to purchase for significantly less than the neighborhood’s upgraded homes’ current market value.

Example: You spend $100,000 on a home in a $200,000 area. After spending $40,000 on renovations, you make $60,000 when you sell the house.

It always works on TV. Real estate investments require knowledge of local property prices and the ability to purchase homes for substantially less than their final market value.

Additionally, you must be able to accurately predict the cost of renovations. If you are able to complete most of the job yourself, it helps (a lot).

What might possibly fail? The most active and potentially dangerous method of investing in real estate is flipping houses. The two largest problems are overpaying for the property up front or finding out that a simple repair is actually something far costlier.

For instance, the “small bit” of wood rot on the doorframe hides the reality that the entire house’s frame is infested with termites and must be demolished.

That’s excessive, and a comprehensive home inspection, which a seasoned flipper will always have, will generally reveal it.

Three rules:

  • Always know the market value of the property on completion,
  • the true physical condition of the house, and
  • have an accurate estimate of the renovation costs.

The entire endeavor could go horribly wrong if you are lacking any one of the three.

Fixing and flipping may be the greatest option to invest in real estate if you have exceptional handy abilities, are knowledgeable about real estate investing, and don’t mind a challenge.

7. Own Failed Attempt at Becoming a Real Estate Entrepreneur

Speaking of things going horrifically wrong, in 7 Lessons I Learned From Failing at Real Estate Investing, I detailed my own failed real estate investing effort.

This is my personal cautionary tale. Earlier, I stated that “on TV it always works.” I made the error of assuming it would operate just as it does on television.

“Real Estate Investing Rule #1 – nothing works the way it does on TV – ever!”

I believed the lie that it would be simple to learn how to invest in real estate. That’s how they present it. I was, however, going much beyond my area of expertise. Financial planning is what I’m good at. Real estate isn’t, it seems.

I don’t want to dissuade you from making real estate investments. Many people are investing in it and profiting handsomely. Both you and I are aware of a few.

However, investing in real estate is more difficult than investing in paper assets like mutual funds and stocks.

Some people are not suited for that.

You would be better off leaving real estate investment to those who are qualified for it if you honestly assessed your readiness to learn how to invest in property.

In light of this, let’s examine some real estate investment strategies that are more appropriate for the current real estate challenge.

8. Rent Out Space in Your Home or on Your Property

This is most likely the simplest direct investment strategy for making money in real estate. If you currently own a property, renting out space can help you make some extra money.

I use the word “space” with purpose. Most people imagine renting a room to a neighbor. That is one approach.

You can also rent out part or all of any of the following:

  • Your basement
  • Garage
  • Attic
  • An outbuilding on your property
  • Driveway
  • A corner of your land

Similar to renting a room to a border, any of these rental agreements may serve as a source of additional revenue. Space requirements for people and enterprises vary greatly. They frequently merely require additional room to store their belongings or automobiles.

In certain places, this is simpler to accomplish than in others.

This is a viable option if your house is situated in a rural location, an older downtown, or a neighborhood with loose land use regulations.

You will encounter legal challenges if you reside in a suburban area with stringent land use regulations. Don’t even consider it if you live in an area with a homeowner’s association (HOA).

9. Real Estate Investment Trusts (REITs)

When it comes to REITs, real estate investing begins to resemble stock or mutual fund investing.

They resemble mutual funds for real estate, in fact. Larger ones can be stored in a brokerage account or even a retirement account and are openly traded.

A REIT will usually invest in several related properties.

This could include enormous office complexes, retail stores, industrial properties, hotels, or warehouses.

This allows you the chance to invest as a shareholder as opposed to an investor with direct responsibility in either commercial real estate or major residential developments.

why use REITs to invest in real estate?

Also, dividend arrangements for REITs are advantageous.

The REIT does not personally pay any federal income tax on the profits. They pay dividends to their shareholders equal to 90% or more of those profits.

At the stockholders’ personal tax rate, the dividends become taxable. (However, they are not regarded as qualified dividends, which receive a more advantageous tax treatment.)

I advise finding out how to invest in real estate utilizing REITs if you want to find hands-off, tax-beneficial, and highly secure real estate investment strategies.

