10 Ways to Invest in Real Estate

Atiyaomar · December 25, 2021, 6:00pm

10 ways to invest in Real estate are Real Estate Investment Trusts (REITs), Crowdfunding in real estate, Renting Properties, Hacking into houses, Airbnb/Vacation Rentals, Wholesaling, Flipping Homes, Private notes and Opportunity-based Zone Funds. It is not only an income-oriented investment, it is also a less volatile asset class than equities. So even if investors create multiple passive income streams from real estate, they can also reduce the risk in their portfolio without sacrificing return.

Here are some basic principles you need to understand to succeed in property investment:

1. Keep your mind open to new ideas. The most successful investors of real estate take advantage of opportunities everywhere. The ability to see creative financing is crucial, especially in today’s market.

2. It is important to know all your options. Investing in real estate is by definition a high-risk gamble. Never make an investment you are not sure about. Understanding what you are doing is crucial to being successful.

3. Investing in your education pays off in the long run. It is common for real estate investors to invest in properties that yield a multiple of their original investment. . The ability to apply a strategy correctly can result in significant returns. Of course, you risk losses if you do not utilize critical resources.

Investing in Real Estate:

1.Real Estate Investment Trusts (REITs)

When most investors think of investing in real estate, they immediately get into real estate investment trusts (REITs) - and rightfully so.
You can easily buy REITs through your regular checking account, IRA, 401(k), or another retirement account. Because they are publicly traded, they are regulated by the Securities and Exchange Commission (SEC) and are required to provide a wealth of information to help you make informed investment decisions.
They offer high liquidity, allowing you to buy and sell immediately. And they facilitate diversification, as you can spread your investments across hundreds or even thousands of real estate properties and projects around the world.
Real estate investment trusts come in two types: equity REITs and mortgage REITs (mREITs). REITs invest directly in real estate, while mREITs borrow money secured by real estate.

Advantage :

A unique feature of REITs is that they are required by SEC rules to distribute at least 90% of their profits in the form of dividends. Investors can therefore expect particularly high dividend yields from REITs compared to ordinary stocks or funds.

Disadvantage :

The downside of this rule is that REITs find it difficult to grow their portfolios when such a large share of their income has to go to shareholders. This means that REITs often do not see the same growth in share prices as many equity indices.

2. Crowdfunding in real estate

A more recent phenomenon in the world of real estate investment, crowdfunding offers another way to invest indirectly in real estate. Although many crowdfunding websites still only accept money from accredited investors, these services have increasingly opened their doors to middle-class investors.

This means that investors with less than $1,000 can start and invest just like their wealthier counterparts. It also opens the doors of opportunities for the middle class to invest in more types of real estate such as apartment buildings and office buildings.

The investment models of these websites are different. Some buy up properties and let investors invest money in mutual funds similar to listed REITs. Others lend money against properties, such as mREITs. Some, like Fundrise, do both and allow investments starting at $500.

Among those who lend money, crowdfunding sites take two different approaches to accepting investments. Firstly, it is the classic pooled fund model, where you can invest in what you want in the fund and get an equal return as everyone else.
The other allows you to choose the individual loans you want to fund, which adds a more personal and participatory dimension to your property investment.

Take Groundfloor as a good example of a crowdfunding website that lets you choose your real estate investments. It allows investments as low as $10, making it easy for anyone to invest and spread their investments across many properties.

Summary: Finally, keep in mind that these crowdfunding platforms pay out the proceeds differently. Many mutual funds, such as Fundrise, pay quarterly dividends. But if you opt for investments, you usually only get your return when the loan matures (usually a one-year term).

3. Renting Properties

Owning investment property outright has its own various advantages and disadvantages.
When you own a rental property, you have an idea of the cash flow, or return on investment (ROI), with great precision. You know the price you’re paying, you know the market rent, and you can predict the long-term average of your expenses, such as annual repair costs, vacancy rates, property taxes, management fees and insurance.
Not many property-based investments offer such predictable returns. When you can predict the return on a particular property, you can only buy good investments. You also have control over the investment. You choose the tenants, property, and management practices.
You can invest money in upgrades to increase rental income. When was the last time the CEO of a stock you owned called you and offered you control over the management of the company?
Then there are the tax advantages of owning real estate. You can write off everything from mortgage interest to property management costs and insurance. And you can continue to write off paper expenses, such as depreciation that you never spent a penny on.
Despite all these advantages, rental properties also have some disadvantages. They are notoriously illiquid. Like any outright purchase of property, it takes a lot of money and time to sell it.
They also require a large sum of change to buy, even if you finance them. When it costs tens of thousands of dollars in closing costs and a down payment to buy a single property, it makes diversification difficult.
And then there are the problems associated with renting a home. Unless you hire an experienced property manager, you can count on tenants calling you at 3 a.m. complaining about their neighbors or asking you to change a light bulb for them.

