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Done right, real estate investing can be lucrative, help diversify your portfolio, and become a stream of passive income. However, many investors — especially those new to real estate — don’t want the burden of being a landlord or managing a property.
Thankfully, many of the best investments don’t require showing up at a tenant’s every beck and call. Here are some of the best ways to make money in real estate, roughly ordered from lowest to highest maintenance.
Considerations: Are REITs a good investment? They can be, but they can also be varied and complex. Some trade on an exchange like a stock, while others don’t. The type of REIT you purchase can be a big factor in the amount of risk you’re taking on, as non-traded REITs aren’t easily sold and might be hard to value. New investors should generally stick to publicly traded REITs that can be purchased via an investment account.
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2. Real estate investing platform
How it works: Real estate crowdfunding investment platforms connect developers with investors. These investors are looking to finance projects in the private market, usually through private REITs. The benefit of a platform like this is the potential to generate higher returns than those investors might receive through a public REIT. However, this comes with greater risk. Many crowdfunding platforms also offer access to alternative investments like art and collectibles.
Income generated: Investors hope to receive monthly or quarterly distributions. This is in exchange for taking on significant risks and paying a fee to the platform.
Considerations: Like many real estate investments, these are speculative and illiquid — you can’t easily unload them the way you can trade a stock. This means they may not be a good fit for investors who may need to sell or convert funds quickly.
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Earned income of more than $200,000 ($300,000 with a spouse) in each of the last two years.
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Have a net worth of $1 million or more, not including a primary residence .
How it works: Renting out a room feels a lot more accessible than the fancy concept of real estate investing. If you’ve got a spare room, you can rent it. Such an arrangement can substantially reduce housing costs. It allows you to stay in your home while continuing to benefit from price appreciation on your property. If you’re not sure you’re ready, you could try a site like Airbnb. It’s essentially house hacking for the commitment-phobe, since you don’t have to take on a long-term tenant. Airbnb somewhat prescreens potential renters, and the company’s host protects against damages.
Income generated: Rental income. Adding roommates can also make a mortgage payment more attainable.
Considerations: Be sure to keep up with any applicable regulations. For example, some co-op apartments don’t allow renting to outside parties unless you meet certain terms. Some properties may also be located in districts where zoning laws disallow leasing or renting.
This is also not a great strategy for renters who happen to have an extra bedroom. The ethics of overcharging for a room in an apartment you do not own to pocket the additional funds could get dicey very quickly. Renting out a room as a renter may also be considered subleasing, which could grant the roommate rights to the apartment. It may also be against the terms of your lease to sublet if you’re living in a rent-stabilized or rent-controlled unit.
How to get started: Crunch the numbers to see how much you may need to charge to help offset your mortgage or to work towards your investment goal. Then, check if there are any laws or regulations that would restrict you from renting out a room in your home. Additionally, ensure you understand how to vet a tenant, charge rent and create a lease. It’s also important that you know your tenant’s legal rights regarding eviction, payment and other aspects of renting.
How it works: If you have some capital to spare and don’t mind property management, you can consider buying physical property and renting it out. This could be a house, apartment building, or another type of residential or commercial property.
Considerations: If you want to buy and rent out an entire investment property, look for one with lower expenses than the amount you can charge in rent. And if you don’t want to be the person who shows up with a toolbelt to fix a leak — or even the person who calls that person — you’ll also need to pay a property manager.
🔦 Investor Spotlight
Tiffany Alexy didn’t intend to become a real estate investor when she bought her first rental property at age 21. Then a college senior in Raleigh, North Carolina, she planned to attend grad school locally. She figured buying would be better than renting.
“I went on Craigslist and found a four-bedroom, four-bathroom condo that was set up student-housing style. I bought it, lived in one bedroom and rented out the other three,” Alexy says.
The setup covered all of her expenses and brought in an extra $100 per month in cash. This was far from chump change for a grad student and enough that Alexy caught the real estate bug.
Alexy entered the market using a strategy sometimes referred to as “house hacking.” The term was coined by BiggerPockets, an online resource for real estate investors. It essentially means you’re occupying your investment property either by renting out rooms, as Alexy did, or renting out units of a building.
David Meyer, head of real estate investing at BiggerPockets, offers more insight into house hacking. He says it allows investors to buy a property with up to four units and still qualify for a residential loan.
“If you manage it yourself, you’ll learn a lot about the industry, and if you buy future properties, you’ll go into it with more experience,” says Meyer.
5. Flipping investment properties
How it works: You invest in an underpriced home in need of a bit of help, renovate it as inexpensively as possible and then resell it for a higher value. This strategy — also known as “house flipping” — can allow you to make a profit if you sell the renovated property for more than what you paid for it.
Income generated: Profit from selling the home. In this case, that means subtracting any costs associated with buying, renovating and selling the home from what you make in the sale.
Considerations: It can be a bit harder than it looks on TV. It’s also more expensive than it used to be, given the higher cost of building materials and mortgage interest rates. Many house flippers aim to pay for the homes in cash. The other risk of flipping is that the longer you hold the property, the less money you make. During the renovation stage, you may be paying a mortgage without bringing in any income. You can lower that risk by living in the house as you fix it up if the updates are cosmetic and you don’t mind a little dust.
How to get started: Do market research to decide what constitutes a “good deal” within your budget and how to eventually price the property. Ensure you have the necessary funds (either in cash or through financing) to secure the deal. Consider working with a partner or contractor to assess the potential cost of repairs and to gain a projected timeline (more on this below).
🔎 Expert Insight
“There is a big element of risk, because so much of the math behind flipping requires a very accurate estimate of how much repairs are going to cost, which is not an easy thing to do,” says Meyer.
His suggestion? Find an experienced partner.
“Maybe you have capital or time to contribute, but you find a contractor who is good at estimating expenses or managing the project,” he says.
Like all investment decisions, the best real estate investments are the ones that best serve you, the investor. Think about how much time you have, how much capital you’re willing to invest, and whether you want to be the one who deals with household issues. If you don’t have DIY skills, consider investing in real estate through a REIT or a crowdfunding platform rather than directly in a property.