There won’t be any tax repercussions if you hold a REIT in a retirement account like a Roth IRA. It’s also a great strategy to diversify your retirement portfolio by adding some real estate.

10. Real Estate Limited Partnerships (LP)

Why should I make a real estate limited partnership investment?

Even more than REITs, these assets resemble mutual funds. They are run by a general partner, who is responsible for overseeing the partnership’s direct management of the properties it owns. Each additional investor is a limited partner.

As a result, even while you share in the profits, your losses are strictly capped at what you initially invested. It’s known as “limited liability” in this situation.

Similar to REITs, limited partnerships allow you to spend as little as a few thousand dollars in larger, more complex real estate ventures.

It is similar to owning stocks to have real estate limited partnerships. The partnership may be very profitable if it has competent management and makes investments in lucrative transactions. Dividends that are higher than those you would receive from equities are available to you on a consistent basis.

On the other hand, a poorly run limited partnership (LP) could cost you your entire investment. This investment can be quite successful for LPs with in-depth knowledge of how to invest in real estate to reduce risk and offer reliable rewards. Many are created primarily to serve as tax havens.

Due to the high rates of depreciation associated with real estate, the tax loss that LPs produce may be more significant than any actual profits.

11. Real Estate ETFs and Mutual Funds

An indirect way to invest in real estate is through the purchase of funds. Although you technically hold shares of the ETF or mutual fund, you do not actually own the underlying property. The funds make investments in the stock of businesses involved in real estate.

Why should I use mutual funds and ETFs to invest in real estate?

The funds make investments in REITs as well as in the equity of real estate investment trusts (REITs), developers, and builders. They have the benefit of being extremely liquid and are ideal for many types of investment portfolios, including retirement plans.

“The downside of real estate ETF’s and mutual funds – which is true of nearly all real estate related investments – is that they run with real estate cycles. When the real estate market is doing very well, they can be incredibly profitable. But when real estate is in one of its bust cycles, they can be one of the worst investments possible.”

12. Real Estate Investing Through Notes and Tax-lien Certificates (ADVANCED)

These real estate investing subcategories were chosen for last since they are often reserved for more experienced investors who are not risk-averse.

Although the payoff may take several years, both can be quite rewarding. In order to get compensated, you must invest money that you won’t need right soon and be ready to go through the foreclosure process.

Real Estate Notes

These entail acquiring mortgages for real properties. However, the mortgages you’re buying aren’t working. You get it?

Purchase subpar loans. Banks sell the notes to you at substantial savings.

You could be able to buy the loan for substantially less than face value, for instance, if a homeowner owes $100,000 on a mortgage but hasn’t made a payment in six months. Just to get the loans off its books, the bank is attempting to collect something on them.

The difference between what you pay for the loan and the amount you receive when it is repaid is your profit or loss.

The earnings may be considerable.

Once the debt is repaid, you can earn $30,000 if you pay $70,000 for a $100,000 note. Insolvency proceedings are a common method of settlement. You have the option to foreclose and sell the home as the new lender on the property. You are paid if it is worth at least $100,000.

However, if its value is only $50,000, you will incur a $20,000 loss.

Real estate notes have a huge potential for profit, but they also have a huge chance for loss. Because of this, only experienced investors are eligible for these loans.

Tax-lien Certificates

These are an alternative take on real estate that is not performing as expected.

Municipalities have the same issue as mortgage lenders: taxpayers who stop paying their taxes. The municipality issues a lien on the property when the owner stops paying their property taxes. Then, certificates representing the liens are offered to investors. As a result, the municipalities may collect the majority, if not all, of the taxes due.

The unpaid taxes and current interest rates can be collected by the certificate’s owner. These interest rates may reach 30% annually.

The lienholder may foreclose on the property if the owner is unable to pay the tax lien.

Conclusion

You just seen at least ten distinct strategies for investing in real estate. You can decide to invest directly by buying rental property or by fix-and-flipping. If you don’t want to deal with the hassles of real estate ownership, you can invest through P2P crowdfunding platforms, REITs, mutual funds, and ETFs. Or you may try your hand at real estate notes or tax lien certificates if you have the stomach (and money) for high adventure.

Real estate is a great way to diversify a long-term investment portfolio or retirement plan, so pick one or two. There are so many options, you simply need to pick the one that feels the most natural to you.

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