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Investing in real estate can be an extremely effective way to build wealth. Real estate is an asset class that has generated wealth for many generations of families for CENTURIES! There are plenty of reasons why anyone looking to build wealth should have exposure to real estate. A few reasons are it is an Inflation hedge, a savings mechanism, and it can provide cashflows forever!! Best of there are many different ways to invest in real estate without your wallet being completely loaded!!!
In this post, we will discuss five different ideas for investing in real estate with the pros and cons of each. Of course, the amount of capital (or money) you will need to invest upfront will vary based on the type of real estate you choose to pursue. We will list these five ways, from the least amount of capital needed to the most.
- Public REITs (Real Estate Investment Trusts)
- Real Estate Crowdfunding
- Purchase a Home
- Buy an Investment Property
- Flipping Homes
Ehhh… flipping houses could fall anywhere on this list, but it will remain the caboose. I have a good reason for this, and I’ll explain why later in the post. So let’s dive in, shall we!?
Public REITs
A REIT (Real Estate Investment Trust) is a publicly-traded company that owns income-producing properties. They are similar to mutual funds, except instead of owning shares of individual companies, they own shares of entire industries. Investors often use REITs who want exposure to real estate without having to deal directly with the risks associated with buying individual homes.
These are also low-cost investment vehicles that you can obtain with ease through a brokerage account. Due to direct real estate not being purchased and sold often (daily or even less than a year), you likely won’t see much volatility (Up and down movement) in the price of a property. But, due to public REIT’s ability to trade like stocks, there can be plenty of short-term volatility in the day-to-day price of REIT shares. In short, this means that public REITs correlate to the stock market.
Fortunately, in the long term, Public REITS behave the same way as a direct investment in property. So as long as you hold the investment long term, it’s like Investing directly in real estate. Forbes has even found that REITs have historically performed better than direct Investments. For example, public REITs averaged a 12% annual return (this is an excellent return, by the way!), while private REITs (direct investments) averaged a 6%- 8% return from 1977 to 2010. I would also like to add that these can be an excellent source of passive income, as REITs are known to pay nice hefty dividends!
Real Estate Crowdfunding
Real Estate Crowdfunding is very similar to Public REITs because you will invest in a portion of the properties. However, the term ‘crowdfunding’ means it allows you to pool your money with multiple investors online to invest in real estate. These investments are what you would call private real estate investments.
Private real estate investments also don’t deal with the short-term price volatility that a public REIT would. There’s less volatility in these investments, typically due to lock-up periods. A lock-up period means a set amount of time you must leave your money invested. You may be unable to pull the cash out or wait until the period ends. You may be penalized if you can pull the money out.
A positive of crowdfunding is that you won’t have to manage your investment properties. You are also splitting the investment risk with multiple other investors, and your assets will have very little correlation (related price movement) to the stock market. In other words, you diversify from your stock portfolio! We know that diversification is critical in wealth building.
You can begin investing in crowdfunding platforms like Fundrise with as little as $10. Other crowdfunding platforms that may require you to have a higher upfront investment are DiversyFund and RealtyMogul.
Purchasing a home
Many people may not think purchasing a home for themselves is an investment in real estate, but I would argue it is. Buying a home will provide you with equity as you pay the mortgage over time. In addition, you will likely see appreciation in the value of your home. This is a form of wealth building!
Also, when considering your mortgage payments think of it as your home forcing you to save monthly. A portion of the mortgage will go towards interest, but the principal is like money into savings. An example would be if rent were $1,000 while your mortgage is $1,200. For the sake of this example, we will say that the mortgage payment consists of $900 in interest and $300 in principal. That would mean that you are keeping $100 more than renting even though your mortgage is more!
Buying a home can be an exciting way of wealth building, but there are also some things to consider before making a purchase. First, make sure you understand how much house you can afford. Next, you will need to calculate your monthly mortgage payment, as well as any other payments such as property taxes and homeowner’s insurance. Next, find out what type of loan you qualify for. Some low down payment options for first-time home buyers include Fannie Mae’s conventional 97 loan and the Federal government’s FHA loans. In addition, if you are a military veteran, you may qualify for the Veterans Affairs VA mortgage loan, a 0% down payment option, and no closing cost!
You could use some of these loans to purchase multifamily properties like duplexes, triplexes, and quadplexes. Then, you could live in one unit, rent out the remainder, and essentially lower how much of the mortgage you pay… Which could be nothing!!!!
Buy an Investment Property
Buying an investment property is one of the best and ideal ways to invest in real estate. You can build home equity, benefit from property appreciation, and possibly have a monthly cash flow. Moreover, you get to take advantage of all this wealth creation from someone else simply paying their rent! On top of all, you even take advantage of certain tax breaks, which can reduce how much you pay in taxes.
One of the most significant advantages of investing in properties is that you can make money while you sleep. In addition, you won’t need to worry about tenants paying rent, property taxes, or doing maintenance work if you hire a management company to take this on—passive income at its finest.
A management company can charge between 8-12% of the monthly rent to maintain the property for you. Although this may seem steep, remember they are lifting an incredible burden from your shoulders.
If you want to keep most of the rent money you are receiving and not hire a management company, you would need to assume a landlord’s duty. This would be scheduling your walkthroughs, repairs, vetting tenants, and dealing with any tenant complaints directly.
Mortgage loan down payments for investment properties is typically much more significant than a conventional loan. For example, you can expect a 20-25% down payment to purchase the property. Although the upfront investment is more significant, it can be less daunting if you go into this investment with a friend or family member. This way, you split the cost and share landlord responsibilities with someone else.
Flip Homes
Last but not least is house flipping. Flipping a home is essentially buying a cheap house that needs work renovation to increase the home’s value. The profit comes from how much you can sell the house for after the cost to purchase and the cost to renovate. For example, if you could buy a home for $80,000, renovate it for $30,000. Adding those costs together would be $110,000 for the project. Let’s say we can sell it for $200,000; that is a $90,000 profit!
Although there is plenty of money to be made in this space, it isn’t without considerable risk, which is why I ranked it last. To flip homes, you’ll need expertise in the type of house you are looking at, its location, and what value you can bring. Projects will involve various contractors if you aren’t Bob, the builder. You will need a flooring expert, plumber, painter, windows expert, etc. A project can quickly sour if a contractor falls off or the price of materials required increases.
You may not have paid a penny when financing the project. There is a specific lender called a hard money lender, which will grant short-term loans. These loans are to assist you in purchasing the property and making renovations. You should note that if a portion of the project fell through during the loan duration, it could be harmful. The interest rates on hard money loans are higher than conventional mortgages and could be costly.
Takeaway
There are many different ways to invest in real estate and options for investors with little money to start. Investing in real estate can also be an excellent tool for diversifying your investment portfolio from traditional assets such as stocks and bonds. So when the stock market crashes, you still have an asset that shouldn’t crash with it. But, as we’ve re-iterated on this blog, wealth building is a marathon, not a sprint! So take the strides you can now to build wealth for the future!!!!!
What is the first way you’ve invested/ or plan to invest in real estate?
