Takeaways
- You can invest in real estate properties directly or through gaining real estate exposure.
- Real Estate Investment Trusts, or REITs, are collections of properties that pay rent.
- Purchasing your first home or condominium is a fast way to start investing in real estate.
- Real estate investments have massive tax advantages over other types of investments.
- Owners of properties can generate rents from tenants that produce monthly cash flow.
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Constructing a well-diversified investment portfolio can be challenging. But as part of any financial planning process, you want to ensure your investments expose you to many different investment vehicles and markets. Finance professionals will tell you that gaining the classic exposure to a broad array of stocks, bonds, and real estate investments is an ideal place to start.
Real estate investing is super attractive for investors who want to add passive income to their portfolio. Like with most investing strategies, many investors don’t know exactly where to start when it comes to investing in real estate. Real estate can be incredibly profitable if done correctly, and there is an entire class of real estate professionals dedicated to buying and selling real estate properties – single-family, multi-family, commercial – to generate a return for their investment portfolios and clients.
5 Best Ways to Invest in Real Estate
The level of time, money, and maintenance to invest in real estate can vary dramatically. Here are five ways to make money in real estate ranging on a spectrum of low to high levels of involvement to get you started investing in real estate:
1. Buy a House
Part of the American Dream is buying and owning your own home. Buying your first house can be a terrific way to gain direct market exposure to real estate. Despite economic conditions and inconsistent inflation, buying a house or condominium can be a perfect way to check off two boxes: finding a place to live and building home equity, which can increase your net worth.
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Usually, the highest hurdle to buying your own home is saving for a down payment. Depending on your real estate market, purchasing a house can be a highly competitive and involved process. You need to understand the local real estate market, how neighborhoods are trending, and ensure you can comfortably afford your mortgage.
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Smart Money Score
Money Needed: Medium - High
Time Required: High
Best For: Individuals who can save the necessary down payment, are financially prepared, or can apply for special real estate loans (e.g., VA loans, FHA loans)
2. Invest in REITS
A Real Estate Investment Trust (REIT) is an investment security that allows you to invest in a real estate portfolio that produces income. REITs are often compared to mutual funds for stock investing because they are pools of portfolio capital that choose to invest in a variety of real estate properties, such as retail buildings, office buildings, hotels, apartment complexes, and more.
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Publicly traded REITs can be bought and sold on stock exchanges. If you have an online stock brokerage account, you gain exposure to real estate in a matter of minutes. Publicly traded REITs allow you to easily invest in real estate properties without the hassle of having to invest directly in a property. Additionally, REITs can provide dividend payments, generate high returns, and are more liquid than other types of real estate investments.
Smart Money Score
Money Needed: Low - Medium
Time Required: Low
Best For: Investors who want direct access to already constructed actively or passively managed real estate portfolios. REITS are also great for investors who basically want dividend-paying stocks.
(Upright Website)
Upright Online Real Estate Investing
Investments: Individual and Pooled Fund Real Estate Offerings
Potential Returns: Earn up to 13%
Minimum Investment: $1,000
3. Invest in Rental Properties
You can also start investing in real estate properties you specifically want to own and rent out to tenants to generate cash flow for yourself. Real estate investors usually do this with a couple of different approaches.
For the more budget-minded investors, you can look to find an investment property with multiple rooms that you can rent out to tenants. Additionally, you could live on the property and charge tenants a rent that covers your mortgage and taxes, providing you with a free place to stay (and completely offsetting your housing costs). This approach helps you build equity in the property over time. All you must do is accrue the money to purchase the investment property.
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Another popular approach is to buy an investment property to exclusively rent out to tenants and generate rents. Becoming a real estate investor can add passive income to your portfolio and help you buy even more investment properties.
Don’t want to get your hands dirty in either scenario when tenants complain about a busted pipe or property issue? You will need to find a property manager to assist with daily tenant needs. The cost of a property manager will reduce your rental income but should be considered an essential expense in your investment analysis.
Smart Money Score
Money Needed: Medium - High
Time Required: High
Best For: High-income earners or super savers who have the time, energy, and resources to visit and research properties.
4. Rent Out Excess Rooms
You don’t need to own your own million-dollar investment property, primary residence, or REIT to invest in real estate. Renting out excess rooms in your condo or apartment can help offset your housing costs and get you comfortable with the business model of real estate. You can do this with websites like Airbnb or VRBO. And if you purchased your own home, you may be able to rent out excess rooms or a studio garage apartment.
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Savvy real estate investors think about your spare room as excess capacity that can be easily turned into a cash flow generator. Getting tenants or roommates to help offset your mortgage will help you build equity in your condo or home and decrease your housing expenses. This is a win-win scenario that makes renting out excess rooms a popular first step into the work of real estate investing.
Smart Money Score
Money Needed: Low
Time Required: Medium - High
Best For: Real estate investors who are already renting a house with excess rooms or own a property with excess capacity or early-stage real estate investors who want to gain experience in the real estate market.
5. Online Real Estate Platforms
Real estate investment platforms - like Fundrise and RealtyMogul - have become very popular ways to begin investing in real estate without having to do a lot of heavy lifting. These real estate platforms help connect property developers with investors. Investors on the platform help real estate developers finance projects they are working on through equity or debt offerings. By investing in deals on real estate investment platforms, you earn monthly or quarterly checks from the developers. Like with all investing, these distributions are not guaranteed.
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Because of the more speculative nature of some of the investments on online real estate platforms, you are usually required to be an accredited investor. Accredited investors, according to the Securities and Exchange Commission (SEC), are defined as individuals who earned more than $200,000 during the last two years ($300,00 with a spouse) or have a net worth of over $1,000,000 (excluding the value of a primary residence) or holds a Series 7, 65, or 83 license [1].
Smart Money Score
Money Needed: Medium - High
Time Required: Low - Medium
Best For: High-income earners or super savers who can afford to participate in these transactions and want exposure to previously unavailable real estate investments.
Smart Summary
Real estate investing can add monthly rent payments, dividend distributions, liquidity, and financial exposure to a unique asset class. Financial advisors and finance professionals argue that a well-balanced and diversified portfolio should maintain investments in real estate. The percentage of your portfolio in real estate investments may ebb and flow with your level of real estate knowledge and risk tolerance. Becoming educated on such a huge part of the investment landscape is a smart money move.
(1) U.S. Securities and Exchange Commission. Accredited Investors – Updated Investor Bulletin. Last Accessed January 3, 2024.
