Real Estate investment isn’t always glamorous. Getting calls to deal with overflowing toilets or eliminating rodents isn’t anyone's idea of a great day. However, if you get the job done right, real estate can be a great form of passive income.
Real Estate is also a great investment for your existing portfolio and can help you climb up the ladder to larger investing opportunities.
To help you on your path, we will explain why investing in real estate is a great choice for your finances and your portfolio. We will also explain what makes a good investment and how to invest.
Why Should You Start Investing in Real Estate?
If you look at Forbes as a guide, their data shows that most billionaires made their wealth through investing in real estate. Although these wealthy people often started off with money to burn before beginning their building-buying business, this dramatic correlation between wealth and real estate shows us that even the titans of capitalist culture see strong value in this form of investment.
If you buy a small apartment or a luxury mansion, you will create a consistent cash flow from the moment you start renting. Depending on your location and how much you rent for, you will also be permitted tax breaks to help your growing businesses.
This means that the money you receive will likely be exempt from taxes, thereby lining your pockets ready for a rainy day.
Don’t be put off by the work of billionaires, though, as most landlords are regular people who have the money to invest in themselves. The only reason why you shouldn't invest in real estate is if you don’t have the money to place your investment.
If the money is there, the decision to invest will secure your financial future.
Is Real Estate A Good Investment?
You may have guessed this from the previous paragraph, but yes, real estate is a good investment.
If you are building up an investment portfolio, real estate should be one of the basic first pillars that you have created. There are two reasons for this.
The first is because real estate offers larger and steadier returns than the traditional stocks and bonds that most investors start with. The second is that because real estate is more stable, your portfolio can handle more risky investments as the overall risk will be reduced.
One reason why real estate is a great foundation for your portfolio is due to its illiquidity. It takes a long time and a lot of resources to sell a property, which means that putting money into a house will keep the money locked up.
This might sound like a bad thing because if your other investments go awry, you cannot reach your real estate money quickly. However, being unable to move your money will stop you from making too many investments too quickly.
Property will open you up to one of the best wealth-building processes; compound annual returns. Your money cannot move without taking up time, meaning you will not be tempted to back out of your investment, allowing you to rake in the compound interest.
10 Best Ways to Invest in Real Estate
It might seem easy enough to invest in real estate; all you need to do is buy a house, right? Well, there are actually dozens of paths to choose from, which all fit into the umbrella of real estate investments.
We are going to show you the 10 best investment opportunities for you to follow, which will give you great returns with levels of varying effort.
1. Real Estate Investment Trusts
Real Estate Investment Trusts are also known as REITs. They are companies or people where everyone involved pools their money together to invest in a singular property or multiple properties.
These trusts allow those who would not have the ability to invest in the property by themselves, bridge the financial gap, and make the investment.
The idea is that you can invest in real estate without buying the actual property. For example, the REITs could be for an office building, investing in it and making it better for the users. The owners then pay you for the privilege, and you receive high dividends from the exchange.
Once the agreement is made, the property in question is often leased out or rented, with the profits split between each investor. Although the property can be sold on, unless everyone in the trust agrees, this process can be tricky.
This type of investment is also more liquid than traditional real estate, as you can invest for long-term growth or a short-term one. Essentially, REITs work very similar to stocks as you can jump in and out of the investment relatively easily.
2. Rental Properties
The first thing that most people think of when they look into real estate investing is the ability to rent out the property. This is the most common form of real estate investment, and that’s not just because it is easy to understand; it’s effective too.
All you need to do, in theory, is buy a house/apartment/studio and rent it out to tenants. The idea is simple, but the realist demands shouldn’t be ignored.
First, you have to accurately investigate whether the property can make a return, then you have to keep up the finances for it. Once the house is prepared, you then need to consistently find tenants to occupy it.
This does take time, but once you have a routine, you should be able to settle into a new life as a landlord. Once everything is set up, you will receive rent that covers the mortgage and gives you constant income.
Another bonus is that your property will likely increase in value as long as it is kept well.
Houses cost a lot of money, so adding another mortgage and proving to banks that you can keep on top of repayments shows them that they can offer you more money for loans and investments, knowing you can handle the increase.
This is why renting real estate should be a big pillar in your investment portfolio.
3. Flipping Houses
In this day and age, “flipping houses” is a term that most of us know. Switch on daytime TV, and you’ll see a whole channel dedicated to flipping houses. If you don’t know this term, then let us explain a real estate investment and great TV show to you.
Some people go to auction houses, others use different market places, whichever way you find the property, you end up buying an old, broken, abandoned home. These homes are often sold by people in debt, and so they need however much money they can get, and they need it fast.
You can buy these homes for super cheap, sometimes for just $10. Once the cheap and broken property is bought, you can then use the money you saved from the purchase to repair the home.
Most of the time, re-creating the house will not cost as much as its new worth when you try to sell it again, however, the process is long and requires either physical labor on your end or the hiring of skilled professionals.
