If your only experience investing in property involves paying your home's monthly mortgage, you might want to consider expanding your real estate portfolio. In fact, there are a number of ways to make money through real estate, and not all of them require taking out a big bank loan or scary second mortgage.
Last updated: June 7, 2021
Invest In Rental Properties
A prime rental property can bring in monthly income and appreciate in value over time. Before taking the plunge, though, buy-and-hold investors should consider a list of factors. These include rental rates, a property's asking price, the state of the housing market, state and local taxes and appreciation potential, said Alex Villacorta, executive vice president of analytics at HouseCanary, a data analytics real estate platform for investors, realtors, brokers and lenders.
"Most of these factors change from neighborhood to neighborhood and even from block to block," Villacorta said. "There are still pockets of opportunity in most markets where home prices remain relatively low and price growth is very strong -- a perfect combination for buy-and-hold investors who are seeking to increase their wealth through rental investment."
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Although areas that command high rents are initially attractive, when rental rates exceed 30% of the neighborhood's median income the investment property market might be headed for unsustainable heights, Villacorta said.
"Depending on the investing horizon, a higher proportion of income needed for rents could be a risk and a reward," he said. "In the short term, surging rental rates indicate that there is strong demand for presumably limited inventory, which portends higher returns for the investor. In the long term, however, these low-supply markets are prime targets for larger multifamily construction or increased single-family home production."
Another option is to invest in a multifamily property from the get-go, said Sep Niakan, owner and managing broker at HB Roswell Realty and founder of the condo listing site CondoBlackBook.com.
"It's always easier to manage both the property and multiple tenants on a single property than multiple tenants in multiple properties," Niakan said. "That said, another way to simplify your rental investment is to purchase a condo, where you will have to spend considerably less time maintaining the property than an independent property."
Find a Flip
Discovering an undervalued property, renovating it and reselling it for a hefty profit looks pretty easy on reality TV shows, But you should be prepared to make a significant investment in both cash and sweat equity, said Bobby Montagne, CEO of Walnut Street Finance, a private real estate development company that provides commercial loans in and around Washington, D.C.
"If you watch HGTV, chances are you think this is an easy route to real estate riches," he said. "In real life, successful property flippers take time, money, local real estate knowledge and renovation expertise. It takes time to find a property you can buy at a steal, supervise the upgrades and then resell at a profit."
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Those who hope to make a fortune on flips should consider all their costs before taking the plunge, Montagne said. No matter how it sounds, flipping houses is not a quick way to make money.
"Flipping costs typically include a down payment of about 20 percent of the purchase price of the property, payments to contractors for renovations, and sales costs like real estate transfer taxes and the real estate agent's commission," he said.
Look Into Private Loan Funds
Private loan funds work with multiple home flippers, spreading the investment over a large pool of home renovations and resales. Fund administrators also assess local market conditions as well as each renovator's expertise and plans for increasing a property's value, Montagne said.
"Investors who don't have the time or desire to supervise renovations -- or lack knowledge about local real estate markets, home design, construction and marketing -- can invest in real estate flips through a private lender," he said.
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Although they won't need to hoist a hammer or comb local listings for home staging ideas, investors should educate themselves when it comes to private loan funds, Montagne said.
"Before investing, vet the backgrounds of those running private loan funds," he said. "Look for a lender with construction experience, local market knowledge and a track record of successful flips in both up and down real estate cycles."
Get Your Foot in the Door Through Crowdfunding
Crowdfunding pools money from multiple investors -- often through online platforms -- to fund a project or real estate development.
"This strategy provides an unparalleled opportunity for first-time investors," said Ralph DiBugnara, president of the online real estate information guide Home Qualified and vice president of retail sales at the mortgage lending firm Residential Home Funding Corp. "Crowdfunding makes investing approachable and affordable by allowing investors to buy shares of a property rather than an entire residence."
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There are numerous platforms out there and not all of them operate in the same way, said Craig Cecilio, CEO and founder of the crowdfunding company DiversyFund.
"The best tip I can offer is to make sure you understand who you are investing with and their investment structure," said Cecilio, whose company manages its own developments. "Many real estate crowdfunding companies lack the experience and understanding of their markets. Their business platforms are based off fees taken from the investor. Be sure to compare companies head-to-head on fees, returns, transparency and the variety of investments offered as well as the leadership experience."
