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Real estate investing can be one way to diversify an overall investment portfolio and potentially generate income. But not everyone has the resources, time, or know-how to purchase and manage an investment property. Fortunately, there are a number of ways to invest in real estate, from publicly traded real estate investment trusts (REITs) to rental properties and real estate crowdfunding. The best option depends on how much money you have to invest, how hands-on you want to be, and how much risk you’re comfortable taking. Here’s what you need to know to get started.
Key Points
• Real estate investing can potentially diversify a portfolio, generate income, build equity, and access tax benefits.
• Options range from hands-off investments like REITs, ETFs, and crowdfunding to direct property ownership and flipping.
• Investors can begin with limited capital through publicly traded funds or real estate crowdfunding platforms.
• Direct property management and fix-and-flip strategies require significant time, skill, operating expenses, and market expertise.
• Choosing the right strategy depends on individual capital, time availability, risk tolerance, and liquidity needs.
Why Invest in Real Estate?
Real estate investing can offer a number of potential benefits for both new and experienced investors. Here are some of the main advantages to consider.
• It can help diversify a portfolio: Real estate investments don’t necessarily move in lockstep with stocks and other investments. However, real estate can still be affected by broader economic conditions, interest rates, and market sentiment, so diversification does not eliminate risk.
• It may offer some protection against inflation: Real estate can sometimes benefit from rising prices. For example, landlords may be able to increase rents over time. That said, inflation can also increase costs such as maintenance, insurance, and property taxes, which can reduce cash flow.
• It may generate income: Rental properties can produce rental income, while some REITs distribute income to shareholders. However, the consistency and amount of this passive income can fluctuate.
• It may appreciate over time: Property values can increase over the long term, allowing you to build equity and capital gains when you eventually exit. However, appreciation is not guaranteed. Real estate values can also decline, sometimes significantly.
• It may offer tax benefits: Depending on the type of real estate investment and your circumstances, you may be able to take certain tax deductions. For example, rental property owners may generally deduct certain expenses such as mortgage interest, property taxes, repairs, and depreciation, according to the IRS.
Another thing that can make real estate investing attractive for beginners is the variety of ways to participate. You can choose an approach based on your available capital, time commitment, desired level of control, and comfort with risk.
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7 Ways to Get Started in Real Estate Investing
Real estate investments can take different forms as part of a broader strategy focused on alternative investments. Some involve directly owning and managing property, while others allow you to gain exposure to real estate without buying a building yourself.
As you compare different real estate investments, here are some factors to consider:
• Minimum investment requirements
• Fees and other costs
• Liquidity and potential holding periods
• How the investment has performed historically
• Potential sources of return
• Investment-specific risks
• How much time and effort the investment requires
Keeping these key factors in mind, you might consider one of these seven ways to get started in real estate investing.
1. Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) is a company that owns or finances income-producing real estate. Depending on the REIT, its holdings may include apartment buildings, warehouses, shopping centers, hotels, office buildings, or other types of real estate. Some REITs invest in mortgages or other real estate-related debt instead of owning properties directly.
REITs offer a way to gain exposure to real estate without purchasing and managing physical property yourself. REITs generally must distribute at least 90% of their taxable income to shareholders annually to maintain their special tax status. However, distributions can fluctuate and the value of a REIT can fall.
Many REITs are publicly traded on a stock exchange, allowing you to buy and sell shares through a brokerage account much like traditional stock trading. This can make publicly traded REITs relatively accessible and liquid compared with directly owned property.
2. REIT ETFs
An REIT exchange-traded fund (ETF) is a fund that generally holds a portfolio of REITs and trades on a stock exchange throughout the trading day. Buying shares of one REIT ETF can give you exposure to multiple REITs through a single investment.
One potential advantage of ETF investing is diversification, and this is also the case with REIT ETFs. Instead of choosing individual REITs, you can own a basket of REITs with one purchase. ETFs may also have relatively low expense ratios, although fees vary from one fund to another.
REIT ETFs also have potential drawbacks. Their share prices can fluctuate based on changes in the value of their underlying REITs, interest rates, economic conditions, and real estate market trends. The fund’s expenses can also reduce potential returns.
As with other investments, it’s important to review a fund’s holdings, fees, investment strategy, and risks before buying shares.
