How to Invest in Real Estate — Even if You’re No Mogul
You might already be investing in the stock market, whether your goal is to fund an upcoming splurge or enjoy a relaxing retirement.
But investing in real estate? That’s a whole different level of penny hoarding… right?
Considering the average price of a new home in America is a whopping $362,400, per Census data from November 2018, it’s easy to think that real estate investments are out of reach for the average earner. Even a minimal 3% down payment on that amount is a five-figure sum!
But at the same time, investing in real estate is one of the most reliable ways to build wealth — and you don’t have to buy a whole strip of office buildings or a swath of rental properties to do it.
In this post, we’re going to cover how to invest in real estate with little or no money to start with, as well as some more creative ways to boost your earnings if you’re getting ready to buy a home.
Why Investing in Real Estate Is a Good Idea
You might think that real estate investing is not only unaffordable, but also a plain old waste of time. Why sink so much money into buying property when there are so many other ways to generate cash flow?
Why is real estate such a good investment?
Well, for one thing, when it goes well, it goes really well. Smart real estate investing is one of the easiest ways to become a self-made millionaire. (Remember, though, that “easy” is relative.)
Even if you’re not hoping to become rich Uncle Pennybags, investing in real estate is a great way to earn a passive, or at least semi-passive, income.
Depending on your approach, your investments could reap rewards with almost zero work on your end.
“Real estate offers a continuum of effort that the investor can put in,” says Scott Trench — and he should know. He’s a personal finance author, house-hacking guru (more on that in a sec!) and the CEO of BiggerPockets.
Oh, and did we mention he’s a real estate investor whose properties have him on track for early retirement… even though he’s yet to celebrate his 30th birthday?
“I like to think of it as a semi-passive business,” Trench says.
When properly managed, investments like rental properties can earn help you earn a hefty paycheck for relatively little work — but it’s also pretty easy to scale the business if you put that money back into your real estate projects.
If buying a whole house of your own is totally off the table, there’s also passive real estate investment to consider: opportunities to put money into real estate without actually purchasing your own property.
In many cases, you can get started on this kind of real estate investing for less than $1,000, and the returns can be substantial.
But before we dive into some specific ways to invest in real estate, let’s go over some key definitions. You’ve gotta talk the talk before you can walk the walk, whether it’s Boardwalk or Park Place you’re after!
Investing in Real Estate: The Lingo
Here are some of the most common terms you’ll hear thrown around in real estate investing circles.
Residential real estate refers to properties designed to be used as places to live. Single-family homes, townhouses and condominiums all count — though homes with more than four units, like apartment buildings and large multiplexes, are considered commercial property.
Commercial real estate is property used for business purposes, such as restaurant and retail space or office buildings.
As mentioned above, extra-large residential buildings are also considered commercial real estate, since they’re generally managed as businesses.
Industrial real estate is property where industrial businesses perform their functions, whether it’s factory space, shipping yards or storage warehouses.
You probably already know this one, but a landlord is someone who owns property and leases it out to a third party, usually for residential or commercial use.
A landlord is also known as a lessor.
A lessee, then, is the person renting the property, who’s also known as a tenant.
Rent is the money a landlord collects from the tenant as compensation for use of the property, usually taken on a monthly basis.
Appreciation is an asset’s increase in value over time. Real estate is one of the only tangible investments whose value tends to appreciate.
Interest is the price charged by a lender for the service of providing a loan, expressed as a percentage of the loan amount.
For instance, according to CalculateStuff.com’s APR calculator, if a borrower takes a $150,000 loan with a 5% APR interest rate, and repays the balance over a 30-year period, that borrower will end up paying the lender back a total of $289,885.27.
That means the lender earns $139,885.27 in interest! (Not a bad payoff, huh? But pretty scary from the borrower’s perspective!)
How to Invest in Real Estate: 3 Ways You May Not Have Thought of Yet
The most obvious way to get involved with real estate investing is, of course, to actually purchase property. And we’re going to go into that investment option in a few minutes.
But what if you want a piece of the real estate investing pie without signing a mortgage — or ever having to respond to a tenant’s 3 a.m. plumbing crisis?
There are actually a variety of passive real estate investment tactics that require nothing but your money. And you don’t necessarily have to have very much of it to start.
Just like investing in stocks, these real estate investment approaches allow you to earn money on the appreciation of the properties you’re backing… without requiring you to actually purchase or manage the property yourself.
1. Real Estate Investment Trusts (REITs)
A real estate investment trust is a company whose bread and butter is purchasing commercial real estate, with the express intent of funding properties that generate income.
REITs then sell shares of those real estate investments to outside investors, who earn money in the form of dividends.
In short, it’s just like investing in the stock market: You put your money on the table to back the company, and you reap returns when the company does well.
In this case, though, the company’s sole mission is to own, operate and finance real estate. So you’re basically buying tiny portions of a variety of different properties you may never even see or set foot on.
Depending on the type of REIT you’re talking about, you may be able to buy into the game for very little money.
