If you’re looking to diversify your investment portfolio, add another source of income, or both, real estate can be a viable choice for growing your money.
People may overlook real estate investments because they assume they’ll need to produce a substantial amount of cash upfront to get started, or they don’t have enough knowledge on the subject. Luckily there are various ways one can invest in real estate, depending on your experience level and current finances. In this article, we’ve outline seven different strategies to consider.
Why Invest in Real Estate?
Real estate properties are worthy investments because they tend to appreciate over time. When you’re investing in real estate, you’re putting your money down and allowing it to grow in the future. This pertains to the structure – be it a house, apartment building, or commercial property – but even more so, the land it sits on.
Some reasons a property may appreciate:
- Inflation – Housing prices will typically rise with inflation.
- Development – When an area continues to be developed over time, for instance if things like other housing developments, schools, an airport, or shopping centers, are built nearby, it will raise the value of the entire neighborhood.
- Demand – Greater demand results in greater value. If over time, more and more people want to buy real estate in a given community, the real estate value in that community will increase. Demand can grow as a community becomes more developed and thus, more desirable, or simply as population increases.
7 Ways to You Can Make Money in Real Estate
If we’ve piqued your interest in real estate investments, here’s a closer look at how you can make them:
1. Put a Spare Room Up for Rent
If you’re interested in getting into real estate investment but need to start small, you could get your feet wet by renting out a spare room in your home. The internet has made it very easy for transactions like this. Sites like Airbnb allow you to post a listing for your available room so interested parties can seamlessly browse and book. You can also post such information to social media sites like Facebook or Instagram.
Room rentals are a nice way to get started because there is little investment involved. It’s also much more flexible. You set the price per night as well as the availability. You could rent the room out to a tenant for a month, or maybe just a weekend. If you decide you no longer want to rent it out, you simply take the listing off any sites you posted it to.
It is worth noting that if you’re going to rent to strangers from websites like Airbnb, you may have to do some of the renter screening process yourself. Before you agree to book a tenant, be sure to do your due diligence. Check their profile on the website and look at past host reviews and ratings to get a sense of what type of tenant they are. You should also contact them directly, which you can usually do through the listing platform.
2. Long-Term Renting
Another great real estate investment option is to acquire buy-and-hold properties. In this case, an investor buys a property for the purpose of selling it down the line once its value has increased substantially. In the interim, the investor can rent the property out as a means to make additional income on it. When buying a property for its resale value, especially if your plan is to rent it out, remember that the location is everything.
Location typically dictates the value of a property so you’ll want to invest in areas with higher real estate value. Investment prices will be steeper but so will the returns. Narrow down the areas you want to invest in and do your homework on each. Find out if there are any older, more run down homes that you can buy for a cheaper price and then fix up.
For this type of investment, it’s likely in your best interest to hire a local real estate agent who knows the market well. Not only will they have a keen knowledge of the inventory, but they’ll know how to negotiate after a home inspection to try and lower the ultimate sale price. The less you put into the house, the more your return will be.
3. Vacation Rentals
A vacation rental property falls somewhere between room rentals and buy-and-hold properties. It’s a property that you purchase and own outright, but is considered a short-term rental property as the rental period that a tenant can book is typically 30 days or less. These are typically a solid source of income because vacation destinations – beachfront cities like Miami and San Diego, or ski towns like Aspen – have value all year round.
As with any type of real estate investment, vacation rentals do have their share of setbacks to be wary of. The better your property does in terms of bookings, the more money and effort you’ll have to put into managing it – making sure appliances are up to date and working well, fixing any wear and tear, etc. If you’re someone who has a full-time job and owns a vacation rental as a second source of income, the property management may become too time consuming.
4. Fix and Flip Houses
The fix and flip strategy in real estate investment focuses on buying houses at a lower price, and then renovating them to resell for a profit. In this case, you’re basically giving an old house a makeover to increase its value and attract buyers to it.
This is a strategy better suited for those with more experience in real estate investing as it can be quite risky and requires a strong knowledge of the renovation process. Every fix and flip property requires its own renovation budget. Your purchasing decisions will be made based on your ability to evaluate and estimate the various renovation costs associated with a given property to ensure it is within your allocated budget. That said, many times unexpected costs arise during the renovation process. For example, you could tear down the walls and discover there’s mold, a load-bearing beam that needs to be replaced or old wiring that needs to be redone. These types of unforeseen costs can cause you to go over your budget and eat into your return.
