What makes a good real estate investment? Any good investment has a high chance of success and a solid return on your investment. One of the factors in favor of real estate investing is the relatively small stake needed to get started, compared to investing in many other assets.
A home mortgage generally requires a 20% to 25% down payment, but, in some cases, a 5% down payment is all it takes to purchase an entire property as a rental opportunity. That’s great for those with do-it-yourself skills and plenty of spare time, but it’s only one of several ways to make money in real estate without an outsized investment upfront. These are some other real estate investment strategies to consider, along with their pros and cons.
Key Takeaways
- Buying and managing rental property is an option for investors with do-it-yourself skills and the time to manage the property hands-on.
- “Flippers” look for undervalued properties and look to sell them quickly for a profit.
- REIGs are an option for passive investing in real estate.
- REITs pay dividends and can be bought and sold on exchanges, like stocks.
- Online real estate investing platforms offer diverse opportunities for a relatively modest stake.
1. Rental Properties
Owning rental properties is a good choice for individuals who have do-it-yourself (DIY) skills, the patience to manage tenants, and the time to do the job properly.
Although financing can be obtained with a relatively low down payment, it does require substantial cash on hand to finance upfront maintenance and to cover periods when the property is empty or tenants do not pay their rent.
On the plus side, once the property starts bringing in cash, it can be leveraged to acquire more property. Gradually, the investor can acquire a number of income streams from multiple properties, offsetting unexpected costs and losses with new income.
Rental Property Investing
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Provides regular income and potential appreciation
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Can be maximized through leverage
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Many expenses are tax-deductible
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Managing tenants can be tedious
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Unexpected costs can eat up income
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Unpredictable vacancies can reduce income
According to U.S. Census Bureau data, the sales prices of new homes (a rough indicator for real estate values) consistently increased in value from the 1960s to 2007, before dipping during the financial crisis. Subsequently, sales prices resumed their ascent, even surpassing pre-crisis levels.
By the end of 2023, the average home sale price in the U.S. hit $498,300, slightly off record highs recorded earlier in the year.
2. Real Estate Investment Groups (REIGs)
Real estate investment groups (REIGs) are ideal for people who have some capital and want to own rental real estate without the hassles of hands-on management.
REIGs are a pool of money from a number of investors, similar to a small mutual fund, that is invested in rental properties. In a typical real estate investment group, a company buys or builds a set of apartment blocks or condos.
A single investor can own one or multiple units of self-contained living space, but the company operating the investment group collectively manages all of the units, handling maintenance, advertising vacancies, and interviewing tenants.
In exchange for conducting these management tasks, the company takes a percentage of the monthly rent.
A standard real estate investment group lease is in the investor’s name, and all of the units pool a portion of the rent to cover vacancies. This means you’ll receive some income even if your unit is empty. As long as the vacancy rate for the pooled units doesn’t spike too high, there should be enough to cover costs.
3. House Flipping
House flipping is for people with significant experience in real estate valuation, marketing, and renovation.
This is the proverbial “wild side” of real estate investing. Just as day trading is different from buy-and-hold investing, real estate flippers are distinct from buy-and-rent landlords.
Real estate flippers often aim to profitably sell the undervalued properties they buy in less than six months.
Some property flippers don’t invest in improving properties. They pick properties they hope have the intrinsic value needed to turn a profit without any alterations.
Flippers who are unable to swiftly unload a property may find themselves in trouble because they typically don’t keep enough uncommitted cash on hand to pay the mortgage on a property over the long term. This can lead to snowballing losses.
There is another kind of flipper who makes money by buying reasonably priced properties and adding value by renovating them. This is a longer-term investment, and investors may only be able to take on one or two properties at a time.
4. Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) is best for investors who want portfolio exposure to real estate without making a traditional real estate transaction.
A REIT is created when a corporation (or trust) uses investors’ money to purchase and operate income properties. REITs are bought and sold on the major exchanges like any other stock.
A corporation must pay out 90% of its taxable profits in the form of dividends to maintain its REIT status. By doing this, REITs avoid paying corporate income tax, whereas other companies are taxed on profits and then determine whether and how to distribute after-tax profits as dividends.
