Personal Finance

6 min read

August 18, 2020

How to Invest in Real Estate: 5 Simple Ways to Get Started

Be it mortgaged buyouts or fractional ownership, we break down the best paths to becoming a bonafide real estate investor

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With many forms of investing, it’s hard to directly see the value of what you’re investing in. You may intellectually understand what a stock or bond represents, but it’s still just a financial concept. You can’t feel it in your hands or see it with your eyes.

That’s why real estate investing has such a primal appeal. You’re buying something that takes up physical space, and you can increase its value by working on it yourself.

If handled correctly, real estate investing can be a great way to diversify your portfolio and make a little passive income. However, as with most asset classes, it can hard to find a good entry point into the market. Let's break down the different options through which you can get started on your real estate investing journey.  

What are the different types of real estate investing?

Real estate investors generally fall on a continuum between house-flipping handymen and entrepreneurs who barely know the difference between a Phillips head and flathead screwdriver. Which type of investment you choose will be largely influenced by where you fall on this spectrum.

Here are the different ways to invest in real estate - and what you need to understand beforehand.

#1: Buying a Second Property

You can buy a second property, rent it out and put that money toward retirement, additional properties or lifestyle expenses. You can rent to long-term tenants as a traditional landlord or look for short-term occupants on sites like Airbnb and VRBO.

Investors can potentially make more money with short-term rentals, but that also requires more time and upkeep. You’re responsible for cleaning the unit in between guests, answering questions and making sure the amenities are fully stocked for each guest.

Airbnb income can be fickle, often varying based on the seasons. When the COVID-19 pandemic hit the United States, many investors who relied on Airbnb bookings to pay their mortgages saw their incomes disappear overnight.

Long-term renting is a more passive, stable way to make money. You should still vet renters carefully by checking their credit report and contacting previous landlords. One bad renter can ruin your property and cause thousands of dollars in damage. It’s better to let the house sit empty for a month than to rent it to someone with a spotty credit history.

#2: Living in a Multi-Unit Home

One of the most common real estate investing strategies is to buy a multi-unit home, like a duplex or triplex, and live in one unit while renting out the others. If the housing market is favorable, you can earn enough money from the tenants to pay your mortgage.

You can also try flipping the multi-unit home slowly over time. An investor employing this strategy would choose one unit to live in, fix it up while living there and wait for one of the other units to become empty. After that, they would rent out the upgraded unit at an increased price and move on to the next unit.

Unfortunately, living so close to your tenants can be awkward - especially if they’re always pestering you about problems, paying rent late or having loud parties. If you have pleasant tenants, then living so close might not be an issue.

Selling a multi-unit home is often more difficult because there’s a smaller demand for them. It’s also more difficult to find multi-family homes to buy, especially in areas with good school districts. This is usually a better strategy if you’re single or married without kids.

#3: Flipping Properties

Buying properties, fixing them up and reselling them for a profit is one of the most common ways to invest in real estate. Unfortunately, it’s not as easy as HGTV reality shows make it seem. House flipping is one of the most time-intensive real estate investment options.

Flipping a house may include cosmetic upgrades, such as repainting the home’s interior, refinishing the hardwood flooring or installing new landscaping. It can also include major mechanical upgrades, such as fixing a leaky roof, replacing worn-out appliances or updating the electrical system.

Flipping properties requires a certain level of home improvement knowledge and expertise. If you end up having to hire out the work, you’re less likely to see financial gain.

One strategy some investors employ is to live in the home while they fix it up. By living in the home for at least two years, Investors can avoid paying capital gains tax on the profit when they sell the house.

This helps investors avoid paying two mortgages at the same time - but it also means they’re essentially living in a construction site. It may be too stressful to stay in that kind of environment if you have young kids or multiple pets.

#4: Investing in REITs

A Real Estate Investment Trust (REIT) is a company that invests in different types of real estate, such as malls, office buildings and apartment buildings. For example, the Vanguard Real Estate Index Fund Investor Shares (VGSIX) REIT holds companies that build and manage wireless towers, storage units and data centers.

Buying a share of an REIT is like buying a share of the S&P 500 index. It means you own a very small piece of many companies.

You can buy REITs from investment companies like Charles Schwab and Fidelity. REITs are arguably the best way to invest in real estate while also remaining diversified. Instead of relying on one house or one area of the country, your money will be spread through a variety of companies.

If you don’t have the time, energy or money to become a hands-on real estate investor, REITs are a great way to get your feet wet. You can sell shares of an REIT just like you would sell any other kind of stock. This makes them extremely liquid compared to other types of real estate investments, which are usually harder to offload.

#5: Investing in Real Estate Crowdfunding Companies

Real estate crowdfunding companies like RealtyShares or Fundrise let you invest directly in real estate projects. Instead of putting your money in an REIT where every dollar is spread out among dozens of companies, you can invest directly into one main project like an apartment complex in Miami or a new hotel in New York, and live out your wildest real estate mogul fantasies - albeit at a more affordable entry point.

The downside to real estate crowdfunding companies is that the money is often tied up in the project for several years. You’re also more directly exposed to risk because the money isn’t diversified like it is with an REIT. Real estate crowdfunding companies also tend to charge higher fees than REITs.

Zina Kumok
Zina Kumok
Zina Kumok has written for outlets such as Investopedia, Credit Karma, and Learnvest. Her expertise has been featured in Glamour, BBC, and Nerdwallet.

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