Summary : If you’re interested in buying a turnkey rental property, look no further than Roofstock. Roof stock has not only completed over $2 billion in transactions, but they also offer you a guarantee that you will have a signed lease with tenants within 45 days or they will cover 75% of the market rent for up to 12 months.**

4. Hacking into houses

No one can say you can’t reside in your own rented house. The idea behind home hacking is simple: get other people to pay your mortgage for you. In the classic model, you buy a multi-family house, move into a unit, and rent out the neighboring unit or units. The neighbors’ tenants pay your mortgage for you and live there for free.

But if multifamily housing doesn’t appeal to you, there are also many strategies for housing single-family units. From roommates to extra housing units, foreign students, and more, there are many ways to turn your home into a source of income. You can even use Airbnb to rent out hacks, periodically using your home as a holiday home for guests.

5. Airbnb/Vacation Rentals

While you can use a rental property as a long-term rental or as a short-term holiday rental through Airbnb, the business model for both differs significantly.
Short-term rentals require a lot more work, from cleaning units between guests to marketing to coordinating check-in and ongoing communication with guests. In essence, you are running a hospitality-based business.
You can make amazing profits through amazing deals and get a property that you can use periodically. But you have to have the right attitude for that.
Where many new investors get into trouble is inaccurately predicting expenses and revenues. Many underestimate vacancy rates, the impact of seasonality, and the cost - both in time and money - of management.
Make sure you triple-check your figures before investing in a short-term rental property and that you are fully aware of the commercial obligations involved. Make no mistake: you are starting a hospitality business, even if you only have one holiday home.

6. Wholesaling

Property wholesaling is often misunderstood by people new to the world of investment property. It is about finding a good deal, putting it under contract, and then selling that contract to another investor at a profit margin. You never have ownership of the property, you just communicate with an eager seller with a willing property investor.
For example, suppose you find a property worth $150,000 and get it under contract for $110,000. You reach out to your network of investors and offer them the property for $125,000. When he finds a buyer, he awards them the contract.
The investor gets a $150,000 property for $125,000, and you get a $15,000 fee - all without the hassle of financing, closing costs, renovations, tenants, or brokers.
Finding good deals takes a lot of work, as does building a network of real estate investors who trust you not to sell them bad deals. And then there’s the risk of not finding a buyer, leaving you stuck between breaking your contract or buying the property yourself.
Still, it’s a great side job to make money while learning some of the fundamentals of property investment before you’re ready to start buying properties on your own.

7. Flipping Homes

Most of the options on this list involve creating passive income streams from real estate. Wholesale trading and flipping houses are the exceptions. Property flipping requires a ton of work on your part, but in return, you can expect extraordinarily high cash returns. And just like rental returns, savvy investors can accurately predict these returns.
Although the calculation part is different, the pivotal challenge is the same: accurately predicting your income and costs. In this case, the income figure is simply the post-rehab value (ARV), or the price you can get for the property after it has been renovated.
This is pretty simple but easy to overestimate, as property values get down within a range of market values.
The cost is not much more complicated. You know your purchase cost and closing costs, so all you need to have an idea of your refurbishment and carrying costs. When new fins get into trouble you are underestimating these costs and not budgeting a buffer for unexpected repairs.
Still, it’s an easy calculation if you know what you’re doing. Consider a quick example: You buy a house for $100,000 and put $40,000 into renovating it. Between both rounds of closing costs and your carrying costs, you spend an extra $25,000. You sell the property for $200,000 at a profit of $35,000.
This is if you pay cash. If you finance 80% of the purchase and 100% of the repairs, you only need to pay a $20,000 down payment, plus closing and carrying costs. Even if you add another $5,000 to the closing and carrying costs to account for the lender’s fees and interest, you’ll still make a $30,000 profit on a $50,000 investment.
That’s a 60% cash return on investment. That may sound incredible until you factor in the headache and work required to oversee the deal.