3. Real Estate Mutual Funds
Real estate mutual funds pool money from multiple investors and use it to purchase a portfolio of securities related to real estate. Depending on the fund’s strategy, its holdings may include REITs, real estate companies, mortgage-related securities, or other real estate investments.
Because a mutual fund can hold many securities, it may provide diversification across multiple companies or types of property through a single investment. For example, a fund might hold REITs that focus on apartments, warehouses, health care facilities, and retail properties. However, investors are still exposed to property market ups and downs. Mutual funds typically also charge annual management fees, which may be higher than REIT ETFs.
Unlike an individual REIT, a mutual fund is not itself required to distribute 90% of its taxable income. Mutual funds can make distributions to shareholders, and investors can also potentially benefit from changes in the value of the fund’s holdings.
One important difference between mutual funds vs, ETFs is how they trade. Mutual fund shares are generally bought from and redeemed with the fund at the next calculated net asset value, rather than traded continuously throughout the day on an exchange.
4. Real Estate Crowdfunding
Real estate crowdfunding platforms allow multiple investors to pool money to finance real estate projects or invest in real estate-related securities. Depending on the platform and offering, investors may be able to participate with relatively small amounts of money compared with buying a property directly.
Crowdfunding investments can be less liquid than publicly traded REITs and ETFs, since some offerings require investors to keep their money invested for a specified period. Eligibility also varies by offering. Some real estate crowdfunding opportunities are available to nonaccredited investors, while others are limited to accredited investors. Under Securities and Exchange Commission (SEC) rules, an individual generally qualifies as an accredited investor if they meet certain income or net-worth requirements or hold certain professional securities licenses.
Because real estate crowdfunding investments can have different structures, fees, liquidity restrictions, and risks, it’s important to review the offering documents carefully before committing money.
5. Rental Properties
Buying a rental property can provide rental income if you can find and retain tenants. Some ways to generate rental income through real estate include:
• Buying a property and renting it to long-term tenants
• Buying a vacation property and renting it to short-term or seasonal tenants, where permitted
• Purchasing a multifamily property, such as a duplex or triplex, and renting the units
• Renting out part of your home
However, owning rental property also comes with risks and responsibilities. Potential challenges include:
• Periods when a property is vacant and produces little or no rental income
• Problem tenants or tenant turnover
• Maintenance and repair costs
• Property taxes, insurance, and other operating expenses
• Lack of liquidity compared with publicly traded investments
• Unexpected expenses that reduce cash flow
Financing is another important consideration. Depending on the property and your circumstances, you may be able to use a conventional mortgage, an FHA loan for an eligible multifamily property you plan to occupy, a home equity loan or home equity line of credit (HELOC), or another type of financing. Each option has its own eligibility requirements, costs, and risks.
Before purchasing a rental property, it’s important to estimate not only the mortgage payment but also property taxes, insurance, maintenance, vacancies, property management, and other expenses. A property that generates rental income isn’t necessarily cash-flow positive after all of its costs are considered.
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6. Fix-and-Flip Properties
With a fix-and-flip strategy, you purchase a property, renovate it, and then attempt to sell it for more than your total costs. The difference between the sale price and your costs isn’t guaranteed to be a profit, and unexpected expenses or a slower-than-expected sale can reduce or eliminate the potential return.
Successful house flipping generally requires knowledge of the local housing market, an understanding of renovation costs, and enough time or expertise to manage the project. You’ll also need to consider who will complete the renovations. Doing some of the work yourself may reduce labor costs, but taking on projects without the necessary skills can lead to delays or additional expenses.
Financing options may include a conventional mortgage, a business or investment-property loan, or a short-term hard money loan, depending on the property and borrower. Hard money loans can have higher interest rates and fees than traditional mortgages and typically have relatively short repayment periods, so borrowers need to carefully consider whether the financing fits the project timeline.
7. Own and Improve Property Directly
Another way to participate in real estate is through direct ownership of property. For example, you might purchase a property and make improvements that could increase its usefulness or market value. You could also purchase a property with the intention of eventually converting it to a rental.
However, owning a primary residence isn’t necessarily the same as making a real estate investment. Your home can build equity and potentially appreciate, but it also comes with costs such as mortgage interest, property taxes, insurance, maintenance, and repairs. Whether a home is a good financial decision depends on factors such as the purchase price, financing, how long you plan to stay, and local housing conditions.
