MoneyLife

How To Invest in Real Estate (8 Strategies)

By Marc Guberti
how to invest in real estate

Real estate investing is one of the best ways to build wealth, and the possibilities go far beyond just buying your own home. You can build up a rental portfolio and collect cash flow from your tenants. 

Real estate income can build up over time and soon surpass your salary as you continue to build up a mix of long-term and short-term rental units. If you’re wondering how to invest in real estate, consider incorporating these methods into your strategy. 

1. Rent out a room

Real estate investing isn’t exclusive to the ultra-wealthy. If you’re short on cash but have your own home, you can rent out your room and treat it as a short-term rental. You can eventually take the real estate income generated from renting out a room in your house and put it towards buying other real estate investments later on down the road. Renting out a room is an easy way to start building your rental portfolio.

2. Long-term rental properties

Rental properties present real estate investors with the ability to generate passive income from their properties. Long-term rental properties are a staple in many rental portfolios. 

Most investors make a 20% down payment on the property, and then they pay the remaining amount owed as a 15- or 30-year mortgage. While you’ll end up paying far less in the long run with a 15-year mortgage, a 30-year mortgage gives you more cash flow every month, which you can then invest into your current property or put it towards buying additional properties in the future. 

While renting out property in its current condition will keep expenses down because you won’t have to spend money renovating the place, there is something to be said about dedicating a portion of your budget towards upgrades 

Upgrading the home before you offer it as a space to rent can help you attract higher-quality tenants. New appliances can cost a pretty penny, so plan it out and think about how many renovations you can afford. Don’t overspend or stress yourself out financially by spending outside of your budget. Aim for the right balance of enhancing the property without burning through your wallet. 

Furthermore, if you hire a property management company to assist with your properties, you can expect to pay them between 8% to 12% of the monthly rent plus expenses. To save money, you can choose to manage the properties yourself which will allow you to keep the 8% to 12% cut, but this route will require a more significant time investment on your end.

3. Short-term rental properties

Don’t want to commit to a long-term tenant? Short-term rental properties provide solid real estate income that you can turn on and off as you please. Start by listing your rental property on Airbnb or VRBO. Whenever you need a break, you can simply not accept additional tenants until you’re ready to host more people. 

You will have to clean the place in between stays as though you are operating a hotel. You can do the cleaning and complete the property management tasks on your own if you want to, but there are also many companies and freelancers who will gladly do it for you! If you pay a company, the expenses will be much higher than if you pay an individual.   

Property managers have existing relationships with cleaners, and if it costs someone $50 to clean your place, the property manager who hired the cleaner will charge you more than $50 so that they can make a profit. Enlisting the help of a property manager means you’ll be able to tap into real estate passive income soon because your short-term rental will be a relatively hands-off experience.

4. Real estate crowdfunding

Most people wondering how to invest in real estate think you need large sums of money to get started. But that’s not necessarily the case! Renting out a room is one way to start with very little capital, but another great way to invest in real estate with very little capital is real estate crowdfunding. 

Seasoned real estate investors need cash to pursue great deals, and that’s where your dollars can help. Real estate crowdfunding sites like Fundrise allow you to invest in other people’s real estate projects and earn dividends from those investments. 

Real estate crowdfunding is the equivalent of buying a fractional share of a property and getting your allocated distribution without owning, touching, or maintaining the property. Real estate crowdfunding is a great way to get started if you’re short on time or cash. 

Some real estate crowdfunding sites allow you to invest as little as $500 into properties listed on their sites. You’ll also have to pay a small fee each year to keep the crowdfunding site running. Fundrise, for instance, charges a non-negotiable 0.15% annual investment advisory fee that helps with the site’s maintenance costs.

5. Real estate investment trust (REIT)

A Real Estate Investment Trust (REIT) makes it easier to diversify your real estate portfolio across various properties rather than just a single property or company. REITs are real estate companies that own and operate income-producing real estate. 

Most REITs trade on the stock market, so it’s easy to get in and out of any investment. REITs already have management teams and experienced leadership in place, which means you have to invest your own money and keep an eye on those businesses for yourself. 

REITs give you access to various real estate investments such as cell towers, storage facilities, and healthcare. These seemingly out-of-reach investments are available to all real estate investors as REITs, many of which trade for under $50 per share. 

These companies must pay 90% of their taxable income to shareholders, which results in higher dividends than your typical stock. The diversification REITs provide can reduce risks.

6. House flipping

Unlike some of the other real estate investing strategies on this list, house flipping requires significant upfront capital. You’re going to need enough money to buy a house and then additional funds to renovate it. 

These expenses can add up, especially if the house is in bad condition. After completing the repairs and finalizing the renovations, the final step is to sell the house at a higher price than you put into it. 

This cumbersome process replaces the headaches of being a landlord, and most investors only need to do a small number of house flips each year to pay their bills. You can use the profits to build up your rental portfolio, REITs, or any other real estate assets. If you want to get into house flipping but you don’t have the necessary funds, you can use crowdfunding to fund your house flipping business.

7. Land flipping

Land flipping is less competitive and more under the radar compared to house flipping. Returns from land flipping can be much greater than the returns made on house flipping, and it’s cheaper to enter the space. Many land flippers buy their properties for anywhere between $1,000 and $5,000, though the cost of land can sometimes exceed these averages. That being said, you will never find those prices on a house unless it’s completely gutted and located in an undesirable area. 

You can generate consistent real estate passive income from your land sale through seller financing. Essentially, you become the bank, and the buyer pays you in monthly interest for a set number of years until they pay off the entire property. Finding these buyers isn’t easy and it requires a lot of hard work, but once you find these buyers and they start paying you, land flipping is as passive as real estate can get.

8. Real estate ETF

If you want to learn how to invest in real estate, but you’re afraid of making a mistake, a real estate exchange-traded fund (ETF) can help. Real estate ETFs allow you to automatically invest in a wide array of real estate assets without much thought. Real estate ETFs are a great way to get into real estate without buying properties because you get to profit off of successful real estate companies. 

While waiting for the ETF to appreciate, you’ll likely receive dividend payments. For example, the Vanguard Real Estate Index Fund (VNQ) is a popular real estate ETF with a year-to-date return just shy of 20% and a dividend yield of roughly 3.60%. That’s a solid return considering you get to avoid all of the real estate headaches!

Now is the time to invest!

Real estate investing plays a significant role in many people’s lives. Housing prices hold a strong influence over the market, and investors will continue utilizing this asset to grow their wealth.

The best way to learn how to invest in real estate is to just get started! Begin with a small amount of money or take on a very manageable project. Then, learn from your mistakes, apply what you’ve learned, and improve as you go!

Want to automate your investing in the simplest way? You can set up the auto-invest in your MoneyLion investment account to further diversify your portfolio. MoneyLion helps you reach your goals faster by providing fully managed portfolios, $5 minimums, and offering you the ability to withdraw at any time. Get started with a MoneyLion investment account today!

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