Real estate investing is not only a great way to diversify from traditional financial assets (like stocks), but it can also be a lucrative opportunity to grow your net worth. In fact, many capitalists and entrepreneurs over the past century have used property ownership to generate fortunes that have lasted for generations.
In today’s market, everyday investors are finding that getting into real estate can really help take their finances to the next level. Some are even able to generate enough income from their properties to cover their living expenses and essentially achieve financial independence.
Still, real estate is not without its risks. And for people who don’t have enough capital to buy a rental property or the time required to become a landlord, the investment can feel like more of an effort than it's worth. This can leave some to wonder: Are there any opportunities for me? – Of course!
There are several great real estate strategies that people can use to invest for higher returns. While some may require owning physical properties, others will be more passive in nature and better suited to an individual investor’s preferences and goals.
In this post, we’ll go through each of these methods and explain how they can be used as a potential investment opportunity. We’ll also identify how this relates to your tolerance for risk versus reward, and what an investor should consider before ultimately choosing their strategy.
The following are some of the most commonly used ways that today’s investors are capitalizing on real estate.
Generally, when the average person thinks of an investment property, the first thing that will come to mind is a rental property. A rental property is usually a modest, single-family home that the owner will lease out to the tenants for a monthly payment. Contracts can be annual or monthly as agreed between the owner and tenant.
Investors who are particularly savvy in real estate will typically look to maximize their profits by seeking out good deals in areas of high demand. For instance, they may be able to command a charge of $1,000 per month in rent but only have $700 in costs between the mortgage, taxes, and insurance. Some of these expenses like mortgage interest, property taxes, and maintenance are considered tax-deductible which also helps add to the bottom line.
One of the biggest drawbacks to rental properties is that they’re an active investment strategy – meaning there can be a lot of work involved. Every time a tenant complains or something needs to be fixed, the owner will have to take care of it. Of course, this can be minimized if the owner hires a property management service to take care of the day-to-day operations.
Short-term rentals have become increasingly popular over the past few years, thanks in part to the simplicity of peer-to-peer platforms like Airbnb. A short-term rental can be defined as any property (such as a house, condo, or apartment) that a guest plans on occupying for about a week or less.
Guests of short-term rentals are typically people traveling for business or visiting nearby family and friends. They’ve become a major alternative to using a hotel because the accommodations are typically more spacious and personalized. Many guests can get a whole house for about the same cost as a 400 square foot room at a standard hotel.
Similar to a long-term rental property, an owner’s profit will be determined by the going rate of the area and how much they paid for the unit. Online platforms like Airbnb make it easy to advertise availability and manage financial transactions. However, these properties can also be prone to low occupancy rates depending on the competition and other factors.
It’s well known that tourists will often pay top dollar to finance their vacations, and that’s why having a dedicated vacation rental can be quite the money-making opportunity.
A vacation rental will usually be a condo unit or standalone home that’s near a beach or popular tourist destination. They are similar to the short-term rental business model but strategically located to attract families who want to vacation and stay somewhere other than a conventional hotel.
Because these units are often several states away from where the owner lives, it can be physically impossible to manage them alone. Therefore, they’ll typically have to partner with a property management service to take care of all the day-to-day responsibilities such as responding to guests, cleaning, maintenance, etc. This can cut into the profits, but it will make the investment far more passive.
The buy and hold strategy is when someone buys a property with the idea that it will appreciate in value over time. The investor may believe that house or condo values will go up for one reason or another, and so they look for a suitable property at a discounted price. Several years later after property value appreciates, the owner then sells it for a profit and cashes in on the equity it’s accumulated.
Buying and holding is something that’s often used in conjunction with a rental property model. Obviously, the owner would be taking a huge loss to just leave the property unoccupied for several years, and so they’ll use it for short or long-term leases. In fact, the cash flow from these occupants can be used to essentially pay the mortgage and help the owner build equity as they wait for the right time to resell the property.
Again, this can be considered an active investment strategy which could be a downside for some people. Unless the owner plans on using a property management service, then they’ll be responsible for taking care of the tenants and maintenance.
Sometimes when an investor wants to capitalize on real estate, they don’t have to look any further than their own homes. Dubbed “house hacking”, this is when an owner takes a room or portion of their primary residence and advertises it as a short or long-term rental.
A good candidate for house hacking might be someone with a duplex, a floor that’s never used (such as a finished basement), or a converted garage. Demand for these types of rentals can be especially high near vacation cities and tourist areas where hotel costs are steep.
The major advantage of this strategy is that there’s virtually no up-front investment. Since it’s the owner’s primary residence, they don’t have to research and acquire a whole separate property. Also, the rental income can help the owner to pay their own mortgage and build up equity at a faster rate.
Not every real estate strategy involves buying or owning physical property. In fact, users of this method only have to rely on one thing: Their ability to negotiate a good deal.
Real estate wholesaling is when an investor finds a home (usually one that’s distressed) and gets the owner to agree to a price. The terms and conditions are then put into a contract, and the investor has a certain number of days to find an interested party to sell them the contract.
To put this into context, let’s use an example:
Notice that at no time did the wholesaler ever offer or buy the property. They used their skills of sales and communication to connect a buyer and seller and turned it into a profitable business opportunity.
What if instead of owning single-family homes and condos investors had the opportunity to buy large commercial real estate like office buildings, warehouses, apartment complexes, etc.?
The obvious challenge here is capital. Who could ever afford to finance projects like these out of pocket? They can’t. It would take funding from thousands of investors, and this is exactly what a REIT aims to do.
A REIT or real estate investment trust is a company that specializes in financing, developing, and operating commercial properties like the ones previously mentioned. Investors can participate by purchasing REIT shares either in the open market or from the REIT directly (depending on if they are public or private REITs). The REIT will then use the pool capital from these investors to put towards growing its real estate portfolio.
