Interested in investing in real estate but feeling overwhelmed about where to begin?
Any new investment is intimidating at first when you’re still struggling to learn the vocabulary, challenges, risks, and rewards. But real estate offers some compelling benefits for investors willing to learn the ropes, from asset diversification to passive income to real estate investing tax benefits.
And you have plenty of real estate investment options to choose from. From a fast one-time payout to ongoing income, hands-on work to complete passivity, you can pick the right investment option based on your personal goals.
Here are nine popular options to help you start building your real estate empire – or at least add real estate to your portfolio.
Reality TV shows like “Flip This House” popularized house flipping back in the mid-2000s, and flipping’s appeal managed to survive the housing crisis and Great Recession.
It’s not hard to see why. When done correctly, investors can earn returns in the several hundred percent range in just a few months.
Of course, many new investors don’t do it right and end up losing money. Even those who do earn a strong return are often surprised at the amount of work required to achieve it. Flipping houses involves an investment of time and labor, not just money.
If you don’t feel like messing around with a hard money loan and rushed renovation, one other option is doing a live-in flip. You move into a home that needs updating, improve it over the course of a year or two, then sell it and pay only capital gains tax on the profit.
There aren’t many investing strategies that let you walk away with tens of thousands of dollars after just a few months. Flipping houses is one of them, but it comes with its own risks. So make sure you get the numbers right, particularly repair costs, carrying costs, and the after-repair value. Also, make sure you’re comfortable with managing and negotiating with contractors before trying your hand at your first flip.
Long-Term Rental Properties
Not everyone is cut out to be a landlord and deal with all the unexpected challenges landlords face. Still, rental properties can provide ongoing passive income and a slew of tax benefits for enterprising investors willing to take on the headaches.
There are three paths to buying your first rental property.
The BRRRR Strategy
One option is buying a property that needs renovation, but instead of selling it upon completion, you keep it as a rental. The BRRRR stands for buy, renovate, rent, refinance, repeat, and it’s a great way to finance 100% of your property purchases.
It works like this: You put down 20% or so with a purchase-rehab loan, make the renovations to create equity in the home, then rent it. With all that equity, you can pull cash out when you refinance for a long-term mortgage. Enough cash to refund your original down payment if you created enough equity.
This works because the refinance loan amount is based on the after-repair value of the property, rather than your original purchase price and repair costs.
That frees you up to repeat the process indefinitely using the same cash. And with each property, you add more passive income with no cash out of pocket.
Like flipping houses, new investors often get into trouble by underestimating costs, particularly renovation and carrying costs. Much of their success comes down to their ability to find good contractors who won’t raise costs on them mid-renovation. HomeAdvisor is a great place to find reputable contractors in your area. They put all contractors on their platform through a screening process to make sure you’re going to be hiring the best company for your needs.
Turnkey Rental Properties
Not so thrilled with the idea of hiring contractors and overseeing renovation projects?
A turnkey rental property is one that’s either already rented out or is in rent-ready shape. Expect to pay more, of course, since you’re not buying a handyman special. That said, you also avoid the headaches associated with renovating a property.
Over the last few years, it’s become much easier to buy turnkey rental properties anywhere in the country. Through Loyagami, you can have your turnkey rental properties easily
While there are many ways to house hack, the classic strategy involves buying a property whether it’s a house or apartment, moving into one unit, and renting out the other unit or units. The idea is simple: Your neighbors pay your mortgage for you.
But you need to be sure the location that can give your substantial amount of rental revenue to make this strategy works, but at least it will ease your mortagage payment per month
Short-Term Vacation Rentals
No one says you have to lease out your rental properties to long-term tenants. Sites like Airbnb, Travelio, and Airy let you rent them out short-term to vacationers or even mid-term to corporate guests.
Vacation rentals come with their own trade-offs, of course. Yes, you can charge more on a per-night basis, but your occupancy rates are lower. And while you won’t have the same headaches with nonpaying tenants and evictions, you’ll have other headaches, like cleaning the unit between guests, furnishing the unit, and paying for utilities.
