How to Invest in Real Estate: 5 Lucrative Strategies of 2023
Investing has become increasingly popular in recent years, with more and more people learning about the incredible potential of compound interest and self-sustaining money growth. As a result, there is now a far greater demand for investment opportunities to help people achieve their financial goals.
Fortunately, there are now more ways to invest than ever - from mutual funds to cryptocurrencies, there is practically no limit to the options available. However, real estate remains one of the best investment vehicles for those looking to grow their wealth. Thanks to its relatively stable value growth, and the ability to generate passive income through rental properties, real estate is an excellent choice for investors of all levels.
Whether you're a seasoned pro or just starting, you must have a solid understanding of the real estate landscape before investing. That's why we've compiled a comprehensive guide on investing in real estate. Our guide covers everything you need to know about finding, evaluating, and ultimately investing in real estate assets that can help you achieve your financial goals.
What Are the Ways to Invest in Real Estate?
Investing in real estate can be done in seemingly countless ways. As we mentioned before, any piece of land or building has the potential to be a real estate investment.
(Keep in mind just because something can be an investment doesn’t mean it will be a good investment)
Below we’ve explained some of the most common ways that people invest in real estate:
1. Rental Properties
Purchasing rental properties is one of the most common and easy to understand ways that people invest in real estate.
The idea of rental properties should be a familiar concept because most people have rented an apartment or house at some point throughout their life.
However, for those that aren’t familiar, investing in a rental property is the act of purchasing a building, and then renting it out for someone else to use.
When renting out a building, you are looking for cash flow (i.e. leftover money each month after you deduct your property’s expenses from the rent it receives).
Cash flow per unit isn’t particularly high when renting out your property, however, it can really add up as you add more units.
Rental properties can take on many forms. They can be something as simple as a single family home or as complex as a shopping center or hospital.
This makes rental properties attractive for many people, since there are countless choices, and they’re also a great way to build wealth over time.
Rental Property Pros & Cons
- You have control over your investment
- Large variety of financing options for rental properties
- Properties are available at almost all price points
- Often requires a loan with strict requirements
- It’s a fairly “hands-on” type of investing
- Investing in your area may be prohibitively expensive
2. Real Estate Development
Real estate development is the act of purchasing real estate and making major improvements to it (developing it).
This term is most often used to describe the purchase of raw land, clearing it if needed, and building homes or other buildings.
Chances are that if you live on a road with a cul de sac, you live in a real estate development.
The beauty of real estate development is that there are many ways you can do it.
You can develop real estate by building something as simple as a modest home, or as complex as a skyscraper.
Most people, however, opt to build just an individual house or a handful of houses.
This type of investing can be great for those who either know how to build a house or know a team of great contractors that can build a house inexpensively.
This type of real estate investment can be incredibly lucrative if you have the necessary team and the ability to scale the business.
Many people who want a brand new home don’t want to deal with the headache of the building process, so they’ll pay a premium to move into a brand new home that someone else built.
Real Estate Development Pros & Cons
- Very lucrative if you can find the right team
- Vacant land is relatively inexpensive
- Great for hands-on investors
- Development is seen as highly speculative
- High degree of risk
- Hard to scale as a business
- Great contractors are hard to find
3. House Flipping
If you’ve ever watched a television show about real estate, chances are you’re pretty familiar with house flipping.
House flipping is the act of buying a distressed piece of real estate (usually a single family or small multifamily building) that could use some work, fixing it up, and then selling the property at a price higher than what you paid for it (including any renovations).
The work associated with “flips” can be anything from improving overgrown yards, and applying a fresh coat of paint across the whole house, to ripping out everything in the house down to the studs and starting anew.
The amount of work you do depends on the flip that you purchase. Just remember that the more complex the work you’re doing is, the greater variance there will be in cost.
For example, if you’re gutting an entire house, you may find things within the walls that you’re not expecting.
Outdated electrical and plumbing systems are very common in older homes, and can be incredibly expensive to fix the right way.