House hacking is simply a clever label for using your own owner-occupant loan to buy an investment property and live in it, said Brian Adams, a realtor with StarPointe Realty and owner of HoodHomesBlog.com in Killeen, Texas.
"You can use it for multifamilies, foreclosures and live-and-flips that can either be turned into rentals while still living there or once you move on in a couple years," he said. "It is an easier start than traditional investing because the financing has better rates and lower down payments than investment loans."
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"My tip for buyers interested in this strategy is to ensure their realtor is someone who does investing and understands what to look for in a good income property in their area," Adams said.
He recommends connecting with knowledgeable real estate agents through local meetup groups or through online forums operated by the real estate investment education site BiggerPockets, which helped popularize the term "house hacking."
Become a Part-Time Landlord
Short-term rental sites like Airbnb, VRBO and HomeAway are making it easier than ever for property owners to connect with travelers and turn their vacation homes into income generators, said Rob Stephens, general manager at Avalara MyLodgeTax, which helps homeowners and others manage lodging tax transactions.
"From an investment perspective, buying a vacation rental home enables you to purchase property in a location you already love and visit frequently," he said. "The income from travelers renting your property will often cover a significant portion, if not all, of your ownership costs while you reap the benefits of long-term appreciation."
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Stephens advises investors to plan on putting money in for the long haul, which is another reason to purchase property in a favorite vacation destination you will enjoy for years to come.
"One key difference between real estate and stock is the relative liquidity," he said. "Buying and selling a home takes time and there are transaction costs involved. That, however, hasn't stopped millions of people from turning their vacation homes into incredible long-term investments."
Real estate investment trusts, or REITs, are companies that own and often manage income-producing real estate or related assets such as office buildings, malls, apartment buildings, hotels, resorts, self-storage facilities, warehouses and mortgages or loans, according to the U.S. Securities and Exchange Commission. Many REITs offer attractive returns and are a good way to add depth to an investment portfolio, said Melinda Kibler, a certified financial planner and client service and portfolio manager with Palisades Hudson Financial Group in Fort Lauderdale, Fla.
"REITs are not only valuable as a diversification tool, but also help with volatility and as a hedge against inflation," she said. "As inflation increases, typically so do real estate pricing and lease rates, therefore boosting performance." All these factors make REITs a relatively safe investment with high returns.
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REITs are a good option for those who are new to real estate investing because several investment firms, including Vanguard, offer real estate index funds such as mutual funds or exchange-traded funds with relatively low fees, Kibler said. Plus, holdings in REITs are easier to liquidate than physical properties if investors need cash quickly.
"A mutual fund or ETF REIT provides diversified, liquid exposure to real estate," Kibler said. "Purchasing such a fund allows you to control how much or little you want to be invested, instead of making a large outlay of cash to purchase a physical property. It also gives you flexibility for when you want to liquidate or invest more."
Become a Home Wholesaler
Wholesaling is essentially a fast flip in which a wholesaler inks a contract with a home seller, then sells the home to another buyer at a higher price before the first contract closes. The wholesaler's contract with the homeowner typically includes a contingency clause that lets the wholesaler out of the deal if he or she isn't able to find another buyer, limiting risk for the wholesaler.
The deal offers advantages to the home seller and end buyer because the wholesaler takes over marketing a property, which might need repairs or have other issues that make it a hard sell. At the same time, end buyers who are willing to make repairs themselves could sell some homes at a hefty profit down the road or rehab the space for themselves in a neighborhood where move-in-ready properties are beyond their budgets.
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It's important to cultivate a contact list of eager buyers before you dive into wholesale deals, said Than Merrill, founder of the real estate investment company CT Homes and founder and CEO of FortuneBuilders, an education and coaching company for aspiring investors.
"An effective key for finding success in wholesaling real estate is for investors to manage an active list of buyers," Merrill said. "This list is built over time throughout an investor's career, whether it be through networking or previous real estate deals. By maintaining a network of interested buyers, investors will find that facilitating wholesale deals will be much easier."
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