Investments are inherently risky - real estate in particular. The subprime mortgage crisis was barely a decade ago and it played a large role in a devastating recession.
Is real estate a good investment today? As with any potential investment, doing thorough research and examining all your options is crucial. One of the causes of the subprime mortgage crisis was predatory loan companies taking advantage of vulnerable homebuyers.
Understand the risks and avoid working with lenders and companies that use questionable practices. Investing in real estate isn't for everyone. If you're willing to dip your toes in the water, your first step is to weigh whether you want to invest by buying property, or without buying property.
How to Invest in Real Estate by Buying Property: 7 Steps
For many of the methods of investing in real estate, you'll need to have money saved. That's especially true if you are going to buy actual property.
If you have that money ready, buying property is the most direct and hands-on way to invest in real estate. But purchasing a house involves quite a bit more than simply holding onto it.
Here are seven ways to invest in real estate that involve a purchase of actual property.
1. Buy and Fix Up a Home
Flipping a house like you're on HGTV is as hands-on as you can get for an investment. You buy the property, you put funds into fixing it up, and sell it for a profit.
Ideally, anyway. Fixing a home requires funds beyond the initial investment, and more time than you might have. It's a process, and one that requires a solid knowledge of real estate and home improvement. Even profitable flips can seem like money losers for a long time. Patience is crucial if you're going to commit to a fixer-upper.
2. Rent-to-Own a Home
Rent-to-own is a tactic where you sign a contract to rent a home for a predetermined period of time with the option to purchase the home once that time expires. Often, that option is a requirement, a promise that you will be buying the home.
A percentage of your monthly rent payments go toward the down payment on a mortgage when the purchase becomes official.
Rent-to-own agreements come with risks, but they're good for people who cannot currently commit to buying a home. This gives people with other loans (credit card debt, hospital bills, etc.) time to pay those off without the added financial burden of a monthly mortgage. Comb through the rent-to-own contract carefully to make sure the details are in your favor, and it has the potential to help you ease your way into an investment.
3. Buy Rental Property
This can mean a few different things. In theory, if you have the money you could purchase an entire rental property and rent out any room or apartment to tenants. Keep your expenses low so you can keep rent affordable to entice prospective tenants.
You also could purchase property that you live in, while renting out other rooms in the property. Either way, you're the landlord. Be a good one, and you'll be in a much better position to succeed on this investment. Keep the property in great condition, be readily available to your tenants when needed, and if necessary hire someone who can help with repairs.
4. Purchase Vacation Property
Vacation property means renting out to tenants for shorter periods. Maintain a good house in the right area, and you may be able to make the same money off a few vacation tenants that you might make from a year-round tenant elsewhere.
Vacation rentals, because they are so often in a desirable area, can be expensive both to buy and maintain. Who wants to rent out a pigsty for their vacation? Weigh the pros and cons carefully. If you do it right - research carefully and consult with good Realtors - a beach rental can be lucrative come summer.
5. Use Lodging Apps Like Airbnb
Airbnb has become a popular way for some property owners to supplement their income. Why not incorporate it into your own investment?
How Airbnb works: Register your house on the app, specify the type of lodging you're offering (you can offer a room or the entire property), how many people it can accommodate and its availability. You also get to approve the guests staying at your property.
Airbnb can be a good choice in certain areas. Desirable vacation destination? Close to a music festival? Nice apartment in a popular city? You may be able to make a decent profit using Airbnb. If it's a property you own but don't reside in, the added availability can help out a lot.
Watch: Here Is Why Some Investors View Airbnb as an Asset Class
6. Purchase Commercial, Non-Residential Property
Commercial property - retail buildings or office buildings - is an intriguing option for those who want to invest in real estate beyond just residential property. It's costlier, and you may want to look for partners in this investment.
As owner or part-owner of the property you can rent it out to businesses in need of space. It is high-risk, high-reward real-estate investing. Income made from renting space to businesses is generally higher than that from residents, and often the contracts to lease commercial buildings are longer than residential ones.
7. Buy Your House... That's It
Yes, if you bought a house and now live in it, congrats. You're a real-estate investor!
Rather than buying a house specifically to flip it, buying and holding can sometimes be incidental to why you actually bought the house: to live there. But consistently paying your mortgage and doing general upkeep for the house to make improvements can up the value of your home should you one day look for a new place to live. Treat your house like a long-term investment, and it could pay off down the line.
How to Invest in Real Estate Without Buying Property: 10 Steps
If buying property is too expensive of an investment for you, it's not only way you can add real estate to your investment portfolio. There are plenty of ways to have a stake in the real-estate game.
Here are 10 ways you can invest in real estate without actually having to buy any property.
1. Invest in Real Estate Investment Trusts (REITs)
A REIT, or real estate investment trust, is a company that either owns or finances real estate that produces income. REITs invest the majority of their money into real estate, and it's how they make the majority of their income.
There are REITs that focus on both residential and commercial property. Most REITs are equity REITs, but some trade in mortgages instead of actual properties. Perhaps most important for you, the investor, is that at least 90% of the taxable income it pays is via dividends to the shareholders. So researching thriving REITs and purchasing shares in them has potential as a profitable investment.
2. Invest in Real Estate Mutual Funds
Real estate mutual funds differ somewhat from REITs. Whereas a REIT is an actual company, mutual funds are simply investments pooled together and overseen by an investment manager.
