Real estate has historically been a reliable way to see a significant return on investment over time — even when the stock market is in turmoil. Since 2011, the average sale price of a home has nearly doubled from $259,700 to $507,800. And residential homes are just one small piece of the overall equation. As the market appreciates and individual properties generate steady passive income, you can see both short-term and long-term gains from a variety of different types of investments.
Even if you don’t have the capital to buy an entire property on your own, there are ways to add real estate investments to your portfolio. Here’s a basic beginner’s guide to different types of real estate investing, ways to find funding, and how to invest with far less than a typical down payment to help you get started.
What is real estate investing?
Real estate investing is a wealth-building strategy centered around purchasing properties (or shares in them) like single-family homes, apartment buildings, and commercial real estate spaces like restaurants or shops.
There are many ways to invest, ranging from buying properties to rent or resell, to investing smaller dollar amounts into stock-like portfolios, crowdfunding platforms, or REITs that cut out the stress of property management. Though real estate investing has traditionally been limited to high-wealth individuals and accredited investors, today, there are options for every type of investor.
Benefits of investing in real estate
Investing in real estate can bring both short-term passive income and long-term appreciation of your net worth. Over time, assuming property values in the local market where you’ve invested continue to rise, you can see gains in both asset appreciation and monthly rental income. Depending on where you live and how you file, property owners may also see big tax benefits. Here are some of the biggest benefits of real estate investing.
Over time, as property values fluctuate, the value of any investments you’ve purchased may increase substantially. In the last couple of years, for example, the United States has seen record growth in home values.
Currently, home equity is at an all-time high of nearly $28 trillion, according to the Wall Street Journal. Equity is essentially a property’s value minus the outstanding debt on any mortgage. For example, if you bought a house for $100,000, you’ve made several years of payments and you currently owe $50,000, your equity is $50,000.
Now, say the property eventually appreciates to $150,000, and at that point, you have $40,000 left on your mortgage. Then your equity would be $110,000. That’s the profit you’ll get (minus fees and other selling expenses) if you sell it for market rate.
One of the biggest draws to investing in rental property is that you can receive reliable monthly cash flow that may immediately offset your investment. If you own a rental property in a hot market, even as your mortgage payments stay the same, you may see rent rise over time, and it may be able to fully cover the cost of your mortgage, annual property taxes, homeowners insurance, and maintenance. While managing a property yourself can be a lot of work, many management companies exist that can relieve some of this burden for a share of your rental income.
Quite a few tax benefits are available to people who’ve bought real estate as an investment. For starters, you can write off depreciation and the cost of repairs on the property you own. Plus, any gains you see over time will be taxed as capital gains rather than income, which is taxed at a lower rate than your standard paychecks. That means you’ll be able to keep more of the money you earn from rental income and eventual sale of the property.
Steady and stable gains
While it’s impossible to predict exactly how your investments may appreciate over time, investing in the real estate market is generally considered to be a conservative strategy. With some exceptions, the housing market, on average, has continued to rise over time. Even as the stock market swings wildly in one direction or the other, real estate prices are far less volatile and produce reliable gains. And if you have a trustworthy renter, you’ll get passive income every month for the duration of the lease.
Ways to invest in real estate
There are many different ways to invest in real estate, and what’s best for you may depend largely on how much capital you have to invest and how much work you’re willing to do to realize gains.
If you’re a first-time real estate investor, figuring out what’s best for you may seem a bit overwhelming at first. Here’s what new investors should know about the different types of assets you can include in your real estate investing strategy.
There are many different types of real estate properties you can invest in. The two main asset classes of rental real estate are residential — such as single-family homes and condos or multi-family homes like apartment buildings — and commercial investment properties — such as restaurants, retail spaces, or offices. In some parts of the world, rental property may also include docks or moorings — for example, houseboats on lakes or canals or boat-based businesses, such as tour boats, ships, or floating businesses.
Real estate crowdfunding platforms like Arrived enable people to break into investing with a lower barrier to entry. Instead of dealing with interest rates, down payments, lenders, mortgages, and credit scores, investors buy shares as you would when investing in the stock market.
However, unlike stocks, in this case you’re buying a fraction of a home. As the property appreciates, so does the value of your share or shares — and you’ll see a portion of the rental income, too. Extra bonus? You won’t ever have to serve as a landlord. Each Arrived home is managed independently by experts, protecting investors from the hassles of managing their own properties.