8. Syndications and silent partnerships

In real estate syndications and silent partnerships, money is put in but no business finding or property management work is actually done. Instead, the lead sponsor or “partner” does all the work and receives an extra share of the profits for their efforts.
Syndications usually involve large commercial properties. The sponsor finds a good deal and then raises money from investors to fund it. As part of the signing of the deal, the investors provide all decision-making power and control to the sponsor.
For this reason, syndicates would come under SEC scrutiny - if they opened their investments to the public. They almost never do, allowing only accredited investors to participate.
The remaining non-accredited investors may instead invest the money as silent partners with friends, family, and other people we know personally. If your brother-in-law flips real estate in addition to his full-time job, you can form your own LLC with him with all the rules you want.
But to enter into a silent partnership, you need to know and trust the real estate investor. Otherwise, don’t expect to sleep peacefully at night when there are few safeguards to protect your money.

9. Private notes

Instead of working as a partner with a relative or close friend with a real estate background, you can lend them money. This gives you even less protection as your name is not on the deed. But it also means no liability and no obligation. Also, many real estate investors don’t like to have a partner to share the profits, they just want to finance.
Again, you need to really know and trust the real estate investor you are funding. If you don’t want to have a real estate prodigy in the family, don’t get sad. You can always start communicating with real estate investors to build these relationships and find new investors with a strong track record of success.
Being nervous is no excuse. Update your networking tips for introverts. I invest money with real estate investors I know and make between 10% and 12% on my money. But if they fail, all I can do is sue them, win a trial and then try to collect. Again, it all comes with trust.

10. Opportunity-based Zone Funds

At the fine end of the property investment spectrum are Opportunity Zone Funds. These funds were introduced by the Tax Cuts and Jobs Act of 2017, which specified some 8,700 Qualified Opportunity Zones to target for economic stimulus. The idea is simple: encourage investment in distressed areas by offering tax relief for investing money in them.
Opportunity Zone Funds are private equity-based funds. An experienced commercial real estate investor raises money from accredited investors and then uses the money to buy property in qualified Opportunity Zones.
As these zones are impoverished, this increases the risk of investing in them. In return for this increased risk, investors receive preferential tax treatment, including deferral of some or all capital gains tax until 2026.
Only accredited investors are eligible for this, and furthermore, the tax benefits justify the higher risk only for high net worth investors. Mum and pop investors do not have to apply.

PASSIVE REAL ESTATE INVESTMENT STRATEGIES	ACTIVE REAL ESTATE INVESTMENT STRATEGIES
REITs	Rental properties (short- and long-term)
Mortgage debt	Flipping houses
Stocks, mutual funds, and ETFs	Land (developing)
Crowdfunded real estate	Foreclosures and REO properties
Land (speculative buying and selling)	Commercial real estate

Reasons for Investing in Real Estate:

With well-chosen current and non-current assets, investors can enjoy predictable cash flow, excellent cash returns, tax benefits, and diversification - and it is possible to use real estate as a leverage tool to build wealth.

Key points:
Real estate investors make money from rental income, capital appreciation, and profits from business activities that rely on property.

The benefits of real estate investment include stable cash flow, passive income, tax benefits, leverage and diversification. Real estate investment trusts (REITs) offer a way to invest in real estate without owning, operating or financing real estate yourself.

Cash Flow

Cash flow is the net income from an investment property after deducting mortgage payments and operating costs. An important advantage of investing in real estate is the ability to generate cash flow. On many occasions, cash flow only strengthens over time as you pay your mortgage - and build up your equity.

Property investors earn money from rental income, profits from different commercial activities that rely on the property, and capital appreciation. Property tends to increase in value over time, and with good investment you can make a profit when it’s time to sell. Rents also tend to increase over time, which can lead to increased cash flow.

This graph is from the Federal Reserve Bank of St. Louis shows average U.S. home cots since 1963. The gray shaded areas indicate recessions in the U.S.

Tax benefits and deductions

Real estate investors can take benefit of innumerable tax leverages and deductions that can save money at tax time. In general, you can deduct the reasonable costs of owning, operating, and managing a property.

Build equity and wealth

When you pay off a mortgage, you build equity - wealth that is part of your net worth. And as you build more equity, you have the advantage of buying more property and further increasing your cash flow and wealth.

