How to Invest in Real Estate

Real estate investing is a popular way for investors to earn money, but learning how to invest in real estate can be difficult for beginners.

From REITs to REIGs, there are different types of real estate investments and real estate terms to know before you get started.

If you want to learn more about how to invest money in real estate and whether real estate investing is right for you, keep reading or use the links below to navigate the post.

How to Invest in Real Estate: 4 Steps

Learning how to invest in real estate means following basic steps to get started. Here’s a quick breakdown of the four steps you need to take to start investing in real estate.

1. Determine How Much You Want to Invest

The first thing you might consider is how much you want to invest. You generally don’t want to invest more than you can afford—which is where a budget can be helpful. Think about how much you’re willing to have tied up in real estate investments and how much you’re comfortable potentially losing altogether. That will be a good starting point for figuring out how to allocate money to real estate investing.

2. Evaluate Your Risk Tolerance

Next, you should consider your risk tolerance, or how much you’re willing to risk with real estate investing. Different investment types come with varying levels of risk, so it’s important to choose an option that fits your risk tolerance. Low-risk investments may be better if you’re learning how to invest in real estate with no experience.

3. Research the Your Real Estate Investment Options

Before you invest, you need to decide how you’re going to invest. You can purchase rental properties, flip houses, contribute to an investment group or REIT, or use an online real estate investing platform. When choosing a real estate investment, consider all the factors that can impact your decision, including risk and upfront cost.

4. Start Investing

Once you’ve made all the important decisions, you can start investing. Remember to track your investment to see how much money you’re earning. That way you can make changes to your investment portfolio as you see fit.

The Mint app makes it easy to keep track of all your investments in one place. 

How Much Money Do You Need to Start Investing in Real Estate?

There’s no set amount of money you need to start investing in real estate, but a larger investment could have the potential to translate into larger returns. It’s also important to note that different types of investments have different upfront costs, so certain investments—like buying a house to flip—may require you to make a large lump-sum payment.

Because real estate investments typically require a decent amount of capital, you might need to save up before you start investing.

Active vs. Passive Investing

Understanding the difference between active and passive investing is an essential part of learning how to invest in real estate. 

Here’s a quick explanation of active and passive investing, including the pros and cons of each type of investment.

Active

When you hear the term “real estate investing”, you probably picture purchasing and selling or renting a property. These types of real estate investments are known as active real estate investing. They involve hands-on real estate purchases, active property management, and market knowledge. 

Active real estate investing demands a wealth of real estate and financial acumen.

Passive

If you’re not ready to buy a house, you can still reap the rewards of supplemental income and asset appreciation through passive investing. Plus, passive investors can benefit from greater real estate diversification without the ongoing responsibilities of landlording or the significant risk of flipping. 

If you aren’t ready to commit to a large down payment for a single property, a passive investment can lower the financial barrier. Where properties can range from tens of thousands to millions of dollars in acquisition and operation fees, passive investments are more accessible. Plus, they allow you to make money in your sleep. 

In addition to requiring less capital, a passive investment also requires significantly less maintenance from an investor. The responsibilities, and ultimately the success of a property, fall on the shoulders of the investor in an active investment. In a passive investment, an investor only provides capital and lets the investment professionals take it from there. 

5 Ways to Invest in Real Estate

Here are five of the most common ways to invest in real estate: 

1. Investing in Rental Properties 

Rental properties have been the default choice for average investors who want to step into the world of real estate investing. 

Investing in a rental property has obvious upsides. Those include: 

• Regular income: a rental property is a regular and recurring source of monthly income as long as it remains occupied 
• Tax deductions: there are a wealth of tax deductions that come along with being a landlord, including the cost of maintaining the property, mortgage interest, property taxes, and more
• Appreciation: generally speaking, properties tend to increase in value over time, which can enable to you raise rent and increase income over time

While this option certainly has the potential to offer supplemental income, it also comes with many ongoing, hands-on responsibilities—and its profitability depends entirely on the investor. 

Here are challenges you may face when investing in rental property: 

• Upfront costs: in addition to the down payment on the rental property, you may need to perform repairs and renovations to get the rental up and running 
• Illiquidity: a rental property is also considered an illiquid investment, meaning that an investor should expect to tie up their money in the asset—typically for years
• Time: being a landlord can be a time-consuming job; not only do you need to handle rent collection, but you’ll also need to be available around the clock for maintenance issues and more 
• Vacancy: in order for your rental investment to remain profitable, you’ll need to keep it occupied; finding new occupants for your building takes both time and effort
• Risk and liability: in addition to needing to comply with state and federal rental laws, landlords may face evictions, property damage, litigation, and more 

Investing in a rental property is a serious commitment. It’s easy to see how a side hustle like this can turn into a full-time job. An investor must have the knowledge to assess, buy, and manage the property in order to turn a profit each month. Without this expertise, you risk not earning a profit at all, or worse, losing money.

2. Flipping Investment Properties 

For those looking for an active real estate investment without the long-term commitment, flipping investment properties is an appealing choice. 

You’ve probably seen shows about flipping on home renovation networks. Investors purchase a dated house with good bones, update it with fresh paint and modern appliances, and voila! They turn tens of thousands of dollars in profit. 

In truth, flipping investment properties is a much more complex process. For one, not all property flippers perform renovations on their purchases. Some simply jump at an undervalued property and instantly turn it for a profit. For those who do perform renovations, decisions and changes must be performed rapidly in order to be lucrative. 