House flipping is a type of real estate investing where you can buy property below market rate and sell it for a profit. Most of the time, flippers conduct major renovations to upgrade a home or office building, like redoing hardwood floors, replacing wiring or appliances, and bringing the space up to par with nearby properties selling for higher prices. Then, once the renovations are complete, they’ll sell the property for a profit. This can provide a high return on investment.
In other scenarios, flippers may speculate that a specific market is about to increase significantly, and will buy properties to hold for a period of time. Then, once the market takes off, they’ll sell them.
Real estate investment trusts, or REITs, are companies that invest in properties and share dividends with investors. Some operate like publicly-traded stocks, giving investors shares in the company, while other, non-tradable REITs may sell shares of a specific property through crowdfunding.
If they adhere to certain strict guidelines, REITs can get tax benefits that can help make them lucrative investments. Each Arrived property operates as a separate REIT, which means investors benefit from passthrough taxation and the Qualified Business Income deduction —improving ROI for investors. These companies’ portfolios generally include a diversified range of assets spread across commercial and residential real estate. They are generally seen as reliable investments and you may already have shares in one through your 401(k) or Roth IRA without realizing it.
Real estate mutual funds
Real estate mutual funds are a way for investors to access a highly diversified portfolio of real estate investments. These funds primarily invest in real estate investment trusts and property management companies.
So, just like mutual funds that invest in a wide array of stocks — offering you a tiny slice of dozens or hundreds of separate investments — real estate mutual funds offer investors a way to gain from a wide range of profitable real estate investments for a low cost. You can invest essentially any amount into a mutual fund — even as little as $5 or $10, depending on which platform you use to make the purchase.
Wholesalers essentially act as middlemen between the buyer and seller of a real estate property. When a homeowner or real estate investor owns an asset they want to offload quickly but they don’t have the time, resources, or tools to find a buyer fast on their own, a wholesaler can come in to take on that part of the process for a profit.
Essentially, the wholesaler and seller will agree to a price — say, $150,000 — and then the wholesaler will try to find a buyer willing to pay more than that amount — say, $175,000. Any money on top of the contract price —i n this example, that’s $25,000 — is the wholesaler’s to keep, without ever investing a penny of their own money into the property.
Wholesaling is usually done with properties considered to be fixer-uppers, and buyers are generally investors looking to renovate and/or flip them for a profit.
Real estate investment groups
Real estate investment groups are organizations whose primary purpose is to invest in real estate. They may buy and hold properties, or buy them to renovate and re-sell them. They do not qualify as REITs, which are subject to limitations and disclosures like other stocks, and therefore are not required to make the same kinds of disclosures. These groups consist of private shareholders and their stock is not publicly traded.
How to fund real estate investing
If you don’t currently have a lot of capital to invest in a property, there are still many ways you can fund a purchase. If you’re looking to buy a property to rent out, it may be wise for you to leverage a smaller down payment — such as 5% or 10% — if you’re able to immediately offset the full mortgage costs and property taxes with reliable rental income. Just be aware that you will generally have to pay mortgage insurance — which can be pricy — until you’ve paid off a certain amount of the loan, so it may be prudent to reinvest any rental profits in paying off the mortgage until you’re able to bring those costs down.
Here are a few ways you can pull together funding for a real estate investment project if you’re not flush with cash.
If you’ve never purchased residential real estate before, a traditional mortgage may be a good place for you to start. Mortgage interest rates for individual investments are generally lower than rates for personal loans. You may be eligible for a larger mortgage than you might otherwise be able to afford if you’re buying a property where you can expect to have reliable rental income, especially if you’re planning to be a live-in landlord.
If you’re looking to buy a property that will serve as both your primary residence and a source of rental income, you may also be eligible for federal, state, or local programs that help individuals access financing for home ownership. Check with your local government to see what’s available in your city or the city you’re moving to.
Personal loans are unsecured debt, which means it’s money financed to you without being tied to an asset like a house or car. You may be able to get a personal loan to cover the down payment on a property you’re planning to pay down with rental income. Just be aware that while these loans are sometimes easier to get than a traditional mortgage, they’re usually much smaller, and they may also come with higher interest rates.
If you’ve never invested in real estate before, investing through a crowdfunding platform like Arrived can make it considerably easier. You won’t have to compare lenders, apply for a mortgage, search for property, manage tenants, or deal with maintenance hassles. Instead, you can browse available properties and invest anywhere from $100 to $15,000 per property and receive a proportionate share of consistent, monthly rental income. Not only that, but you’ll benefit from home appreciation, too.