Before investing in a vacation rental property or deciding to use an existing rental to host tourists, make sure you gather accurate numbers for expenses like vacancy rate, management fee, cleaning costs, and seasonal rents and occupancy rates. Include utility costs, and be conservative in all estimates.
It can be an effective business model if you approach it as a business and not a passive investment. Loyagami can help you provide the property management to help you do the day-to-day operation without hassle
Public Real Estate Investment Trusts
Real Estate Investment Trust Letters Blocks Houses
A real estate investment trust, or Dana Investasi Real Estate (DIRE) in Indonesia, is a type of security traded on public stock markets. The DIRE fund uses its capital to invest in real estate, either directly by buying properties or indirectly by lending mortgages against real property
One common advantage to DIRE compared to traditional stock funds is high dividend yields. By law, DIRE must disburse at least 90% of their profits to shareholders in the form of dividends, making for high-yield investments.
The downside of that high dividend yield is that DIRE often have trouble putting together capital to grow their portfolio since they have to immediately pay out so much of their profit to shareholders.
Real Estate-Related Stock Funds
Certain industries include a high exposure to real estate, such as commercial construction companies, homebuilders, home improvement retailers, and even the hotel industry. That means you can indirectly invest in real estate by buying shares in companies that make their living from the real estate sector.
You could invest by picking individual stocks or by buying industry-specific mutual funds or exchange-traded funds. Just be aware these companies’ stocks aren’t driven solely by real estate markets and could rise or fall based on reasons as varied as poor management, or high building material costs
Crowdfunding Websites & Private DIRE
Not all real estate crowdfunding websites operate on the same model.
In one model, the crowdfunding website provides financing for short-term purchase-rehab loans – the kind of loans flippers and BRRRR investors use. To come up with the cash to fund those loans, the crowdfunding website sources money from the public. As the capital investor, you can look over the loans currently being funded, evaluate the property and borrower, and invest money toward the loan.
Note that many crowdfunding websites only accept funds from accredited investors, set high minimum investment amounts, or both.
Private Equity Funds
Accredited investors with plenty of money to invest have more options than the rest of us. Among those options are private equity funds.
These funds allow wealthy investors to pool their money for larger-scale investments such as commercial buildings. A fund manager oversees the day-to-day operations – for a hefty fee, of course – leaving the fund’s investors to sit back, relax, and enjoy the returns.
Lending Money Hands Giving Cash
One way to invest in real estate indirectly and passively is by lendingmoney directly to real estate investors for a property purchase.
Most often, that means lending to friends, family members, and other people you know personally and trust with your money. That trust is key because if they default on you, you have little recourse other than suing them. Most private note lenders don’t get a lien against the property, and even when they do, it’s no trivial matter to foreclose on a property.
But typically, private note investors charge high interest rates. And when they personally know the real estate investor and their (hopefully excellent) track record, that often translates to low risk, high returns. Just be careful when mixing your personal life and financial investments. You’re risking your personal relationships, not just your money.
You have no shortage of options when you’re ready to add real estate to your investment portfolio.
Before deciding which real estate investing strategy to take, get very clear on your personal goals. Flipping is great for generating cash with a quick turnaround, but it’s a one-time payout that’s taxed as regular income, and it’s far from passive. In contrast, lending money in the form of a private note to your real estate investor friend is completely passive but leaves you with no control or assurances other than your personal trust in the borrower.
Real estate is a notoriously illiquid investment, so make sure you understand the time commitment for your funds before investing. Plan out your ideal exit strategy, then create a contingency plan in case you need to switch to Plan B.
As a source of high returns, ongoing income, and tax benefits, real estate makes a winning case for inclusion in your portfolio. But as with any investment, do your homework and understand the risks before shelling out your hard-earned cash.
How have you invested in real estate in the past? What are your concerns and challenges moving forward?