• With so many different ways to invest in real estate, there are options for anyone who wants to become a real estate investor.
  • Real estate can provide recurring income, long-term appreciation, tax benefits, portfolio diversification, and equity.
  • New investors need to watch out for market shifts, potentially high upfront costs, and regulatory challenges.

Learning how to successfully invest in real estate can increase your financial stability and grow wealth over time. While buying your own home may be your first real estate investment, there are any number of other potential opportunities.

This article will show you five different ways to invest in real estate, the pros and cons of real estate investing, and how to start investing in real estate. As with any investment, there are risks associated with investing in real estate. It is advisable to seek counsel from local experts, including real estate agents, attorneys, tax professionals, and financial advisors, before proceeding with an investment.

How To Invest in Real Estate - The Basics

There are many different ways to invest in real estate. Some investors look to generate recurring income from their investments, while others look to earn a profit by buying low and selling high. Some manage to do both.

One important lesson in learning how to invest in real estate is understanding your options and the advantages and potential disadvantages each offers.

5 Ways To Invest in Real Estate

Here are five popular ways to invest in real estate.

1. Rental Properties

Long-term rentals, often referred to as “buy-and-hold” properties, are units that you purchase and rent out to tenants. You can invest in single-family homes, multi-family apartment buildings, or even commercial spaces.

Advantages of rentals:

  • Recurring monthly income potential.
  • Long-term appreciation potential.
  • Some expenses may be tax deductible.[1]
  • You can leverage mortgage loans to acquire properties without paying all cash.

Disadvantages of rentals:

High upfront costs.

  • Ongoing leasing and property management required.
  • Unexpected maintenance issues and vacancies.
  • Possibility of difficult tenants who damage the unit or fail to pay rent on time.

2. Flips

Flips are properties that are purchased, renovated, and resold quickly. Single-family homes, multi-family apartments, and commercial spaces can all potentially be flipped for a profit. Flippers often try to find distressed properties priced below market value, giving them a greater chance for profitability. This includes the costs of purchasing and then improving the property, with the intention of selling the improved property for more than the total of the purchase, renovation, and holding costs.

Advantages of flips:

  • Quick timeframes, which free up capital for the next project.
  • Strong return potential, particularly when the project is well-managed and market prices are increasing.
  • Some expenses may be tax deductible.[1]
  • You can leverage mortgage loans and construction loans to finance the project.

Disadvantages of flips:

  • High upfront cost.
  • Potential for unexpected expenses and delays during renovation.
  • Hands-on management is required, either completing much of the work yourself or overseeing a trusted contractor.
  • Changing market conditions could make it difficult to find suitable properties or sell completed properties.

3. Real Estate Investment Trusts (REITs)

REITs are companies that own and operate income-producing real estate on behalf of investors.[2]

REITs often own property that would be difficult for individual investors to purchase and manage, such as retail shopping centers, office buildings, or large apartment complexes. REITs vary in size and range of properties. Some specialize in a specific property type,

while others specialize in a geographic area. Large REITs may have many properties spread across the country. Investors earn periodic dividends based on the portfolio's performance.

Advantages of REITs:

  • Recurring passive income from dividends.
  • Comparatively low upfront cost.
  • Ease of purchase, particularly for REITs that are traded on exchanges.
  • Automatic diversification since REITs own multiple properties.

Disadvantages of REITs:

  • Can be difficult to sell shares when REITs are not publicly traded on exchanges.
  • No choice in which properties are included in a given portfolio.
  • Changing market conditions could affect the portfolio’s performance.

4. Real Estate Crowdfunding

Crowdfunding allows you to pool funds with those from other investors to finance a real estate initiative.[3] The effort could be almost anything — for example, a new development, a project designed to be sold on completion, a long-term residential rental, or a quick flip. Because the deal is professionally managed, you get to leverage the experience of the experts, and enjoy the benefits of real estate investing without managing the property yourself.

Advantages of crowdfunding:

  • Comparatively low upfront cost.
  • Potential for recurring rental income or proceeds from the sale, depending on the deal.
  • Diversification available by spreading your investment capital among different deals.
  • Ease of investment via online platforms.
  • You get to leverage the expertise of the project manager.

