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How to Invest in Real Estate: 4 Distinct Ways to Make Money

Learn the four types of real estate investing, their pros & cons, and how to choose the best option.

Investing in real estate is an exciting way to earn passive income and a great strategy for diversifying your investment portfolio. It allows you to use properties to build wealth.

There are different ways to invest in real estate, each with pros and cons. Your options depend on your risk tolerance and desire for active involvement.

What Is Real Estate Investing?

Real estate investing involves purchasing, owning, managing, renting, or selling real estate for profit. It is a form of investment that capitalizes on the potential appreciation of property value over time, in addition to generating rental income.

How It Works

Real estate investors make money through rental income and appreciation in property value. The key to successful real estate investing lies in purchasing properties at a price that allows for profitability through rental income, future resale, or both.

How to Make Money with Real Estate

  1. Rental Income: This is the monthly income you receive from tenants if you own rental property. It’s a primary way many investors earn through real estate.
  2. Appreciation: Over time, real estate typically increases in value, allowing investors to sell properties for more than they paid.
  3. Business Operations: If your property includes a business (like a laundromat or parking facility), you can earn income from those operations.
  4. Side Hustle: You can rent your extra bedroom, garage, driveway, and yard through short-term stays for extra income.

Examples of Different Types of RE Investing

  • Residential Real Estate: Involves purchasing single-family homes, apartments, condos, or townhouses to rent out or sell at a profit.
  • Commercial Real Estate: Includes office buildings, warehouses, and retail spaces. These properties can offer higher rental income but may require more significant initial investments.
  • Industrial Real Estate: Involves investing in factories, business parks, or mines.
  • REITs (Real Estate Investment Trusts): Allows investors to invest in real estate without owning physical properties. REITs are traded on stock exchanges and invest in various real estate assets.

How to Find Real Estate Opportunities

Familiarize yourself with your local real estate market. Look for areas with high growth potential or high demand for rentals. Let your network know you’re in the market for real estate. And use websites like Zillow, Realtor.com, Redfin, and LoopNet that offer listings for residential and commercial properties.

You can also consider finding properties through real estate auctions. These properties are sometimes sold at lower prices at auctions, though this can involve higher risk. Additionally, you can join real estate investment groups that provide opportunities and insights for investment.

Where Should You Focus?

  • Focus on emerging neighborhoods: These are areas on the brink of development and present lucrative opportunities.
  • Find stable markets: Established areas with consistent growth rates can offer lower risk.
  • Look at markets with high rental demand. University towns, areas near airports and event spaces, and areas with high employment growth typically have strong rental markets.

How to Invest in Real Estate: 4 Ways to Earn with Property

There are many different ways to invest in real estate. The following are four types of investments, their pros & cons, and how to choose the best option.

1. Invest in Your Own Home

Investing in a home is how most people become real estate investors. A home is a long-term investment that can appreciate and provide a solid return. But a home isn’t a “real” investment because you need a place to live and can’t profit from the house unless it’s sold.

However, you can turn your home into an income-producing property. There are many ways to rent spaces in your house to help you earn extra income and reach financial goals, such as paying off the mortgage faster (read about house hacking).

Turn your home into an income-producing asset

Consider the following ways to have your home generate rental income:

  • Rent a spare bedroom: List unused rooms on Airbnb and other sites for travelers on a short-term basis. This is best for those who enjoy the company of others and meeting new people.
  • Rent garage space: Offer your garage to store other people’s stuff. Neighbors.com is a site that can help.
  • Rent parking spots: If your house is near city centers or large entertainment or sporting venues, you can list your driveway for cash. Neighbor.com and SpotHero are options.
  • Rent backyard: Depending on the size of your backyard, you may be able to rent it for income. This includes renting your pool to others, too. Peerspace is one such marketplace that connects homeowners with day-use renters.

2. Invest in Rental Properties

Another way to become a real estate investor is to own rental properties. You can buy and hold different investment properties, such as single-family homes, duplexes, triplexes, multi-units, commercial buildings, land, etc.

The great thing about rental property is the recurring cash payments, capital appreciation, and multiple tax advantages. 

However, the process can be time-consuming and work-intensive, and you might find yourself with more work as a landlord. Hiring a property manager can reduce your workload, but they will take a percentage of the monthly rent. It’ll impact your monthly cash flow revenues, but the cost may be worth it for those who want to own property and not have landlord duties.