5. Try Online Real Estate Platforms
Online real estate investing platforms work by connecting investors to people who are looking for funding for their income-generating real estate projects. Investors come together online, pool funds, and invest in a commercial or residential property in exchange for profits. This type of arrangement is also known as real estate crowdfunding.
Investors who are using online real estate platforms expect to get an income from their investments, either monthly or quarterly, depending on the agreement. The downside of using online real estate platforms is that you may have to be approved as an accredited investor before you can invest. In other words, to qualify for the investment, you must have earned at least $200,000 in annual income for the past two years, or have a net worth of at least $1 million (as an individual or combined with your spouse’s net worth).
If you do not meet these requirements, there are certain platforms that are open to non-accredited investors, like RealtyMogul, Fundrise, and Groundfloor.
6. Real Estate Investment Trusts (REITs)
Real estate investment trusts, or REITs, work by pooling investors to generate funds that can be used to purchase or fund income-generating properties. REITs are companies that own several real estate properties like commercial buildings, apartment complexes, or hotel buildings. Buying stock from those companies allows you to enter the real estate investment market without actually owning the property.
REITs are attractive to investors for multiple reasons: 1. Since you don’t own the properties you invest in, you are free from the responsibilities of maintaining them. 2. REITs usually pay higher compared to other investments. This is because companies must cash-out 90% of their taxable income and distribute it to their investors through dividends. 3. When you invest in REITs, you can choose to reinvest your income from REITs back, which grows your investment (and income) even further.
Willing investors can buy REIT stocks on major brokerage firms (i.e. New York Stock Exchange or NASDAQ), or go for a non-traded REIT. If you’re relatively new to the concept, it might be better to stick to publicly-traded REITs because it is much more liquid and easier to sell compared to non-traded REIT.
If you’re considering investing in real estate properties through REITS, you might need to present a significant amount of money. Some companies offering REIT may require an investment minimum of around $1,000 to $25,00.
7. Invest in Commercial Real Estate
Commercial real estate properties are a great strategy for people looking to invest in larger projects like office buildings, shopping centers, retail stores, salons, healthcare facilities, hotels, etc. for income-generating reasons.
With commercial real estate, you’ll generally earn money through the leases of your tenants. The amount would be agreed upon beforehand, which is usually on a dollar-per-square-foot basis of the rented space. You can then collect the payment monthly or annually.
One of the upsides of commercial real estate investments is that it can lead to huge progress. As developers build on the property, it helps increase the value of the entire area. If the lease agreement comes to an end, having a developed space opens up an opportunity for others to lease the space at a higher price.
Disadvantages to commercial real estate investing are that it’s expensive and the process has many tedious steps, like securing licensing paperwork and zoning documents.
Helpful Tips to Remember When Investing in Real Estate
Hopefully this article opened your eyes to the various ways you can invest in real estate. Before you do, be sure to keep these three practical tips in mind:
1. Work with a Professional
Real estate can be a complicated process, especially if you’re just starting out. To avoid costly mistakes, appoint the help of professionals. Whether you’re buying or selling a property, you should work with a real estate agent to help you find the best deals, close them and evaluate risks. Working hand-in-hand with an expert in the field can be extremely educational. As you continue to expand your portfolio, you’ll be able to leverage your knowledge and maximize your profits in the future.
2. Study the Market
Before you make any purchasing decisions, study the market you’re looking to buy in. Get to know the current trends – what comparable properties have been selling for over the past few years, the average rent prices, seasonal influxes, etc.
Beyond the market, you’ll also want to familiarize yourself with the area, specifically things that can affect real estate value. What are the school systems like? Are there any exciting new projects in development? What is the employment rate? The crime rate?
The information you get from your homework will help you negotiate when you’re ready to make a purchase, and again when you’re ready to rent or sell.
3. Location, Location, Location
Again, location is everything in real estate. When looking for a property to buy or invest in, try to consider the following:
- Is the area in or near a good school district, malls, parks, and other recreational areas?
- Is there a revitalization plan in place for the locale?
- Is the population rising, and are development plans likely?
Use these questions as a checklist. Properties within areas that tick all these boxes are more likely to grow in value over time and are worth investing in.
The Bottom Line
There is definitely money in real estate, and there are different ways to earn it based on your comfort level and finances. Start small and work your way up. Seek the help of professionals and do your best to learn from them as much as possible. Like anything else, the more you do it the better you’ll get.