Most people are well acquainted with the notion that investing in real estate can be an effective path to building wealth. However, a lot of people don’t realize just how many ways to invest in real estate are available to them.
There are many more options than buying rental properties and house flipping, to use two of the better known ways to invest in real estate. And some of them don’t even require purchasing any property. This can make them surprisingly accessible, even to individuals without large sums to invest or with less-than-stellar credit.
Take a look at this quick introduction to seven ways to invest in real estate, then delve deeper into those that are most appealing to you.
Investing in Real Estate: A Variety of Options
- Rental property – You can buy a single-family or multi-family home, condo, apartment complex, beach house, retail store or other commercial property, industrial facility, etc. and rent it to tenants. This requires a down payment, with the goal being to bring in enough rental income to cover your mortgage, property taxes, and other expenses, and also provide some profit to start recouping the down payment and eventually earn a true profit. You must maintain the property and keep it occupied to earn money. Hiring a property manager makes life easier, but generally reduces your monthly income by around 10 percent.
- Property flipping – This is the term for purchasing an underpriced home or other property, making improvements to it, and selling it for a profit. A number of television programs on HGTV and other networks depict the process, but they tend to make it look a lot quicker, easier, and safer than it actually is. In reality, there’s a significant amount of risk with this investment strategy—often because renovations end up taking much longer and costing much more than anticipated—but the rewards can also be significant. See our post on where to find low-priced real estate if you’re thinking about property flipping.
- Real Estate ETFs – Exchange-traded funds (ETFs) are one of the most popular ways to invest in real estate that don’t involve buying property. These are a group of stocks or bonds in a single fund, and can be compared to mutual funds and index funds because of their relatively low cost and wide diversification. By purchasing ETFs that are focused on real estate, such as those investing in hotels, resorts, and office buildings, you can invest without holding any physical real estate and while maintaining a diverse portfolio. Real estate mutual funds are another similar option.
- REITs – Real estate investment trusts are another of the property-free ways to invest in real estate. These are similar to mutual funds. They’re good for people who like to make passive investments and who aren’t necessarily looking for regular income and instead will keep reinvesting the dividends (which tend to be higher than with stocks). You’re investing in companies that own commercial real estate. Some REITs trade on an exchange like a stock, while others are not publicly traded. Newer investors generally do better with publicly traded REITs, as the risk and complexity is greater with private REITs.
- Stock in real-estate focused companies – Of course, you can always directly buy stock in companies that aren’t REITs, but that are involved in real estate. Hotels and resorts, timeshare operators, real estate developers, large-scale homebuilders, and construction companies are just some examples. Expect lower dividends than with REITs, but you have more control over your investments. This can be a good option for people with some experience and who like to research companies and stay actively involved in managing their investments.
- Crowdfunding investments – Today, there are a good number of websites that connect developers to people who want to invest in their projects. Often—but not always—you have to be an accredited investor to use these sites. Some popular examples of these platforms include RealtyShares, RealtyMogul, and Fundrise. Some, like the latter, allow you to start with as little as $500. Look into the historical performance on any sites you consider, and keep an eye on the fees you will incur.
- Rent out a room – This option isn’t so much an investment as a way to generate an additional stream of revenue from an asset you already own. If you have a spare bedroom in your home, an apartment over your garage or in your basement, or a mother-in-law suite, rent it out. This is a simple, low-risk way to experiment with making money from real estate. Local college students or recent graduates are often interested in affordable options like these. Also, Airbnb is a popular platform for finding short-term tenants who are visiting your area and looking for a lower-cost, more personal and authentic alternative to a hotel.