Private REITs aren’t traded on the stock market, which means they’re generally unavailable to the average investor. With high fees and higher minimum investments, this is the domain of accredited investors with substantial net worth.
Publicly traded REITs, however, are available on the stock market — and if you have a brokerage account and enough capital to buy a share, you can go ahead and add it to your investment portfolio. However, these REITs do see substantial market volatility just like regular stocks, so it’s definitely not a risk-free investment.
There are also public, non-traded REITs, which aren’t available on the stock market but are registered with the SEC, or U.S. Securities and Exchange Commission. They sometimes carry high investment fees and minimums, but not always, and so may occasionally be an option for the average investor.
2. Crowdfunded Real Estate Investing
If you’re familiar with platforms like Kickstarter or Patreon, you already understand how crowdfunding works.
We found a company that helps you do just that for real estate.
You don’t have to have hundreds of thousands of dollars. You can get started with a minimum investment of just $500. A company called Fundrise does all the heavy lifting for you.
Through the Fundrise Starter Portfolio, your money will be split into two portfolios that support private real estate around the United States.
3. Private Equity Funds and Opportunity Zone Funds
Private equity funds work kind of like mutual funds — or the crowdfunding platforms we just mentioned, but at a higher, less grassroots level.
They still work by pooling the assets of many investors to make high-value investments but are generally limited to accredited investors who can put down at least $100,000.
Opportunity zone funds are another type of pooled-asset investment strategy, but they’re specifically geared toward backing developments in economically distressed U.S. neighborhoods.
Because they help stimulate needed growth in those areas, they’re subject to some pretty appealing tax incentives — especially if you leave your money in the fund for a substantial period of time.
For instance, if you retain an opportunity zone fund holding for five years, your tax liability on capital gains (i.e., earnings made through appreciation) is reduced 10%. If you retain it seven years, the reduction is bumped to 15% — and if you can afford to leave the money tied up for a decade, you won’t pay any capital gains taxes.
That makes backing opportunity zone funds a very interesting option indeed for a qualified investor looking for a long-term investment opportunity.
But again, depending on the fund you choose, you may be subject to an investment minimum of as much as $250,000.
Investing in Real Estate the Old-School Way: Buying Property
If you are on board to become a bona fide property owner — the kind who can actually put the key in the door — there are ways to make buying a home, which is already usually a smart money move, into an even smarter investment.
For those of you ready to sign a mortgage (or even buy a house in cash!), here are some income-generating tactics to consider as you enter the real estate market.
Ever dream of living rent- (or mortgage-) free?
House hacking is all about making that dream possible. (And it’s also how Scott Trench, the real estate investor we mentioned above, got his start.)
Basically, you find a property that you can simultaneously live in and rent — in many cases, a duplex with two separate living areas.
You then use the money you earn as a landlord to eradicate your mortgage payments quickly, ideally eclipsing your monthly payment entirely.
Trench in particular used house hacking as a ladder to get his start as landlord with multiple rental properties.
After he paid off his first duplex, the rent he was earning was pure profit, which he was then able to reinvest in more properties… which earned him even more rent. (Genius, right?)
The best part of house hacking is that it takes a necessary living expense — i.e., keeping a roof over your head — and turns it into an earning opportunity.
So if you’re already looking to buy a home of your own, you may as well see if you can find one that’s hackable.
If you’ve ever magically lost an hour or three of your life by watching the nigh-pornographic property transformations on HGTV, you’re probably familiar with house flipping.
And your experience of that rags-to-riches story doesn’t have to be limited to the TV screen. If you’re relatively handy and have an understanding of real estate values, you could try the tactic yourself.
The way it works is pretty simple, on the surface: You purchase an investment property that could use some TLC — a “fixer-upper,” in common parlance — and put in the repairs and remodels necessary to make it nice and shiny.
The value of the house goes up, at which point you can sell the property for a profit.
It’s important to note, however, that this is one of the most work-intensive ways to invest in real estate. And you do stand to lose a whole lot of money if you don’t do it right.
Renovations are already expensive, and if the house sits empty on the market, you could lose even more money — both in opportunity cost and actual charges, like property taxes.
In other words, this approach is not for the total real estate investing beginner!
Airbnb and Other Vacation Sublets
As anyone who’s taken a vacation in the past five years knows, hotels are so last century.
Nowadays, it’s all about the intimacy, convenience, and relative affordability of peer-to-peer short-term rental accommodations, like the ones available on Airbnb.
If the home you buy has a spare bedroom — or better yet, an outbuilding or separate in-law quarters — you can use that space to turn a tidy profit.
Just be sure you look into the regulations in your area first. Some cities have enacted a short-term rental permit or licensing program in order to ensure enough housing remains available for permanent residents.
As you can see, there are many ways to get started in real estate investing, even if you don’t have the cash to buy a rental property outright.
And who knows? If you play your cards right, the returns you make may just put you in mogul territory — or at least keep a roof over your head.
Jamie Cattanach’s work has been featured at Fodor’s, Yahoo, SELF, The Huffington Post, The Motley Fool, Roads & Kingdoms and other outlets. Learn more at www.jamiecattanach.com.