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Key takeaways:
- Real estate investing can be a great way to diversify your investment portfolio, and anyone can do it.
- You can make money two ways—right away, through a regular rental income stream and over time, as the value of your property appreciates.
- We cover 7 ways to start investing in real estate as a beginner. Some require more involvement on your part, and others allow you to invest in established real estate ventures.
You don’t need to be a real estate tycoon to make money by investing in property. In fact, if you’re a homeowner, you’re already on your way to building wealth through real estate investing.
Owning a home is often the first experience most people have with real estate investing, but there are many other ways to diversify your investment portfolio through property purchases. Several of them don’t even involve a mortgage.
Does real estate investing make sense for you? You have a lot of options, but it’s easy to get overwhelmed so let’s start by learning about some of the basics.
Real estate investing: a key component of a diverse portfolio
Real estate can be a good way to diversify your overall investment portfolio. While the real estate market has certainly had its ups and downs, investments in the sector have historically performed well.
According to the Federal Reserve Bank of St. Louis,1 the average price for a U.S. home rose every year between 1970 and 2007. Prices fell from 2008 to 2011 during the Great Recession, and dipped again in 2020 because of the pandemic, but have since recovered, and continue to rise.
How real estate investing makes money
You can basically make money two ways:
- Value appreciation. The increase in real estate value is known as appreciation. If you buy a property for $250,000 and later sell it for $600,000, you’ve realized $350,000 in appreciation. Growth in the value of your real estate investments depends on property size, location, amenities, condition, market forces, and other factors.
- Rental income. When you become a landlord, the rent you collect is considered real income for you. As long as you keep your property fully leased, this provides a reliable income stream that can help you pay the mortgage or leverage additional property purchases.
You can have it both ways; you can earn rental income while your property appreciates in value. However, when deciding to invest in real estate, it’s important to prioritize how you want to make money and when, and how involved you want to be in managing the property.
7 Ways to start real estate investing as a beginner
There are many ways to approach real estate investing. They differ mostly in terms of how involved you want to be along the way.
“Hands-on” approaches to real estate investing
These four approaches focus primarily on residential real estate and require active involvement on your part.
1. Rent out a room in your house
It’s not a bad idea to start small. An easy way to dip your toes in the water of real estate investing is to rent out a room in your home, either on a long-term basis or for short-term rentals.
2. Invest in a rental property
A rental property gives you two ways to benefit financially—through the income you make from the lease and through the long-term appreciation of the property itself. A lot of financial responsibilities come with being a landlord. Things like paying for the mortgage, insurance, and property taxes seem straightforward. But maintenance costs can be higher with a rental, and there are real costs associated with finding the right tenants. Certainly, you can hire a property manager to take care of all this, but their fees come directly out of your pocket.
3. Flip houses
While they admittedly make this look easier on reality TV than it really is, flipping houses can be a great way to build wealth through real estate investing. When you ‘flip,’ you buy a property, make improvements to it, and then sell it at a profit—all in a short amount of time. Hot sellers’ markets are hard for house flippers because the key to flipping success is to buy low and then sell high, generating enough profit to more than cover your purchase, renovation, and closing costs.
If you’ve got a lot of contractor contacts, or if you’re handy and have the time to dedicate to making the improvements yourself, this can be a good way to invest. But flipping houses requires both capital and vision. If you can look at a property and immediately see what ‘could be,’ you might be successful at house flipping.
4. Buy a second home
You can purchase a second home for your own use as a vacation property, or purchase an investment property. Both options provide good potential for equity growth, but they also come with extra costs in terms of maintenance, taxes, insurance, and more. If you’re on track for retirement and your budget will easily cover the expenses, investment in a second home may make a lot of financial sense for you.
“Hands-off” approaches to real estate investing
Although there are exceptions, these ‘hands off’ investment options usually have more of a focus on commercial real estate investment, and typically require only your money. In fact, you can invest in some of these with very little funding.
5. Real estate investment trusts (REITs)
When you invest in an REIT, you become a property owner but without all the responsibilities and headaches associated with ownership. With an REIT, the managers of the trust buy and sell properties, and you become part owner of their portfolios. You can buy shares of a publicly traded REIT company or REIT mutual fund just like you buy stocks or exchange-traded funds. REITs are available to ordinary investors, making them a good place to start in terms of real estate investing.
REITs generate income for the trust’s shareholders by purchasing income-producing properties such as shopping malls, office buildings, and others. You may also be able to make money by buying your shares in the REIT and then selling them later for a higher price.
6. Real estate investment groups (REIGs)
An REIG is like a mutual fund for rental properties, typically multi-family projects like apartment buildings or other commercial properties. When you invest in an REIG, you become part owner of that property, but the people who operate the investment group take care of all management responsibilities. REIGs are designed to be more flexible than an REIT. And when it’s well run, an REIG can become a very profitable investment.
7. Online real estate platforms
Sometimes called real estate crowdfunding, this investment option connects developers with investors who want to help fund projects in exchange for part of the profits of the development. This means you can invest without having to deal with any management responsibilities for the property, but it also means this can be a very speculative venture. Your investment can typically be structured as either debt or equity financing, which means you can either get repaid with interest or you can take a share of the profits of the venture. Investors usually must meet specific criteria in terms of net worth or household income to invest.
Importance of self-education in real estate investing
Research is king when it comes to real estate investing. Successful investors learn as much as they can about real estate markets before they jump in. If real estate is something that interests you, it should be both easy and fun to educate yourself.
Read articles, news stories, books, and blogs; attend seminars and surf the internet to become acquainted with real estate markets in your area. Study online sites to see what homes sell or rent for, how long they sit on the market before they’re sold, and other factors. Network with people in the industry to learn how they’ve succeeded. Some real estate investors even study to get their brokers’ license, so they can buy and sell properties themselves, saving thousands on realtor fees.
Before you jump into real estate investing, decide what type of properties you want to target and how involved you want to be in terms of managing those properties. Or, if you just want to test the waters, consider investing in an REIT.
Start building wealth
Real estate can be a great way to grow your overall wealth while diversifying your investment portfolio. Like all investing, it comes with risk and can be tricky to navigate, which makes it both intimidating and exciting.
Your investments in real estate can provide immediate cash flow from rental income, or long-term appreciation that is either realized when you sell the property or when you use the equity to leverage the purchase of other real estate properties.
If you’re not sure about it all, start small. But don’t wait to start; you’ll be glad you jumped in.
