Real estate investing, when executed correctly, offers a path to wealth generation, portfolio diversification, and eventually, a steady stream of passive income. For many investors, particularly those new to the field, the perceived burden of landlord responsibilities can be a deterrent. However, numerous real estate investment avenues exist that do not require hands-on property management.
Here are five prominent ways to invest in real estate, categorized by their level of maintenance commitment:
1. REITs (Real Estate Investment Trusts)
How it Works: REITs are companies that own and often operate income-producing commercial real estate, such as office buildings, retail spaces, apartments, and hotels. Investing in a REIT is similar to buying shares in a stock or a mutual fund, allowing investors to gain exposure to real estate without directly owning physical property.
Income Generated: REITs are legally required to distribute a significant portion (at least 90%) of their taxable income to shareholders as dividends. These dividends are typically steady and regular, making REITs a popular choice for income-focused investors, including those in retirement. Investors can choose to reinvest these dividends to further compound their investment growth. Dividends are taxable in the year received unless held within a tax-advantaged account like an IRA.
Considerations: REITs can be diverse and complex. Some are publicly traded on stock exchanges, offering high liquidity, while non-traded REITs are less liquid and can be harder to value. New investors are generally advised to stick to publicly traded REITs due to their transparency and ease of trading.
How to Get Started: Publicly traded REITs can be purchased through a standard brokerage account, which can typically be opened in under 15 minutes. For broader diversification within real estate, investors can also buy into real estate ETFs (Exchange Traded Funds) or mutual funds that hold shares in multiple REITs.
2. Real Estate Investing Platforms (Crowdfunding)
How it Works: Real estate crowdfunding platforms connect real estate developers and projects with investors interested in financing private market real estate ventures. These often involve private REITs or direct equity/debt investments in specific properties. The appeal lies in the potential for higher returns compared to publicly traded REITs, though this comes with increased risk. Some platforms also offer access to other alternative investments like art and collectibles.
Income Generated: Investors aim for monthly or quarterly distributions, acknowledging the significant risks involved and platform fees.
Considerations: Investments through these platforms are often speculative and illiquid, meaning they cannot be easily sold or converted to cash quickly, making them unsuitable for investors who might need rapid access to their funds.
How to Get Started: Many crowdfunding platforms are exclusively for accredited investors, defined by the SEC as individuals with an annual income over $200,000 ($300,000 with a spouse) for the past two years, or a net worth of $1 million or more (excluding primary residence). However, platforms like Fundrise and RealtyMogul offer options for non-accredited investors.
3. Rental Properties
How it Works: This traditional method involves purchasing physical property (residential or commercial) with the explicit goal of renting it out to generate income. This strategy is suitable for investors with available capital who are prepared for property management responsibilities.
Income Generated: Regular rental income. Investors should consult a financial advisor to understand the complexities of tax rules related to rental income, including obligations and available tax breaks.
Considerations: To ensure profitability, combined property expenses (including mortgage, taxes, insurance, and maintenance) should be lower than the achievable rent. If an investor wishes to avoid hands-on management, budgeting for a property manager’s fees is essential.
How to Get Started: Work with a real estate agent and a financial advisor to identify a property that aligns with your budget and long-term investment goals. Key steps include researching location, calculating potential ROI, understanding landlord legal responsibilities, and having a clear grasp of all upfront, ongoing, and long-term expenses.
“House Hacking” – An Investor Spotlight:
Tiffany Alexy’s experience illustrates “house hacking,” a strategy where an investor occupies their investment property while renting out rooms or other units. At 21, she bought a four-bedroom condo, lived in one room, and rented out the other three, covering all expenses and generating an extra $100/month. This approach allows investors to potentially qualify for residential loans (for properties up to four units) and gain hands-on industry experience if they self-manage.
4. Flipping Investment Properties
How it Works: This strategy, commonly known as “house flipping,” involves purchasing an undervalued home in need of renovation, improving it as cost-effectively as possible, and then reselling it for a higher price. The profit comes from the difference between the sale price and the total “all-in” costs (purchase, renovation, and selling expenses).
Income Generated: Profit from the sale.
Considerations: Flipping can be more challenging and expensive than it appears on TV, especially given fluctuating building material costs and mortgage interest rates. Many flippers aim to pay cash to avoid interest. A significant risk is the longer holding period, as mortgage payments accrue without rental income. This risk can be mitigated by “house hacking” – living in the property during cosmetic renovations.
How to Get Started:
- Market Research: Thoroughly understand what constitutes a “good deal” within your budget and how to price the renovated property for sale.
- Financing: Secure necessary funds (cash or financing) for the purchase and renovation.
- Partnerships: Consider working with an experienced partner or contractor to accurately estimate repair costs and project timelines. As BiggerPockets’ David Meyer advises, finding a contractor who excels at estimating expenses or managing projects can be invaluable, especially if you contribute capital or time.
5. Renting Out a Room
How it Works: This highly accessible method involves renting out a spare room within your primary residence. It can significantly reduce housing costs and allows you to benefit from property appreciation while living in your home. Platforms like Airbnb offer a less committed option, providing some pre-screening of renters and host guarantees against damages. This is a form of “house hacking for the commitment-phobe.”
Income Generated: Rental income, which can help offset mortgage payments.
Considerations:
- Regulations: Be aware of local regulations, including zoning laws, cooperative apartment rules (e.g., waiting periods before renting), and potential restrictions on subleasing if you are a renter yourself (especially in rent-stabilized/controlled units).
- Ethical Concerns (for renters): If you are a renter, overcharging for a room in an apartment you don’t own to pocket extra funds can raise ethical and legal issues, potentially violating your lease or granting the roommate tenant rights.
How to Get Started:
- Financial Planning: Calculate the rent needed to offset your mortgage or achieve investment goals.
- Legal Checks: Verify local laws and regulations regarding renting out a room.
- Tenant Management: Understand how to vet potential tenants, charge rent, create a lease agreement, and be aware of your tenant’s legal rights concerning eviction, payment, and other rental aspects.