It boils down to this - you buy the house for cheap, make it better and sell it for more.
4. Investing in Land
Buying land is often cheaper than buying property. This is because there is so much you need to do to make the land profitable. If you hope to create a farm, a block of apartments, or a row of houses, you will need to invest more into this land than your original purchase.
Before you buy land, you need to know what you plan on doing with it and if the land is capable of being used in that way. For example, you cannot build an apartment block on sinking land.
Unlike the other investment, land investing can take years or even decades to complete, from purchase to finished design. The costs can also pile up, as buying the land is often the cheapest part of land investment.
That being said, you can go in your own direction. You don’t need to worry about previous builds and utilizing space already made for you.
If you want to look into investing through the land, you could look at raw land listings on MLS. MLS stands for Multiple Listings Services; you can also use real estate agents to guide you to the land, and it’s known details.
5. Real Estate Stocks, Mutual Funds, and Exchange-Traded Funds (ETFs)
This type of real estate isn’t commonly known, however, it is a great way to take advantage of the interest rates involved with real estate without spending a lot of money buying the property to begin with.
ETFs can come in many forms, including investing in things like home builders, home improvement suppliers, construction companies all the way to supporting government help for first-time buyers programs.
ETFs often have REIT shares, which we have spoken about before, but they don’t have to invest in one particular property to be used.
Regardless of which type of ETF you choose, these are all considered to be a stock type. This means they will rise and fall with the economy, and you will need to be patient and not react quickly if you see a dip in the stock.
6. Real Estate Crowdfunding
In 2012 a new law was set called the 2012 JOBS act. In this law, companies and real estate developers were allowed to invite investors and sell shares online. This created a whole new type of real estate investment called real estate crowdfunding.
It works by allowing those who would normally not qualify to be an investor, begin their journey on this path. 8.5 million more people started investing in low amounts creating low-value REITs for around $500.
The investors sign up to a crowdfunding platform, research the offers available to them, and make an offer. The platform then agrees or disagrees with the request, and then the new investor can start building a small capital on their investment.
The process is simple, but as this platform opens up investment opportunities to people who might not be educated in the process, it can lead to bad investing choices.
To avoid this, you need to be aware of what you are signing up for and the risks involved. If the property gets flooded, then your value in the real estate will be lowered.
No agreement is perfect.
7. Commercial Real Estate
Commercial Real Estate is where the big money is at, but to get into it, you often need to already have money. Also known as CRE, Commercial Real Estate is when you buy a property that is not for residential use.
For example, office buildings, hotels, warehouses, retail centers; that type of property. However, “multifamily residential properties” which contain 5 or more units of said property are considered commercial too.
This type of investment should only be considered by those who have experience in real estate. This is because building codes, legal documents, and cross-line laws will all be used in these contracts, and you need to understand them or know where to look to be sure that you haven’t broken any laws.
Despite the massive amount of research needed for this type of property, Commercial Real Estate processes are very similar to buying real estate for residential use. The idea is that you buy a property and then rent it out for others to use.
The complex nature happens when you involve the businesses and their individual sector guidelines.
8. Foreclosed Properties
Foreclosed properties, also known as REO or Real Estate Owned properties, are homes used as collateral for a secure loan (like a mortgage) and have been repossessed. The borrower has defaulted on the loan, so the home is now being sold to pay for their debt.
Foreclosed properties are often used in flipping houses, but we aren’t looking at the flipping for this section. Instead, we are talking about the property itself.
The lender will want the home sold as quickly as possible to pay for the borrower’s debt, and so the property will likely sell for a low price, however before you buy one you need to be aware of its state.
People in this amount of debt often have homes that are not well looked after and could be close to crumbling. Before you bid on the house, you need to look at the paperwork and examine the details shown to you.
Water damage, failed piping, location, and frame are all things you should be looking at.
Once you have calculated the cost of repair (including materials and labor), you can combine it with how much you believe the home will sell for once restored. Restored home value minus cost of repair will tell you just how high you are willing to bid on the REO before backing down from the auction.
9. Consider Renting Out a Room in Your House
This can be for a long-term or short term timeframe, but renting out a room inside a property you already live in is a great way to gain money from unused space.
For example, Airbnb, which is one of many online platforms which allow you to rent your property for a short amount of time, is a great way to rent off a room when you know your area has become valuable.
Do you live near a sports arena, and game season is soon? You can add a room to one of these platforms as demand will be high, and you have a prime spot.
This type of real estate investment is low cost, high return, and low risk as your property is already liveable and the renting time is short. Websites like Airbnb can help you value the rooms as well, so you can be competitive or more desirable compared to places around you.
The tax element of this type of renting fluctuates with how many days in the year the room has been rented. It also considers how much you made from the experience.
10. Online Real Estate Investing Platforms
Investors pay a fee to an online platform, which then shows them a bunch of investment opportunities. These opportunities allow great rewards with significant risks, which is why many of the platforms require the investors to be accredited or earn an income of over $200,000 in the last two years.