Disadvantages of crowdfunding:

  • Limited potential to cash out before the deal is completed.
  • Lack of control over the direction of the project.
  • Some deals are limited to those who meet the Security and Exchange Commission's criteria for accredited investors.[4]

5. Rent Out Spaces on Your Property

Homeowners are finding creative ways to generate income from their properties in a strategy known as house hacking. You could, for example, rent out a spare bedroom in your home. You could also rent out storage spaces or parking spaces. Some homebuyers even choose small multi-family properties so they can live in one unit while renting out the other(s).

Advantages of house hacking:

  • The upfront cost can be low, particularly if you already own your home.
  • Recurring monthly income potential.
  • More loan types available for primary residences than investment properties.

Disadvantages of house hacking:

  • Other people on your property.
  • Could lead to extra wear and tear.
  • Requires ongoing management.

Pros and Cons of Real Estate Investing

Be sure to weigh the upsides and downsides of investing in real estate before making your first purchase.

Key Benefits of Investing in Real Estate

Varied Options

With so many different ways to invest in real estate, there are options for nearly any budget and timeframe.

Cash Flow Potential

Some investment types, such as rentals and REITs, provide recurring income.

Appreciation Potential

While property values can decrease under certain economic conditions, property values rise over the long term.[5] It is also possible to force appreciation by adding value to a property through development or renovation.

Tax Advantages

Property owners may be able to deduct certain expenses, such as mortgage interest, property taxes, operating costs, depreciation, and repairs. Due to the complexity of income tax, it is advisable to consult with a tax professional before investing.

Diversification

Diversification means including different asset types in your investment portfolio. If one investment performs poorly, the other investments may bolster the portfolio. Real estate offers diversification from traditional securities-based investment portfolios.

Equity

Equity is the value you own in a property. As you pay down the mortgage and the property appreciates, your equity grows. This equity can be converted to cash through tools like home equity loans and home equity lines of credit.

Debt Leverage

Real estate enables qualified investors to borrow money to finance their investments. This provides an opportunity to own assets that are valued far higher than the amount of cash you put into the deal.

Hedge Against Inflation

While inflation devalues cash, it can add value to assets like real estate by pushing property values and rental rates higher.[6] This would increase both cash flow and appreciation.

Potential Challenges and Risks of Real Estate Investing

Market Shifts

Changing market conditions can cause property values and/or rental rates to decline, which can cause investors to lose money. This typically happens when supply exceeds demand, which can be caused by multiple factors, including declining employment, increases in new construction, or mortgage interest rate hikes.

Holding Costs

Property owners incur costs, such as property taxes and insurance, even if the property is vacant and not generating income. It’s important to have a plan to cover those expenses during periods of vacancy.

Potentially High Upfront Costs

Direct ownership models, like rental properties and flips, require a down payment and closing costs.

Comparatively Low Liquidity

Liquidity measures the ease of converting investments to cash. Many real estate investments are considered low liquidity because it takes time and effort to sell properties and receive the proceeds from the sale.

Regulatory And Legal Challenges

Laws and regulations govern property purchases, structural developments, and landlord-tenant relationships. Because laws and regulations vary from one city to the next, it’s best to consult with a locally licensed real estate agent or attorney before cementing your decisions.

How To Start Investing in Real Estate

Step 1: Assess Your Financial Situation and Set Your Investment Goals

Determine how much you can afford to invest and how active you want to be in the management of your investment. Decide how much risk you’re willing to take. Set specific goals for the investment, such as the amount of cash flow you wish to earn or the amount of appreciation you’d like to see over time.

Step 2: Choose a Real Estate Investment Strategy

Based on your financial situation and investment goals, select a real estate investment strategy. You may want to start with a simple investment to gain knowledge and experience before moving on to more advanced investments.

Step 3: Research Markets

Get to know the market in which you plan to invest. If you’re looking at rental properties, for example, search for pricing information and rental rates online. You may also want to enlist the assistance of a licensed real estate agent or attorney early in the process since they have insider knowledge of the market.

Step 4: Evaluate Individual Opportunities

Explore specific properties, REITs, or crowdfunding platforms. Look for properties or deals with the greatest potential to meet your investment goals from step one.

Step 5: Arrange Financing and Make Your Investment

If you plan to purchase a rental or flip, learn about your home loan options and prepare to make an offer when you find the right property. If you plan to start with a REIT or crowdfunding platform, place your investment online.

Final Thoughts

Real estate investing is a strategic method for building wealth, and you can get started now. Even if you’re not quite ready to purchase an investment property of your own, you can use REITs, crowdfunding, or house hacking to start making money in real estate. Then, you can funnel that capital toward larger real estate investments until you have a portfolio that supports your goals.