Portfolio diversification

Another advantage of investing in real estate is its diversification strength. This means that adding real estate to a portfolio of diversified assets can reduce portfolio volatility and provide a higher return per unit of risk.

Leverage effect on real estate

Leverage is the use of various financial instruments or borrowed capital (e.g. debt) to increase the potential return on investment. A 20% deposit on a mortgage, for example, gives you 100% of the house you want to buy - that’s leverage. Since real estate is a tangible asset that can serve as collateral, financing is readily available.

Competitive risk-adjusted returns

Returns on real estate vary, depending on factors such as location, asset class, and management. However, one number that many investors strive to beat is the average return of the S&P 500 - what many people refer to when they say “the market”. The average annual return over the past 50 years is around 11%.5

Inflation hedging

The ability of the real estate to hedge against inflation stems from the positive relationship between GDP growth and demand for real estate. As economies flourish, the demand for property increases the cost of rents. This, in turn, leads to higher capital costs.

Real estate thus tends to balance the purchasing power of capital, spreading some of the inflationary pressure to tenants and absorbing some of the inflationary burdens in the form of capital costs.

You can’t work forever, and even if you could, you probably don’t want to work. If you want to design your perfect life, it may not involve work at all. If you want to become financially independent and retire early, you need multiple sources of income.

And real estate offers a range of opportunities, irrespective of your current wealth, to create passive income and gradually replace the income from your 9-to-5 job.

Summary: Investment in real estate is profitable and beneficial business which helps to increase income and build a great future.

Here are 10 most frequently asked questions:

Frequently Asked Questions (FAQs)

1. What should I know before doing investment in real estate?

The location of the property.
Property valuation.
Investment objective and horizon.
Expected cash flows and profit potential.
Beware of debt

2. What is the most cost-effective way to invest in property?

Properties with a high return on capital are generally the most profitable investments. Airbnb and traditional rental properties are amazing types of real estate investment because you can earn a positive cash flow every month and a high return on your investment.

Investments in rental properties offer consistent and immense profits.

3. What is the two percent rule in real estate?

The two percent rule in real estate relates to the percentage of the annual cost income of your house that you should charge for rent. In other words, for a property that costs $300,000, you should charge at least 6,000 dollars every month to make it beneficial.

4. What are the risks involved in the investment in real estate?

Investing in real estate can be lucrative, but it is important to know the risks. The main risks involved are bad locations, negative cash flow, high rates of vacancy, and problems of tenants. Other risks involved are lack of liquidity, hidden structural problems, and the unfortunate prices of the property market.

5. Why is an investment necessary?

Why should you invest? Investments offer current and future financial security. They allow you to grow your assets while earning a return higher than inflation. You can also take advantage of the power of compound interest.

6. What is the best risk management strategy for investing in real estate?

Real estate is extremely dependent on location, so diversification is one of the fruitful ways to mitigate risk. Owning a variety of asset classes in different sectors or markets reduces your risk.

7. What is liquidity in real estate?

Liquidity refers to the extent to which an asset can be bought and sold fast in the market at a cost price that highlights its intrinsic worth. Tangible assets such as real estate, works of art, and collectibles are all relatively illiquid.

8. What is an illiquid asset?

Illiquid assets are assets that cannot be quickly converted to cash, at least not at their market value. Although illiquid property investments may be more valuable than liquid investments in the long term, they should be included in the long-term buy-and-hold portion of an investment portfolio.

9. What are the two types of REITs?

The two main branches of REITs are equity REITs and mortgage REITs, commonly characterised as mREITs. Equity REITs generate income by collecting rental income from the properties they own on a long-term basis and selling them. mREITs investment in mortgages or mortgage-backed securities tied to residential or commercial real estate.

10. How to invest?

Open an account.
Choose investments that match your tolerance of risks (stocks, mutual funds, bonds and real estate).
Give your money a purpose.
Decide how much help you want.
Choose an investment account.
Open your account.
Choose investments that fit your risk tolerance.

Conclusion:
There are many ways to create income streams from real estate. Some are completely passive, such as REITs and crowdfunding investments. Others require little work on your part, such as rental properties.
And some, like retail properties, are labor-intensive but lucrative. Anyone hoping to live a long life needs a plan to replace the income from work.