The main attraction for REIT investors is that virtually anyone can buy shares and never interact with the properties whatsoever. Public REITs can be bought at the current market share price. Private REITs generally require a minimum investment of around $5,000 or more.
Another huge selling point to REITs is that they pay very attractive dividends. Because of the tax structure of a REIT, they’re required to pay out 90 percent of their profits to the shareholders. This can sometimes be a great source of income for someone who wants reliable cash flow (such as a retiree).
REITs aren’t the only way to make money off of exclusive commercial real estate projects. Another way investors are starting to come together is through something called crowdfunded real estate.
This is a business model that takes the popular concept of crowdfunding and applies it to investment properties. Real estate entrepreneurs will come to a crowdfunding platform in search of capital, and investors will pick which projects they’d like to sponsor. By doing this, they can essentially partner with these entrepreneurs and participate financially in their real estate ventures.
Similar to REITs, crowdfunded real estate pays very attractive dividend yields and doesn’t require the investor to do any work on the properties. However, participants are required to lock up funds for five years or so or face a withdrawal penalty.
Capitalizing off of large real estate projects may sound like a great feature of REITs and crowdfunded real estate. However, investors who may want to take a more hands-on approach can also form what’s called a real estate investment group or REIG.
REIGs are private groups of investors who pool their financial resources and real estate know-how to pursue their own business ventures. For instance, each member might bring a special skill to the table such as specializing in raising capital, construction, legal permits, finance, etc.
Because a REIG is not a taxable corporation, they aren’t governed by the same rules and regulations as REITs. However, by that same token, participants are subject to the membership rules, fees, and rules of the group.
People who want to add real estate to their portfolios certainly have a lot of good options. From buying physical properties to letting other people do all the heavy lifting, there are plenty of money-making opportunities and tools at their disposal.
However, before an investor hands over their first dollar, they must understand which of these methods will fit best with their goals, risk tolerance, and overall comfort. Here are a few questions that every investor needs to consider.
Investing is all about making the greatest amount of money possible without exposing yourself to too much risk. Real estate certainly can accomplish this. However, not every one of the strategies will get you there at the same pace.
For instance, investing in REITs or crowdfunded real estate can produce decent returns over 5 to 10 years that may be comparable to that of stocks. But on the other hand, owning a physical property that’s constantly producing cash flow and can eventually be sold for more than the investor paid for it could lead to a far greater financial windfall. Investors need to be conscious of not just the earning potential but also the limitations of the path they choose.
Investors have the option to be as engaged in their real estate investments as they want to be. For example, people who have a lot of experience and are particularly knowledgeable may be well suited for rental properties or possibly even REIGs and wholesaling.
However, owning physical properties is not going to be a great fit for everyone. Some people are more comfortable and have better chances of succeeding if they are only vested financially. In those cases, maybe a REIT or crowdfunded real estate would make a more suitable choice.
Keep in mind that there are ways to compromise and do both. For example, many real estate entrepreneurs will buy several properties to use as rentals and then hire a property management service. This allows them to focus on the business aspects of the venture and make money passively while the property manager handles all of the routine tasks.
There’s no getting around it – investing in real estate can be expensive! Buying even a modest $100,000 investment property would require a minimum $20,000 down payment plus easily another $10,000 in repairs, insurance, and permits.
If you’re an investor with that type of capital, then that’s no problem. However, if you’d prefer to not tie up that much money in one project, then buying a property could feel like a huge risk.
As an alternative, buying shares of REITs or crowdfunded real estate can be far cheaper. Single shares of public REITs can usually be purchased for less than around $100. Additionally, some real estate crowdfunding platforms have minimums as low as $10 to get started.Of course, it is also possible to get into the real estate game with no money whatsoever. You can read more about those strategies here.
Every investor will enter the real estate game with a different set of skills than the next. Some people may have no experience whatsoever while others may be working on their tenth rental property. However, the question that everyone should always be asking themselves is “What have I learned that can help me to be a better investor?”
Admittedly, some people work best by “doing” – meaning that they have to try it for themselves and make their own mistakes to learn right from wrong. Others may recognize that they have no skill set at all and might be better off as passive investors from the sidelines. Again, it's all about finding the right fit for you.
Keep in mind that your real estate journey doesn’t have to be something you do on your own. If you’d like guidance and knowledge of someone who’s acquired several years of real estate experience, then what you need is the Market Insiders program.
Market Insiders is a coaching platform that connects self-motivated individuals with real-life pros. Each week, you’ll have the opportunity to join a coaching call where you can ask questions and discuss your ideas. Not only will you get their feedback, but you’ll also be able to observe the discussions among the other participants which may open you up to other new ideas.
Real estate investing can have its ups and downs, and certain aspects of it may not be for everyone. Thankfully, there are several strategies for both passive and active investors of all types.
For instance, some people may choose to receive cash flow from single-family rental properties or focus on short-term rentals such as Airbnbs and vacation rentals. Both strategies make it possible for the borrower to build equity and sell the property for more than what they originally paid.
Other opportunities are more passive and don't involve owning real estate at all. Shareholders of REITs or crowdfunded real estate are paid in dividends and never interact with the property whatsoever.
Some strategies are somewhere in between being active and passive. For instance, people who are good at sales can wholesale real estate while others may wish to bring their talents together to form a REIG.
To pick the best strategy, investors need to be honest with themselves about their expectations and tolerance for risk. They also need to be realistic about how much money they have to invest, how engaged they'd like to be in the process, and if they have the right knowledge to be successful.
Real estate is certainly an area for financial capitalization. However, like all investments, it has to be a good fit for you to make it work. Consider the pros and cons of each strategy and go with the one that makes you the most comfortable.