House flipping is generally seen as a high-risk, high-reward opportunity. When a flip goes well, investors reap the benefits, including: 

• Quick return: real estate flipping can turn a significant profit very quickly; it takes about 6 months on average to flip a house 
• Market stability: generally speaking, the real estate market is predictable and fairly unsusceptible to large and unexpected fluctuations 
• Can be hands-off: if an investor doesn’t plan on performing renovations on the property, house flipping can be a fairly hands-off process 

Again, high risk could come along with this high reward. Real estate flippers may face significant risks, including: 

• Market knowledge: if you want to turn a property for a profit, you need to have in-depth knowledge of the real estate market; otherwise, you risk making significant investing mistakes
• Loss: there’s always the potential that a property simply won’t sell at the price you expected, and that may leave you at a loss 
• Upfront costs: buying and selling real estate requires a lot of capital upfront; this is especially true if you plan on performing renovations on your investment 
• Taxes: a significant boon on a real estate investment can shoot you into another tax bracket, increasing your tax liability.

3. Real Estate Investment Trusts (REITs) 

A real estate investment trust is a form of passive real estate investment that utilizes individuals’ money to contribute to the purchase of a real estate investment. Many individual investors buy into, or invest in, a corporation or trust. The corporation or trust then uses those funds to invest in real estate. 

There are plenty of upsides to investing in REITs rather than purchasing property oneself. Those include: 

• Diversity in property type: REITs are not specific to residential properties; through an REIT, one may invest in commercial or industrial real estate, as well 
• Diversity in location: REITs enable investors to invest in properties in many different locations; this diversification could help protect investors from location-specific market fluctuations 
• Highly liquid investment: REITs are traded via exchanges, unlike properties which require various entities to exchange 

Of course, a real estate investment trust doesn’t hold the same significant risks of active investing. As such, it typically doesn’t come with the same financial boon of active real estate investing. 

4. Using an Online Real Estate Platform 

Online real estate platforms such as Fundrise are the crowdfunded investment of the real estate world. These allow investors to invest as much or as little as they desire in the real estate purchase. In return, the investor becomes a shareholder. 

As with REITs, crowdfunding through online real estate platforms has significant perks, such as: 

• Lower barrier to entry: some investments through online real estate platforms can be bought into for as little as $1,000—hundreds of times less than the cost of a property
• Greater diversity: those who invest using online real estate platforms also enjoy the options of investing in real estate across multiple locations, property sizes, and classes of real estate rather than putting large amounts of money into one property

Of course, as a relatively new form of passive investment, online real estate platforms have their downsides. Those include: 

• Less liquidity: unlike an REIT, most online platforms are not yet public and cannot be traded on major exchanges, resulting in less liquidity 
• Fees: some online platforms have associated fees for management that can eat away at investment profits 

5. Real Estate Investment Groups (REIGs)

Real estate investment groups (REIGs) are groups of investors who pool their money, time, and/or knowledge together to invest in real estate. This means you can invest in real estate without purchasing property on your own, allowing you to invest with less capital. REIGs are less restrictive compared to REITs, which have a board of directors and a stringent set of rules.

There are a handful of very obvious benefits of REIGs, including:

• Upfront cost: lower upfront costs allow you to invest without having to save up as much money.
• Ease: because you’re working with an investment group, you don’t necessarily need the knowledge or experience to invest in real estate.
• Diverse assets: REIGs allow you to invest in a physical asset, plus you get diversity through investing in different types of properties.

While there are plenty of reasons to consider investing in REIGs, there are also potential downsides. These downsides include:

• Group reliance: success isn’t guaranteed because you’re relying on the knowledge and experience of the group you invest in. These groups may also vary in terms of trustworthiness.
• Membership fees: if a group charges a membership fee, you’re not getting as much out of your investment.
• Liquidity: it can be hard to get your money out of an REIG depending on the agreement you signed.
• Disagreements: disagreements among the group can lead to turmoil that affects your investment.

What’s the Best Way to Invest in Real Estate?

Many investors understand how real estate can offer a valuable and reliable source of supplemental income when selected and managed well. Before beginning, it’s important to assess which method of real estate investing maximizes your return for the amount of time, money, and responsibility that you’re able to commit.

If you’re not ready to become a landlord or property flipper, you can skip the hassles and potential pitfalls that have traditionally gone hand-in-hand with real estate investing and invest passively in a diversified pool of real estate. 

Regardless of which method fits best with your investment strategy, getting into the historically well-performing asset class of real estate is a great way to start building an income stream today. Ready to get started? Use our investment calculator to plan your first adventure. 

Should You Add Real Estate to Your Investment Portfolio?

Ultimately, it’s up to you to decide if investing in real estate is right for you. If you’re going to invest, learning how to invest in real estate is a crucial first step.

One thing to consider is the fact that there are several types of real estate investments, some of which require less time and money. Beginner investors may want to consider more accessible real estate investments such as REITs, REIGs, and online real estate platforms.

If you opt for an active real estate investment, just remember that you’ll likely need to commit a lot more time and effort.

If you’re not sure if real estate investing is right for you, you can always consult an online financial advisor for personalized advice.

Strategize Your Real Estate Investment

Investing in real estate can potentially be very lucrative, but it’s important to choose the right investment based on your capital and risk tolerance. From investing in rental properties and flipping houses to REITs and REIGs, there are several ways to invest in real estate.

If you’re just getting started with investing, make it easier with tools like Mint. Mint gives you one convenient place to track all your finances, so you can monitor your real estate investments regularly. That way you can more easily see when you might need to make some adjustments to your investing strategy and keep your goals on track.

This is for informational purposes only and should not be construed as legal, investment, credit repair, debt management, or tax advice.  You should seek the assistance of a professional for tax and investment advice.

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Source: mint.intuit.com