If you’re considering buying a home, understanding what you can afford and what you may qualify for with a mortgage can be a good place to start. Shopping around with multiple mortgage lenders can help you compare interest rates, fees, and loan terms.
How Do You Invest in Real Estate With Limited Capital?
You don’t necessarily need enough money to purchase a property outright to get started with real estate investing. REITs and REIT ETFs, for example, can provide exposure to real estate through a brokerage account without requiring you to make a large down payment or manage a property.
Real estate crowdfunding can also have relatively low minimum investment requirements, although the minimum varies by platform and offering. Some crowdfunding investments are available to non-accredited investors, while others may have higher eligibility requirements.
If you want to own property directly, you may be able to use financing to purchase a rental property rather than paying the full purchase price in cash. A larger down payment can reduce the amount you need to borrow, but you’ll still need money for closing costs, reserves, maintenance, and unexpected expenses.
How to Know If Investing in Real Estate Is a Good Idea for You
Is real estate investing right for everyone? Not necessarily. Every investor’s goals, finances, and risk tolerance are different. Asking yourself these questions can help you determine where real estate might fit into your portfolio:
• How much money are you able and willing to invest in real estate?
• What is your main goal or reason for considering real estate investments?
• If you’re interested in rental properties, will you manage them yourself or hire a property management company?
• How much rental income would a property need to generate to make sense for you after expenses?
• If you’re considering a fix-and-flip, do you have the time, skills, and financial resources to manage a renovation?
• How will you finance a rental property or fix-and-flip?
• If you’re considering REITs, real estate crowdfunding, or REIT ETFs, how long do you expect to hold the investment?
• How much risk are you comfortable taking?
• How much liquidity do you need if your financial circumstances change?
It may also be worth talking with a financial or tax professional if you’re unsure how a real estate investment could affect your broader financial situation or tax bill.
The Takeaway
There are several ways to invest in real estate, from publicly traded REITs and REIT ETFs to crowdfunding, rental properties, and fix-and-flip projects. Each approach comes with different costs, risks, liquidity, and time commitments.
For beginners, the right choice may depend largely on how much money they have available, how involved they want to be, and how much risk they can comfortably take. Understanding those factors and researching an investment before committing money can help you choose an approach that fits your financial goals.
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FAQ
How can I invest in property with little money?
You don’t necessarily need enough money to purchase a property outright to invest in real estate. Real estate investment trusts (REITs) and REIT exchange-traded funds (ETFs) allow you to gain exposure to real estate through a brokerage account, while some real estate crowdfunding platforms have relatively low minimum investments. If you want to own property directly, financing can reduce the amount of cash needed upfront, although you’ll still need money for a down payment, closing costs, reserves, and ongoing expenses. Your options will depend on your finances, investment goals, and risk tolerance.
Is real estate investing worth it?
Whether real estate investing is worth it depends on your financial goals, available capital, time, and tolerance for risk. Real estate can potentially generate rental income, provide portfolio diversification, and appreciate over time, but returns aren’t guaranteed. Direct property ownership also comes with expenses, maintenance responsibilities, and limited liquidity. Real estate investment trusts (REITs), exchange-traded funds (ETFs), and crowdfunding can offer real estate exposure without directly managing property, but each carry unique risks, fee structures, and liquidity profiles. Before investing, it’s wise to consider the potential benefits, costs, risks, and how the investment fits with your overall financial plan.
What makes a good real estate investment?
A good real estate investment depends on your goals and financial circumstances. For a rental property, factors such as location, purchase price, expected rental income, operating expenses, vacancy rates, and financing costs can affect whether the property makes financial sense. For real estate investment trusts (REITs) and other publicly traded investments, you’ll want to consider the underlying assets, fees, performance history, and risks. Regardless of the type of investment, it’s important to understand the potential costs and risks and avoid assuming that past performance or projected returns will continue.
What is the easiest way to buy real estate online?
For many beginners, buying shares of publicly traded real estate investment trusts (REITs) or REIT exchange-traded funds (ETFs) through an online brokerage may be one of the simplest ways to gain exposure to real estate. You can also use online crowdfunding platforms to participate in certain real estate offerings, although eligibility, minimum investments, fees, and liquidity vary. If you want to purchase a physical property online, real estate listing and brokerage websites can help you find properties, but buying a property involves financing, inspections, closing costs, and other steps beyond the online purchase itself.
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