How to find your first real estate investment property
Figuring out how to break into real estate investing can seem overwhelming at first. There are so many different kinds of properties to choose from, and virtually unlimited markets to get into. Once you’ve identified the type of property you’re aiming for — say, office space to rent out or a rental home — and the city or state you’d like to buy in, here are a few places you can start looking for properties for sale.
The MLS and real estate agents
MLS, or multiple listings services, are ways for real estate agents and brokers to share data about properties available for sale. If you’re looking to buy a real estate investment property, you can start by searching sites aggregating listings from different agencies and MLSs. Zillow, for example, is one that’s widely used by prospective buyers and renters.
Alternatively, you can work directly with a real estate agent to help you find the type of property you’re looking for. A real estate agent can help you make the process much more streamlined, as they have access to tools you may not, and they may also have knowledge of properties coming on the market soon that could be a good fit for your needs. They can help you navigate the local market, negotiate with the seller for a better rate, and understand what features of a home are most desirable to renters in the area.
When a property enters foreclosure, banks typically sell them at auction to the highest bidder. You’ll generally need to pay a deposit upon winning the bid and pay the balance in cash within a few weeks of the sale. You can learn of auctions through sites specializing in foreclosure sales. Make sure to do your due diligence before agreeing to make the purchase. While you may not be able to tour the property, and there may not even be photos available of the interior, you can research nearby property values and how they’ve changed over time, as well as typical rental prices in the area.
Real estate platforms
Real estate platforms are ways to crowdfund investment properties for shared gain. Arrived, for example, sells shares in vetted properties in neighborhoods with high potential for long-term growth. You can buy shares of such homes for far less than a down payment, and without needing to apply for funding through a lender the way you’d traditionally need a to if you were investing alone.
Mistakes to avoid when investing in real estate
Even though real estate can produce significant gains over time, it’s not a foolproof game. Before you jump into something that might seem like a good deal at face value, here are a few common mistakes you should consider.
Don’t invest with the wrong partner
While it can be challenging to go into investing alone — and financially unfeasible for many —you want to make sure you don’t make a rash decision and build a partnership that won’t last. If you’re investing with someone else, make sure you know them well and fully discuss what to do in the event everything goes sour — such as if the market tanks, or one of you wants out.
Also make sure you have a contract that lays everything out and states clearly who owns what and where your responsibilities lie. Don’t assume you’ll never have issues if you’re going into it with someone you’ve worked with before—people can react unpredictably when life throws them curveballs, and it will protect your personal relationship as well to have clear contracts to follow should the need ever arise.
Don’t underestimate renovation costs
Especially if you’re new at investing, it can be easy to get emotionally invested in the potential of something that seems like a good deal. But it’s worth hiring an expert if you need to understand how much it will cost to get something up to code, or to renovate it into a first-time homebuyer’s dream. A simple kitchen renovation can easily double in cost if you’re not careful.
Don’t rush into it
You’ve heard it before, but it’s worth saying again: If it seems too good to be true, it probably is. A great deal on a house that just needs a “little bit of TLC” could actually involve a nightmare hiding in the wiring, foundation, or even the property’s water rights, depending on where you’re buying. Do your due diligence. Ask all the questions, even the ones you’re afraid are too dumb, and don’t get caught with a bad investment as a result of a rash decision.
Don’t move too slowly, either
You know the other old adage, too: the best time to buy was yesterday, or 10 or 20 or 50 years ago. While you don’t want to rush into an investment that could turn out to be a liability in the long run (especially since real estate is an illiquid investment you can’t often offload quickly) you also don’t want to wait too long and let an opportunity escape you. Do your research, know how much you’re able and willing to invest, and move when the time is right.
Don’t underestimate what it takes to be a landlord
If you’ve never managed a property before, avoid a rude awakening by doing research and/or talking to someone who’s done it. Know your local laws and what’s required of you — landlord obligations and rental laws can vary on a town-by-town basis.
In some college towns, for example, there are laws against how many unrelated people can live in the same house. And in some popular vacation spots, there are significant restrictions against short-term rentals through platforms like Airbnb. Don’t make the mistake of buying a property in a place where you can’t actually realize the benefits you’ve bought it for.
Easily invest in rental homes
Investing through a crowdfunding platform like Arrived can take away nearly all of the stress of real estate investing. Now you can buy shares of properties, earn rental income, build equity through home appreciation, and let us handle the rest. Browse available properties to start investing in real estate today.