How to invest in rental properties

Owning rental property is as straightforward as owning your home. The only difference may be how investment properties are financed compared to primary residences. It often requires a higher down payment and goes through stricter mortgage underwriting.

There are two ways you can make money with rental properties.

  • Short-term rentals. With short-term rentals, you are choosing to earn income with short stays. Many consider placing their rentals on Airbnb or Vrbo. It requires more management, but you can hire a manager to do the work for you. One thing to consider is the location for short-stay rentals. Are you close to an airport or a venue? Does the city attract tourists?
  • Long-term rentals. These properties are designed to be rented ideally for a year or more with a long-term tenant. The goal is to provide consistent and regular income. 

Before you invest in real estate rentals, be sure to research all of the rules and regulations regarding the area where you plan to invest. Some locations restrict short-term rentals, and other areas can offer higher income for long-term rentals.

3. Buy Real Estate Investment Trusts (REITs)

REITs are real estate investment trust firms that pool investor funds into a portfolio of properties. It’s a good option for individual investors who don’t want to manage real estate properties.

Real estate investment trusts (REITs) make their money from owning real estate assets such as office buildings, shopping centers, hotels, and apartment complexes. REITs will either lease, rent, or sell the properties for profit. As a trust, there are rules on what assets they can own and how they return capital to shareholders through dividends. Most real estate investment trusts (REITs) focus on one type of property — residential, industrial, commercial property, multi-unit buildings, healthcare facilities, or infrastructure.

If you want to start investing right now without spending a lot of cash upfront, consider investing in REITs instead. With REITs, the trust manages the property. All you need to do is collect your dividends, which are often higher than many stock-based dividend payouts.

How to buy REITs

Investing in publicly traded real estate investment trusts (REITs) is similar to investing in stocks, exchange-traded funds (ETFs), or mutual funds. You can buy and sell REITs through a brokerage account like trading company stocks, making owning them more liquid than owning real property. According to Nareit, the National Association of Real Estate Investment Trusts, there are over 200 publicly traded REITs available in the stock market.

Learn how to open a brokerage account.

There are also non-traded REITs registered with the SEC (Securities Exchange Commission), but you cannot buy them through an online brokerage. Instead, you can purchase them directly through real estate crowdfunding platforms like Fundrise and RealtyMogul. These real estate opportunities are available for non-accredited investors but will require a minimum investment.

Additionally, private REITs are available to accredited investors with at least $1 million in net worth or at least $200,000 in annual income for the previous two years. These real estate deals are not correlated to stock market performance.

4. Flipping Houses

Instead of owning property, consider becoming a real estate flipper. House flipping is another strategy involving buying properties in good locations, renovating them, and reselling them for a profit. Expertise in valuation and renovation is required to find the best opportunities. Flipping homes has high costs, from remodeling expenses to real estate commissions to taxes on capital gains.

The goal of real estate flipping is to hold the house for the least amount of time. The idea is to find undervalued properties in hot markets and up-and-coming neighborhoods.

How to Flip Houses

It’s vital to understand the real estate market before investing in a flip. Equally important is assessing the total cost of renovation. Some homes may have significant issues that need to be addressed, which can add to the expense. 

Flipping property requires a good relationship with a real estate agent, funding for the renovation, and a list of trusted builders, electricians, and plumbers. Additionally, project management skills and a knack for navigating city hall for permits and inspections are a must.

Additional Considerations

  1. Set Your Goals: Define what you want to achieve through real estate investing and your timeline.
  2. Follow A Budget: Determine how much you can afford to invest and how you will finance your purchases (mortgages, loans, etc.).
  3. Market Research: Analyze different markets and types of properties to identify promising investment opportunities.
  4. Understand Risks: Properties require maintenance, and unexpected repairs can affect profitability. External economic factors can also impact property value. And rental properties carry the risk of vacancy or tenants who damage property or do not pay rent.
  5. Start Small: Your first investment doesn’t have to be a huge property or a significant project. Small, manageable investments can introduce you to real estate investing with lower risk.

Are you investing in real estate?

Jason Vitug

Jason Vitug is a bestselling author, entrepreneur, and founder of phroogal.com and thesmilelifestyle.com. His purpose to help others live their best lives through experiential and purposeful living. Jason is also a certified yoga teacher and breathwork specialist and has traveled to over 40 countries.

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