Investing in Real Estate: 5 Steps to Begin

Investing in real estate will bring diversification to the portfolio — and investment access can be as simple as purchasing a mutual fund.

If you’ve ever had a landlord, you certainly don’t aspire to be one: Answering complaints about oversize insects and flooded toilets doesn’t seem like the most prestigious job.

But property investment can be highly profitable when done right. It would further expand your current portfolio of assets and be an additional source of revenue. And many of the best real estate investments do not require every beck and call to appear at a tenant’s.

The problem is that many new investors do not know where or how to invest in real estate. Here are a few of the best ways to make extra income in real estate, from low to high maintenance.

best methods to invest in real estate

1. Buy REITs (real estate investment trusts)

REITs allow you to invest without physical property investment. They are also businesses buying commercial real estates, such as office towers, shopping facilities, condos, and hotels, similar to mutual funds. REITs continue to pay significant dividends, making them a common asset in pensions. Investors who don’t need or want daily profits will spend those dividends immediately to increase their wealth.

Will REITs contain an adequate investment? These can be, but these can be diverse and different as well. Most trade on a stock exchange; others aren’t listed publicly. The sort of REIT you own will be a significant factor in the level of risk you take on because non-traded REITs are not readily priced and may be difficult to assess. Generally, new buyers will stick to publicly-traded REITs, which you can purchase from investment firms. You’ll need a brokerage account for that. If you don’t already have one, it takes less than 15 minutes to open one. Several businesses don’t need an initial investment (although the REIT itself would usually have a minimum investment).

2. Using an online platform for real estate investments

If you’re acquainted with companies like Prosper and LendingClub— which match lenders with investors willing to offer them funds for various personal needs, such as a wedding or home renovation — you’ll fully comprehend online real estate investing.

These platforms connect real estate developers, either through debt or equity, to investors who want to finance projects. Investors are hoping to gain monthly or quarterly distributions to take on considerable risks and pay the platform a fee. Unlike other real estate transactions, these are speculative and illiquid — the way you can sell a portfolio, you can’t quickly unload them.

The trouble is, you may need wealth to finance it. Many of these sites are available only to qualified buyers, identified by the Securities and Exchange Commission as individuals who have obtained an income of more than $200,000 ($300,000 with a spouse) in either of the last two years or who have a net worth of $ 1 million or more, not having a primary home. Alternatives like Fundrise and RealtyMogul among those who can’t fulfill the criteria.

3. Consider investing in residential property

Tiffany Alexy didn’t expect to become a real estate developer when she purchased her first rental property at age 21. When a senior college in Raleigh, North Carolina, she chose to attend nearby graduate school and felt buying would be cheaper 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 arrangement covered all of her bills and pulled in an additional $100 a month in cash — far from a graduate student shift, and enough for Alexy to catch a real estate bug. At the age of 27, she has five rentals and is the broker and developer of the Alexy Realty Group in Raleigh.

Alexy entered the industry using a technique often referred to as house hacking, a term coined by BiggerPockets, an online platform for real estate investors. This means that you are occupying your investment property by renting out space, as Alexy did or by renting out units in a multi-unit house. David Meyer, vice president of growth and on-site marketing, says house hacking allows investors to purchase properties of up to four units and still qualify for a residential loan.

Of course, you can also purchase and rent an entire investment property. Find one with gross costs that are smaller than the sum you will spend in rent. Even if you don’t want to be the person who turns up with a toolbelt to repair a leak— or even the person who calls that guy — you’ll still need to pay for the property manager.

“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.

4. Consider flipping investment properties

This is HGTV come to life: you invest in a low-priced home in need of a little affection, renovate it as cheaply as possible, and then resell it for profit. This is a process called house flipping; the strategy is a bit harder than it looks on TV.

“There is a bigger 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.

The other risk of flipping is that the longer you retain the property, the less revenue you make because you pay the mortgage without any income. You will lower the risk by staying in the house while you repair it. This works as long as most modifications are cosmetic, and you don’t mind a little bit of dust.

5. Rent out a room

Ultimately, to dip the very edge of your toe in the water of real estate, you could rent a portion of your home via a platform like Airbnb. It’s a house hacking commitment-phobe: you don’t have to secure a long-term guest, prospective renters are at least somewhat pre-screened by Airbnb, and the company’s host guarantee gives insurance against losses.

Renting a space feels a lot more open than a luxurious real estate investment idea. When you have a spare room, you should rent it out.

Like all investment decisions, the best investment in real estate is the investment that best serves you, the investor. Think about how much time you’ve got, how much capital you ‘re willing to invest, and whether you want to be the one who deals with household issues when they unavoidably come up. If you don’t have DIY skills, consider investing in real estate through a REIT or crowdfunding platform instead of directly in a property.