Like regular dividend-paying stocks, REITs are a solid investment for investors who seek regular income.
REITs can afford investors entry into nonresidential investments such as malls or office buildings, that are generally not feasible for individual investors to purchase directly.
More importantly, some (though not all) REITs are highly liquid because they are exchange-traded trusts. In practice, REITs are a more formalized version of a real estate investment group.
When looking at REITs, investors should distinguish between equity REITs that own buildings and mortgage REITs that provide financing for real estate and may also invest in mortgage-backed securities (MBS).
Both offer exposure to real estate, but the nature of the exposure is different. An equity REIT represents ownership in real estate, while a mortgage REIT focuses on the income from real estate mortgage financing.
REITs
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Pay dividends to investors
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Core holdings tend to be long-term, cash-producing assets
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Many trade on exchanges
5. Online Real Estate Platforms
Real estate investing platforms are for those who want to join others in investing in a relatively large commercial or residential deal. The investment is made via online real estate platforms, which are also known as real estate crowdfunding.
The best real estate crowdfunding platforms pool resources of investors looking for opportunities with other investors looking for financial backing for real estate projects. That gives the investor an opportunity for diversifying into real estate without putting up a large stake.
Investing in Real Estate Platforms
Why Should I Add Real Estate to My Portfolio?
Real estate is a distinct asset class that many experts agree should be a part of a well-diversified portfolio. This is because real estate does not usually closely correlate with stocks, bonds, or commodities. Real estate investments can also produce income from rents or mortgage payments in addition to the potential for capital gains.
What Is Direct vs. Indirect Real Estate Investing?
Direct real estate investments involve owning and managing properties. Indirect real estate involves investing in a pool of money that is used to buy and manage properties. REITs and real estate crowdfunding are examples.
What Is the Typical Minimum Investment in Real Estate?
The typical minimum investment in real estate varies depending on whether you’re pursuing direct or indirect investment strategies. When purchasing a rental property outright, you’ll generally need $25,000 to $100,000 or more for a down payment plus closing costs and fees. This amount will also depend on the location, size, and quality of the property. For multi-family properties, the cost is often higher, potentially starting at $150,000 or more, depending on its size and location.
Indirect real estate investments generally have lower minimum requirements, making them more accessible to a broader range of investors. In fact, you can often buy shares of REITs for under $100 per share, and real estate mutual funds often have similar minimums of a few hundred to a few thousand dollars. For real estate crowdfunding platforms, minimum investments can vary widely, typically ranging from $500 to $25,000 or more.
Is Real Estate Crowdfunding Risky?
Compared to other forms of real estate investing, crowdfunding can be riskier. Some of the projects available may appear on crowdfunding sites because they were unable to source financing from more traditional means. Moreover, many real estate crowdfunding platforms require investors’ money to be locked up for several years, making it an illiquid investment.
Still, the top platforms boast annualized returns of between 2% and 20%, according to Investopedia research.
What Are Favorable Conditions for Investing in Real Estate?
Good market conditions for real estate investing typically involve a combination of economic, demographic, and local factors that create favorable opportunities for investors. A robust job market with low unemployment rates and rising incomes often leads to increased housing demand, potentially driving up property values and rental rates. Areas experiencing population growth, especially from in-migration, tend to see heightened demand for both residential and commercial properties. Additionally, markets with low vacancy rates, ongoing infrastructure development, and landlord-friendly policies are often appealing to investors.
On a broader economic scale, lower interest rates generally make borrowing more affordable, potentially stimulating demand for real estate as mortgages become more accessible. However, extremely low rates can sometimes lead to the market overheating. Moderate inflation can also benefit real estate investors as property values and rents typically increase with inflation, while fixed-rate mortgage payments remain constant. Conversely, high inflation can lead to increased interest rates, potentially cooling the market. It’s important to note that these factors are general guidelines that often interact in complex ways, and their impact can vary depending on local market dynamics and specific investment strategies.
The Bottom Line
Whether real estate investors use their properties to generate rental income or to bide their time until the perfect selling opportunity arises, it’s possible to build out a robust investment program by paying a relatively small part of a property’s total value upfront.
As with any investment, there is profit and risk with real estate investing and markets can go up as well as down.