If you encounter an issue like this and don’t have money budgeted for it, your flip can turn into a flop.
House Flipping Pros & Cons
- Upside potential is much higher than buy and hold investing
- “Fixer-Uppers” are often very cheap
- You can do the work yourself and save on repairs costs
- Very easy to repeat once you learn
- High degree of risk - many things can go wrong
- Requires a lot of oversight
- Dealing with contractors can be difficult
- You can’t use a mortgage to buy homes in extreme disrepair
Much like flipping houses, wholesaling houses is an area of real estate that is often pushed on rookie investors.
There are countless people offering courses and seminars on “how to make millions in just a few months with wholesaling”.
While that does sound tantalizing, wholesaling isn’t nearly as easy as it’s made out to be
Wholesaling houses is the act of getting a piece of real estate under contract (usually well below market value), and selling that contract to someone who is actually interested in owning that real estate.
You typically never take possession of the real estate, but you profit on the spread between the purchase contract you have and the price the buyer pays.
If done correctly, you can make hefty sums of money wholesaling houses.
As we mentioned before, wholesaling isn’t as most people think it is, and there is still quite a bit of work involved in becoming a successful wholesaler.
To get started wholesaling, you need to contact droves of people (ideally who don’t have their homes listed for sale) and try to buy their houses for below market value.
Figuring out which people to reach out to is the tough part though.
Your strategy will depend highly on the area that you’re in.
Successful wholesalers have found wholesale deals by doing everything from driving around looking for distressed houses, to looking up delinquent property tax records.
Once you’ve identified potential opportunities, reach out and make offers.
Once someone accepts your offer, and you have the home under contract, you then find a buyer and sell the contract to them.
Real Estate Wholesaling Pros & Cons
- Very inexpensive to set up
- Incredibly scalable
- No contractors needed
- Not nearly as easy as most gurus make it seem
- Requires much more work than other real estate investments
- Very time intensive to set up
5. Real Estate Investment Trusts (REITs)
Real estate investment trusts (REITs for short) are an often forgotten way to invest in real estate.
A REIT is a large corporation that pools money and invests in real estate for its investors.
REITs are often forgotten because you usually buy into them via purchasing their stock on a stock exchange, like the Nasdaq or New York Stock Exchange.
However, privately held REITs are garnering the support of “retail” investors in recent years.
Equity crowdfunded REITs, such as RealtyMogul are becoming increasingly popular.
Since you often purchase REITs on a stock exchange, they’re usually thought of more as a stock investment than as a real estate investment.
However, it’s important to remember that a REIT’s underlying business is investing in real estate.
The type of real estate that they invest in depends on the REIT that you buy into. There is a REIT for practically every type of real estate you can think of.
There are REITs that invest in medical buildings, large apartment complexes, malls, and even hotels.
Even though they’re often overlooked, REITs can still be a great way to get exposure to different types of real estate, such as industrial parks, large apartment complexes, self-storage facilities, etc.
Most people don’t have the time or capital to invest in large scale real estate ventures, like the ones mentioned above, however REITs make it simple and easy for anyone to diversify their real estate exposure.
It’s also important to note that in the United States, REITs are required by law to pay out 90% of their net income to investors through dividends.
This can be a great way to get some exposure to the cash flowing potential of real estate without having to go through the hassle of owning and maintaining physical buildings.
REITs Investment Pros & Cons
- The most hands-off way to invest in real estate
- Dividends are paid to you quarterly
- REITs are heavily vetted by the Securities and Exchanges Commission (SEC)
- Little to no control over your investment
- Limited potential for appreciation
- Inability to leverage your money
Is My House a Real Estate Investment?
Chances are, your primary residence probably can’t be classified as a real estate investment.
An investment is an allocation of money that you expect to provide returns over time.
This means that you buy an investment with the expectation that it will be worth more later on down the line.