The investor then receives either monthly or quarterly income from the platform.
The platform shows the investors property suggestions, like a mall in their town, a hotel that needs refurbishment, or even a car parking lot. The idea is similar to other forms of banking, but the difference is that the online platform distributes and collects the payments, making it more of a “one stop shop” for investors.
What Type of Real Estate Investment Is Best For You?
There are a lot of different types of real estate investment, but the best one for you will come down to how you react to their pros and cons. Here is a quick summary for each type to help you better see which one strikes you as more secure and worth the risk.
Commercial Real Estate
Flipping A House
Long Term Rental Property
Mortgage Notes and Debt
Real Estate Crowdfunding
Real Estate Stocks, Mutual Funds and ETFs
Real Estate Investment Trusts
Real Estate Owned (REO) and Foreclosures
Short Term Rental Property
In most instances, you need to have a bit of knowledge about investments to bridge the gap to real estate investment. Without this knowledge, you might be limited to short-term rental properties.
However, once you get the hang of these investments, most of them will create an automatic cash flow increase for you.
Remember to look into tax reductions or tax exemptions for the type of real estate you are thinking of buying. Each state will have different laws, so you might need an accountant to guide you on this process if you are unsure.
Real Estate Investing FAQ's
Have more questions? We have more answers!
One of the biggest tax benefits you can claim from real estate comes from its tax-deductible nature. This is true for mortgage interest payments, property taxes, property insurance, and many more property-related benefits.
Therefore the real estate investment isn’t necessarily unfairly distributed, but the whole property market has been given a tax relief to which investors are allowed to get involved with.
On top of that tax relief, investors can also take advantage of the limited partnership and limited liability companies and their benefits. For example, there are tax deductions for office spaces, travel expenses, meals, and more.
Depending on your location, you should look into the tax codes, tax benefits, and self employment structures that are in place to look after your income.For example, in some states, the law The Tax Cuts and Jobs Act of 2017 has allowed tax deductions for passive incomes, meaning rent can have a tax deduction of up to 20%.
Depending on your location there are 4 types of tax implications that you need to be aware of.
Ability To Defer Taxes
Deferring your taxes for another year or even a couple months can allow you to get the most out of capital growth. However, you should be wary of missing your deferred slot and failing to pay altogether
Reducing Taxable Income
Because passive income (or income you earn without doing anything) is tax reduced, you could earn $100,000 from renting properties and pay no tax. For comparison, earning $100,000 through work, you could be taxed anywhere from $7,650 to $15,300, depending on your state.
This difference may not be fair, but it does exist.
Capitalizing on Depreciation
Depreciation is the amount of money it costs to pay for a single asset over its lifetime in your ownership. Because properties take a lot of time to become useless or lessen in value, the depreciation value is in favor of the investor. This makes it a great investment to capitalize on other taxable investments.
Capital Gains Tax
Properties are taxed on sale with a capital gains tax which is lower than income tax. This means that you can buy and sell properties at a lower rate giving you more value in the property.
No. You do not need to become a real estate agent to invest in real estate. However, from looking at the advice above, you may want to consider having a real estate license to get involved with the more lucrative real estate assets.
This will allow you to gain commission on the sale of your property and therefore earn a separate amount of money. If you become an accredited investor you will also have access to properties with higher rates but also higher risks.
If you are just starting off with your real estate investment journey, you should begin with the lower risk categories until you gain industry knowledge about the real estate world. Then you should consider these additional licenses.
Absolutely. Depending on your real estate journey you can make hundreds of dollars a month from rental properties or even rental rooms. You can charge your tenant above the mortgage price to give yourself a couple extra hundred dollars a month, or you can aim for larger sums by flipping a house.
Buying a house cheaply, and then doing it up can allow you to charge more for the same property you had bought not a year before. To do this well, you need to balance your budget when refurbishing the property.
This means possibly doing some of the work yourself instead of hiring labor. However, as long as you sell the house for more than you bought it for and for more than the cost of labor and materials, you will be able to make a massive profit.
Ideally, your flipped houses should start off as Foreclosures. These will cost very little money but may need more work to fix. Depending on your skill level, you can attempt to renovate the property all by yourself thereby cutting costs and earning a lot of money when the time comes to sell.
Again, depending on your location, there will be a required amount of money that you need to place on a property to get a mortgage from it. Usually this is 25% of the property's value, however it can range from 20% to 40%.
Ideally you should put down enough to make the mortgage easier for you to manage; however, when you go over 30%, the monthly cost often doesn’t change. Stick as close to 25% as you can.
When it comes to charging your tenants, you should aim for the mortgage cost you are currently paying plus 10% to allow for house maintenance and profit.
This figure should change depending on location and the property in question, but remember that if you charge too high then your tenants might not be able to afford the rent.
I’m Donny. I’m a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.