A mutual fund allows investors to have diversified their portfolio both in terms of having a mutual fund and having real estate. Like with other sorts of mutual funds, you can choose ones that are growth-oriented or income-oriented. As a diversified asset, they are designed with the intention of mitigating risk, but they are still vulnerable to the risks inherent in real estate. If a real estate-related risk negatively affects one of the investments in the fund, it's likely to impact a lot of others too.
3. Invest in Real Estate ETFs
In addition to REITs, there are REIT ETFs, or exchange-traded funds. REITs invest in real estate; REIT ETFs invest in REITs.
For example, the Vanguard Real Estate ETF (VNQ) - Get Report includes some of the most notable REITs within its fund, like Simon Property Group (SPG) - Get Report and Prologis (PLD) - Get Report . It could be less risky than investing directly in a REIT, and certainly less risky than actually buying property, but you'll also be getting less of a return back. Still, if risk is one of your biggest concerns when mulling a real estate investment, a REIT ETF is something that should be considered.
4. Wholesaling Houses
Wholesaling real estate is a little similar to flipping homes, but you don't own the home and you don't have to front any maintenance cost.
Wholesaling a house means contracting someone who is looking to sell their house, and quickly taking that contract and selling it to a prospective buyer for a profit, which the wholesaler keeps. No fixing up involved.
If you can actually successfully do this, great! There's much less risk as you're not putting your own money into the operation. The difficult part of doing this is actually finding a house that has been undervalued on the market that you can manage to sell for a profit.
5. Use an Online Real Estate Investment Platform
Much like with other sorts of stocks, there are online platforms that help you make real estate investments as well. Often, these investments you make are part of crowd funding, a way for others to be able to buy property without requiring venture capital. Popular online real estate investment platforms include Fundrise and RealtyShares.
This option tends to be more for those with money to spare, considering the costs necessary to purchase large property.
6. Real Estate Partnerships
Some real estate investments require an exorbitant amount of money. Not everyone can foot that. If you're not the only one involved in the investment, however, it could become more manageable.
Partnerships are a common way to invest in real estate, with each person taking over different responsibilities. Often, this can be used as a way to purchase property at a lower price. You can set the terms - such as simply paying the mortgage, or perhaps handling the down payment for the property. Depending on the terms of your partnership, you may be investing in real estate without doing too much hands-on work of owning property.
7. Invest in Real Estate Service Companies
There are plenty of companies that work primarily in the world of real estate that you can invest in.
Look beyond REITs for your real estate companies. For example, RE/MAX is a company that sells homes via real estate agents. Companies involved in real estate that don't involve actually buying property can be a way to not only diversify your portfolio, but get a good sense of the current real estate market.
8. Invest in Home Construction Companies
Another real estate-related investment that could be worth your time are companies that are involved in the construction of homes.
There are plenty of home building companies whose stock trades on the NYSE every day, such as Lennar (LEN) - Get Report and D.R. Horton (DHI) - Get Report . It's an intriguing investment option for those who believe that the construction of homes is something that will continue to increase, because if that's true, business should continue to boom.
9. Become a Real Estate Appraiser
Have you considered employment within the real estate industry? It can not only be an investment of sorts, but prepare you for how the market is doing and when the time is right to make good investments.
One job within the industry to consider is a real estate appraiser. An appraiser can specialize in either residential or commercial real estate, and determine the value of a property. They take specifics about both the property and its nearby surroundings into account to do this. According to the U.S. Bureau of Labor Statistics (BLS), the median salary for a real estate appraiser or assessor in May of 2017 was $54,010. Those with the highest salaries, however, could make over $101,000 a year.
10. Start a Brokerage or Become a Real Estate Agent
You could also get into the game of selling real estate. Real estate agents require some education and training before they can actually get out there and flip houses, but successful real estate agents can take home nice commissions on the properties they sell.
Agents generally work for real estate brokers, and if you'd rather be at the top than out there selling the homes, perhaps consider opening a brokerage and hiring agents. Brokerages get a large part of the commission that the agents make, so having successful agents can bring in a lot of money.
But starting a brokerage isn't simple, and it's incredibly expensive. You need extensive training and licenses to open and maintain one. If you're a successful agent looking for the next step in their real estate career, it could be a great idea. But if you don't have that level of success, knowledge or funding, you may want to start with becoming an agent.
How Much Money Do You Need to Invest in Real Estate?
Depends on what form of investment you plan on doing. You probably don't need me to tell you that if you're buying a house that you'll need a lot of money for it.
The more disposable income you have for your investment, the more options you have. Buying property is exceptionally costly, as is the work you'll be doing to the property if your plan is to sell it as a fixer-upper or rent it out. Even if you just plan on living in it and paying your mortgage, that's a long-term plan for paying off the investment. At minimum for any of these you'd need tens of thousands of dollars, and that can spiral into hundreds of thousands quickly. Who has that sort of cash just hanging around?
REITs are a good option for those who don't have the funds capable of buying property but are still interested in real estate as an investment option. For a REIT on the lower end, you may be looking at $500. It's significantly lower than other real estate investments, plus you have the potential for dividends on them as well. Often these will cost somewhere in the thousands though, as will using online platforms for real estate investments. So if you're looking for somewhere to start, you should try to have at least $1,000-2,000 saved up for a possible investment.
Is Real Estate a Good Investment?
If you've done the proper research on the market and the specific ways you want to invest, real estate has the potential to be a solid investment.
Ultimately, the biggest way to determine whether it's a good investment is how it fits into your current financial state. Like any investment, real estate won't work out well if you make an investment you can't afford. If you can't afford property to invest in without having to borrow money, then it won't be a good investment. Do the research and know the limits of what your financial situation can handle.