Investing in real estate offers diverse opportunities, from REITs and online platforms to owning rental properties or leasing out rooms. While rental properties provide a traditional route, the day-to-day demands of maintenance and tenant management can deter some investors.
Strategic real estate investing can deliver substantial returns, diversify portfolios, and create passive income streams. Many profitable real estate opportunities minimize hands-on management.
New investors may find the array of options overwhelming. Here’s a breakdown of effective real estate investment strategies, ranging from low-maintenance to more involved approaches.
Invest in REITs (Real Estate Investment Trusts)
REITs offer a way to invest in real estate without owning physical property. Similar to mutual funds, REITs are companies that own and manage commercial real estate such as office buildings, retail spaces, apartments, and hotels. They typically distribute high dividends, appealing to investors seeking steady income. Those who prefer growth over immediate income can reinvest dividends to compound their investment.
Are REITs a good investment? They can be, but their characteristics can vary widely. Some trade on stock exchanges like typical stocks, while others do not. The type of REIT chosen can significantly affect risk levels, with non-traded REITs often being illiquid and challenging to value. For new investors, publicly traded REITs, accessible through brokerage firms, are generally recommended for their liquidity and transparency.
To invest in REITs, you’ll need a brokerage account, which can be opened quickly with many firms requiring no initial investment (though specific REITs may have minimum investment requirements). Another option for diversified exposure to real estate is investing in funds that hold stakes in multiple REITs, such as real estate ETFs or mutual funds focused on REIT shares.
Utilize an Online Real Estate Investing Platform
Online real estate investing platforms facilitate connections between developers seeking financing for projects and investors interested in providing funds through debt or equity. Investors typically expect to receive regular distributions, either monthly or quarterly, in return for assuming significant risks and paying fees to the platform. However, similar to many real estate investments, these opportunities are speculative and lack liquidity — they cannot be easily sold like stocks.
The challenge lies in the initial capital requirement. Many of these platforms are accessible only to accredited investors, as defined by the Securities and Exchange Commission (SEC). Accredited investors are individuals who have earned income exceeding $200,000 ($300,000 with a spouse) in each of the past two years or possess a net worth exceeding $1 million, excluding their primary residence. Alternatives for investors who do not meet these criteria include platforms like Fundrise and RealtyMogul.
Consider Investing in Rental Properties
Tiffany Alexy stumbled into real estate investing at just 21 years old when she purchased her first rental property. A college senior in Raleigh, North Carolina, she originally intended to attend grad school locally and saw buying a property as a more financially sound decision than renting.
“I found a four-bedroom, four-bathroom condo on Craigslist set up for student housing. I bought it, lived in one bedroom, and rented out the other three,” Alexy explains.
This arrangement not only covered all her expenses but also generated an additional $100 per month in cash flow — a significant boost for a grad student, sparking Alexy’s interest in real estate investing.
Alexy employed a strategy known as “house hacking,” a term popularized by BiggerPockets, an online resource for real estate investors. House hacking involves occupying an investment property by renting out rooms or units in a multi-unit building. David Meyer, vice president of market intelligence at BiggerPockets, notes that house hacking allows investors to purchase properties with up to four units while still qualifying for residential loans.
Alternatively, investors can buy and rent out entire investment properties. The key is finding properties where rental income exceeds expenses. For those averse to hands-on management tasks like repairs, hiring a property manager is essential.
“If you choose to manage it yourself, you’ll gain valuable industry experience. This knowledge will be beneficial when you invest in future properties,” advises Meyer.
Consider Flipping Investment Properties
Flipping houses brings the excitement of HGTV into reality: You purchase an undervalued property needing some TLC, renovate it economically, and then sell it for a profit. Known as house flipping, this strategy is more challenging than portrayed on television and has become costlier due to rising building material costs and mortgage interest rates. Many flippers aim to purchase properties outright with cash.
“There’s a significant risk factor because accurate cost estimation for repairs is crucial,” explains Meyer. “It’s not an easy task.”
His advice: Partner with someone experienced. “You might have capital or time to contribute, while finding a contractor skilled in cost estimation or project management,” he suggests.
Another risk of flipping is decreased profitability with time, as holding costs accumulate without generating income. One way to mitigate this risk is to live in the property during renovations, particularly if repairs are cosmetic and you can tolerate some temporary inconvenience.