Most people don’t buy their primary residence with the expectation of it being worth more in the future, they buy for amenities, neighborhoods, etc.
This means that unless you’re living in a house hack or live-in flip, your home is not an investment.
Frequently Asked Questions
Real estate investing can be incredibly difficult to wrap your head around, and we’ve just scratched the surface so far.
In order to shed some light on the matter, we’ve put together a list of some of the most common questions.
By no means will this answer every question you might have, but we’ve tried to address some of the bigger ones.
Which Type of Real Estate Investing is Right for Me?
The best thing about investing in real estate is that there is a type of real estate investment out there for everyone.
Finding out which type is best for you is something that you have to determine based on your long term financial and life goals.
If you’re looking to build wealth fairly passively over the long term, then owning rental properties might be the best strategy for you.
Want to have projects to work on? Then going the flip route might be a better idea for you.
Maybe you want to just buy something and wait for a dividend to hit your account every quarter, without ever having to lift a finger. If that’s the case, then a REIT is probably the best for you.
How Much Money Do I Need to Invest in Real Estate?
The beautiful thing about real estate investing is that, since there are so many ways to invest, there is a way to invest at every price point.
For example, you can invest in a REIT for as little as a few dollars.
However, if you’re looking to invest in tangible real estate, like a flip or a rental property, you’re probably going to need more than a few dollars.
When buying properties, most people use a mortgage, which you can qualify for with as little as 3.5% of the purchase price when using an FHA loan.
What Kind of Returns Can I Expect?
The returns you get on your real estate investments can vary widely since different markets can be drastically different, however, the math behind your returns will always stay the same.
Return on investment is a commonly used term in the investing space, and it’s calculated by dividing your net profit by your initial investment and multiplying by 100 (to get a percentage).
Returns on flipping houses and developing properties are usually in the 10-20% range, depending on the complexity of the project, and whether or not there are any unforeseen surprises along the way.
Capitalization Rate (Cap Rate) is typically used more for rental property investing and is calculated by dividing your net operating income by the market value of the asset and multiplying by 100.
Cap rates can vary quite a bit, but for in-demand areas (such as major metropolitan areas), a healthy cap rate is usually in the 4-6% range.
Lastly, when it comes to REIT investing, most people are interested in dividend yield. This is the percentage of share price paid out to the shareholder each year.
Normal dividend yields for REITs are typically in the 3-5% range but can vary depending on the type of real estate your REIT is investing in.
What Do I Need to Get Started Investing in Real Estate?
If you’re looking to get started investing in real estate, you’ll need a few things. REITs will only require money, a bit of research, and a stock brokerage account.
However, physical properties will require a bit more.
If you’re looking to purchase a physical property, you’ll of course need some money, but you’ll also likely want to have a real estate agent, a contractor, and a lender (typically a mortgage broker) at a minimum.
A real estate attorney, an accountant, and a property manager might also be good additions to your team of real estate professionals when you’re looking for your next investment.
How Can I Find Real Estate Professionals in My Area?
The internet has forever changed real estate investing, making it easier than ever to find the best real estate professionals near you.
However, when entering the real estate world, having connections with people in your area is still important.
Whether those connections are through online forums, or in person meetups, word of mouth recommendations are still one of the best ways to find local professionals.
Where Can I Find Real Estate Deals?
Real estate deals can come from a wide range of sources.
You can find them on listing sites (such as PropertyNest), through real estate professionals you know, such as agents and contractors, or somewhere as simple as a “for sale by owner” sign in front of a house.
Nowadays, there are even sites like RoofStock that help connect investors looking to buy rental properties with other investors that are looking to sell.
Real estate deals can be found everywhere, you just need to know where to look.
Where Can I Learn More About Real Estate Investing?
As we previously mentioned, the internet has revolutionized the real estate investing industry.
At PropertyNest, we strive to be a one-stop shop for all things real estate and real estate investing.
We’ve got an ever-expanding catalog of content catered to investing in real estate, so be sure to check back often for more information.
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