Real estate is widely regarded as one of the best investments you can make. Historically, housing has proven to be more stable than other forms of investment, consistently outpacing both inflation and the stock market.
Yet, many people shy away from real estate investing, believing it’s too complicated or that it requires a large down payment. This couldn’t be further from the truth! Real estate is actually quite accessible.
Whether you’re interested in the traditional approach of purchasing and renting out properties, renting out individual rooms, or investing in multifamily units similar to how you’d invest in stocks, there are plenty of opportunities available.
In this article, we’ll explore six straightforward ways you can start your journey as a real estate investor.
1. House Hacking
If you have an extra room, a remodelled basement, or live in a duplex, “house hacking” is one of the simplest ways to dip your toes into real estate investing. By renting out a portion of your home, you can start generating income with little-to-no additional cost since you already own the property.
However, because you’ll be living with or near your tenants, thorough tenant screening is essential. You’ll need to research appropriate rent prices based on your space, the local rental market, and your current mortgage payment. Don’t forget to consider hidden costs like renter’s insurance, utility bills, and any renovations required to make the space tenant-ready.
House hacking allows you to earn passive income while gaining hands-on experience as a landlord, which can be invaluable if you decide to pursue larger real estate investments in the future.
2. Long-Term Rentals
One of the most common entry points for real estate investors is renting out properties to long-term tenants. This typically involves single-family homes, where one tenant or family resides, though multifamily properties with multiple tenants are also a great option to consider.
Long-term rental properties offer several advantages, including tax benefits, financing flexibility, and consistent cash flow.
On the tax side, rental property owners can deduct expenses like property taxes, mortgage interest, and repairs, which can significantly reduce taxable income and lead to savings at tax time. Additionally, traditional mortgages, private loans, and partnerships make financing these properties easier, as they are widely available and often straightforward to obtain.
Monthly rent payments provide steady cash flow, allowing investors to build wealth over time and create a passive income stream. Compared to short-term rentals or other investment types, long-term rentals are generally easier to manage and provide more reliable income.
3. Short-Term Rentals
Short-term rentals, often referred to as vacation rentals, are properties rented out on a nightly basis rather than monthly or annually. Platforms like Airbnb and VRBO have made it easy for real estate investors to list properties, manage bookings, adjust pricing, and generate additional income. Many investors who venture into short-term rentals even turn it into a full-time business.
One of the main advantages of short-term rentals is the potential for higher rental income compared to long-term rentals. Since they are rented for shorter periods, nightly rates can be higher, leading to greater overall cash flow. Additionally, short-term rentals offer flexibility—investors can rent out the property part of the year and use it for personal purposes during the remaining time, making them ideal for vacation homes or second properties.
There are also tax benefits, including deductions for expenses like property upkeep and depreciation, which can lower taxable income.
However, short-term rentals come with challenges. The biggest drawback is the higher maintenance costs due to the frequent turnover of guests. Cleaning, repairs, and replacements are needed more often, which can drive up expenses over time. The increased wear and tear from constant guest turnover can also add to long-term maintenance costs.
Another potential downside is seasonality, as demand for short-term rentals can fluctuate depending on the time of year and location. This makes it harder to predict cash flow and occupancy rates consistently.
While short-term rentals can be lucrative, investors should weigh these potential downsides carefully before diving in.
If you’re not keen on short-term rentals but want better cash flow than long-term rentals provide, medium-term rentals might be the perfect middle ground. More profitable than long-term leases and with fewer demands than short-term rentals, medium-term rentals cater to tenants who stay for 30 days to under a year. Typical tenants include traveling nurses, business professionals, and digital nomads, who tend to take good care of the property since they’re temporarily settling in.
4. Real Estate Crowdfunding
Real estate crowdfunding allows multiple investors to pool their money together to fund the purchase of real estate properties. In recent years, this investment method has surged in popularity. In fact, the global real estate crowdfunding market reached $10.78 billion in 2021 and shows no signs of slowing down.
There are several key benefits to real estate crowdfunding:
- Access to new properties: Historically, access to commercial real estate or niche residential properties, like luxury high-rises, was reserved for a few wealthy and well-connected individuals. Crowdfunding now opens the door for everyday investors to include these types of properties in their portfolios.
- Portfolio diversification: Just like with stocks, owning a single property can bring significant gains or losses. Crowdfunding allows you to spread your investment across multiple properties, reducing risk in a manner similar to a mutual fund.
- Passive income: Crowdfunding investments are managed by a fund manager or developer. They handle the property’s operations and distribute dividends according to the terms of your contract. Aside from initial research, there’s little effort required on your part.
- Affordability: Many real estate crowdfunding platforms have relatively low entry points. While some require five-figure minimum investments, platforms like Fundraise let you start with as little as $10.
While crowdfunding is ideal for passive investors, it’s not a quick way to make money. Your funds will likely be tied up for an extended period (Fundraise, for instance, recommends a minimum investment horizon of five years). Additionally, you won’t have direct control over the properties, and you may incur management and advisory fees.
5. Real Estate Investment Trusts (REITs)
REITs offer a passive and affordable way to invest in real estate. These companies finance, own, or manage income-generating properties and real estate assets. Many REITs specialize in specific property types, such as residential, industrial, retail, office, or multi-use properties, and can be easily bought and sold through brokerage accounts.
In the U.S. alone, REITs collectively hold over $3.5 trillion in real estate assets. There are over 200 publicly traded REITs, many of which are priced under $100 per share. To maintain their tax-advantaged status, REITs are required to distribute 90% of their earnings as dividends, putting more money directly in investors’ pockets.
REITs come with several advantages. One of the main benefits is their liquidity, as shares can be easily bought and sold on major stock exchanges, providing flexibility and easy access to capital. REITs also offer attractive dividend yields, giving investors a consistent income stream.
However, REITs also have some downsides. Since their value is tied to share prices, they can be more vulnerable to market volatility than traditional real estate investments. Fluctuations in the stock market can significantly impact the value of REIT shares. Additionally, REITs are sensitive to interest rates, meaning that rising rates could reduce the value of the underlying real estate assets.
6. Join a Team
Successful real estate investors rarely go it alone—and neither should you! Whether you’re an investor-friendly agent, a general contractor, a house cleaner, a marketing expert, or simply someone with extra capital and a willingness to learn, joining a team of professionals can be a great way to get started. Collaborating on projects like house flips or using the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method gives you the opportunity to learn from others while gaining hands-on experience.
By working alongside experienced experts, you can ask questions and develop practical skills. After contributing to a few projects, you may feel confident enough to lead your own fix-and-flip and become a seasoned investor yourself.
If you ever run into challenges or have questions, don’t hesitate to reach out to real estate communities and forums for advice!
Conclusion
Real estate investing has come a long way, especially with the rise of digital platforms. Everyday investors now have more opportunities than ever before. While the numerous options can seem overwhelming, it’s important to view this as a positive. Despite challenges like rising interest rates and inflation, there’s never been a better time to start investing in real estate. So, take the leap and begin your journey today!
