5 Strategic Ways to Invest in Real Estate
Investing in real estate is one way to build wealth. It can help you generate passive income, diversify your portfolio, and meet goals for retirement, rainy days, and life events.
Many people have made a fortune out of property ownership and the like, and it is lucrative if you have done your homework. To that end, read this article rounding up strategies to make money in real estate. First-time investors and those looking for the right time or tools may find this information useful.
From Real Estate Investment Trusts (REITs) to crowdfunding platforms, as reviewed, the options below present many paths of real estate investing.
REITs are companies that own and operate a wide range of income-producing properties, including malls, office buildings, hotels, resorts, and warehouses.
You can buy shares of publicly traded REITs or those registered with the US Securities and Exchange Commission and trading on stock exchanges. You can also invest in REITs through real estate mutual funds or exchange-traded funds.
What makes REITs worth the buy?
- It presents an easy way to get started as a real estate investor and earn from investments without actually owning, financing, or managing properties. According to the National Association of Real Estate Investment Trusts, REITs have gross assets totaling $3.5 trillion and own more than 516,000 properties in the United States.
- It provides regular dividend payments with REITs distributing 90 percent of their taxable income as dividends to shareholders.
REITs can vary in their specialization, and the price of their shares can fluctuate. You can also incur transaction costs when buying or selling shares.
Buying a house for rental purposes provides you with a steady source of income. You can sell the property when its value appreciates.
The most conventional way to own an investment property is through a loan with banks or hard-money lenders. This loan will cost more than that for an owner-occupied residence in the form of higher mortgage fees and downpayment of at least 15 percent.
Being a landlord comes with a host of responsibilities and skills. You also need to prepare for costs (both scheduled and hidden) arising from property repair and maintenance, legal advice and fees, taxes and insurance.
Here are modern alternatives to traditional leasing that will still generate income and act as a training ground for landlordship.
- House hacking involves occupying a house for residence and renting out the rooms or units in the case of multifamily housing as an investment. This strategy allows owners to generate rental income that would go to mortgage payments, utilities, and other property ownership costs. Based on the case study of Brandon Turner, who coined house hacking, one upside is getting a government-backed mortgage with a low down payment based on occupancy rules.
- Hosting on Airbnb offers a higher earning potential with per-night bookings than long-term rentals. Aside from the host service fee of three to five percent, the cost of maintaining the property is something to keep in mind. And as the host or owner, you have to exercise more vigilance in keeping an eye on the place every time.
Do you have repair skills and access to funds at the very least? If yes, consider house flipping, that is, buying a house for a low price and adding improvements for a higher resale price.
Also known as fix-and-flip, the strategy requires off-loading the property fast and profitably. Doing so also cuts losses from holding the property with its mortgage payments, utilities, and property taxes.
While flipping houses looks fun on TV, it is a business with the following realities:
- The project is time-bound and requires meticulous planning and working with professional contractors.
- Take into account the repair costs and determine after repair value (ARV) to make an offer that generates profit, based on the 70 percent rule.
- Traditional mortgages can be restrictive for flipping properties (e.g., FHA’s 203(k) rehab loan has a 90-day rule for that). It’s either cash or funding from private lenders for the upfront costs.
- Consider the location and the ease of transportation for you and the buyer. After all, you can’t fix a bad location.
Individual investors can pool their resources to participate in bigger deals. This way, they can afford otherwise pricier commercial or residential developments. This is the concept behind forming a real estate investment group or club that is organized as a company to manage the properties.
Real estate crowdfunding also harnesses the power of the collective but with a more diverse pool of participants and investment opportunities. It uses online platforms to connect investors to commercial deals where they can contribute and realize returns.
Here are several major reasons to participate in crowdfunded projects:
- The minimum investment per deal is lower (e.g., $10,000 can let you invest in a multi-million property).
- It offers diversification by investing in one deal or multiple projects.
- Platforms can have user-friendly interfaces.
Here are some considerations for you:
- Crowdfunding platforms may be open to accredited investors only. An accredited investor has a net worth exceeding $1,000,000, among other standards. Still, some platforms accept nonaccredited investors.
- Experiences from people who have worked with sponsors or used the platforms are very important. This is part of your due diligence in finding deals you can trust your money with.
- Management and other types of fees apply.
Real estate investing is not a get-rich-quick scheme, but it’s an opportunity to accumulate money with the right mix of strategies suitable to you.
- REITs distribute dividends.
- Renting out covers homeownership costs.
- Flipping houses when done right is profitable.
- Crowdfunding platforms present diverse opportunities for a relatively small amount of money.
Think long term, and always do your research to make informed decisions.