Though not entirely without risk, real estate is widely regarded as one of the best long-term investments you can make. After all, you have to live somewhere, and owning a home means putting money back into your own pocket — instead of a landlord’s — with each monthly mortgage payment.
While homeownership is a common starting point for many hopeful investors, there are myriad types of real estate investments worth having on your residential radar. In this article, with the help of Jordan Terrell, a top agent and real estate investment expert based in Westminster, Colorado, we’ll take you through 11 investment options with a brief introduction as to which require the most time, effort, and money to pursue.
Types of real estate investments
There are four main categories of real estate investing:
- Residential (buildings that house people)
- Commercial (spaces in which businesses operate)
- Raw land (undeveloped property)
- Third-party (investments into crowdfunding deals, investment trusts, and so on)
While some of the investment types we’re about to get into can fall under more than one category, we’re focusing here on residential real estate investing.
1. Peer-to-peer lending
If you’re keen to start investing in real estate but cash is limited, know that it’s possible to invest with $5,000 or less.
Particularly if you’re interested in helping others, peer-to-peer lending can be an interesting option. This style of investing involves putting your money toward individuals or projects you really believe in, such as helping someone to buy a home or make major repairs to a property.
The three major players for real estate peer-to-peer lending are:
- Peer Street, a crowdfunding platform for homebuyers with investments that generally pay out in less than two years. You’ll need to be an accredited investor, but you can start investing with as little as $1,000.
- Lending Club, which offers more investment opportunities than just real estate and also requires just $1,000 to begin.
- Prosper, another personal loan platform that makes it possible to get started in micro-investing with as little as $25.
It’s worth remembering that even with a generous rate of return, you’re unlikely to amass great wealth by investing a few thousand dollars. Peer-to-peer lending can, however, be a great way to dip your toe into the waters of real estate investing with minimal risk.
Similar to peer-to-peer lending, crowdfunding involves multiple people pitching in toward one cause and can be a compelling path for beginning real estate investors.
While platforms such as GoFundMe and Kickstarter are typically used to assist individuals or small groups with personal causes or new business ventures, real estate crowdfunding lets you and other investors pool your resources to fund real estate developers.
Commonly, developers will purchase rental properties with the crowdsourced funds, and investors will make money by earning a small portion of the regular rental income.
Real estate crowdfunding platforms you might check out include:
- Crowdstreet, for owning a sliver of high-end properties with a minimum $10,000 investment.
- Fundrise, which allows investment in real estate funds for as little as $1,000.
- RealtyMogul, a diverse platform for both beginner and experienced investors.
- Roofstock, which focuses on single-family home investments.
- Brickfunding, for comparing real estate crowdfunding projects.
3. Real estate investment trusts (REITs)
You can look at a REIT as a way of niching down in real estate investing. A trust acts as a company that focuses on a specific type of income-producing real estate — such as hotels, apartment buildings, senior housing, and so on.
As with most investments, the more money you can put in, the more you stand to gain in the future, but REITs can be an attainable pathway into real estate investing for the everyday buyer.
4. Fix-and-flip homes
If you have even a vague interest in real estate and own a television, you’ve almost certainly watched a show or two about flipping houses.
The premise is simple enough: Find a home in need of renovation, buy it for a low price, fix it up, make it look pretty, sell the property at a profit. Rinse and repeat as desired.
“Flipping is a great way to make significant cash,” says Terrell. Depending on your investment goals — as in, whether you’re aiming for earnings now versus taking a more long-term approach — flipping homes can mean pocketing profits in a matter of weeks or months instead of years.
Of course, anyone who has taken on home repair projects knows that there’s often more to a job than meets the eye. The fix-and-flip approach can be fun for those who enjoy getting their hands dirty, but this type of real estate investment is not for the faint of heart (or wallet). You’ll need to have the cash or credit worthiness to secure financing to buy the home, then you’ll need funds to make the necessary repairs and upgrades.
If you’re interested in flipping houses as an investment strategy, you’ll want to have a trusted contractor on your team to help with estimating project costs and executing the construction work.
5. Short-term rentals
With platforms like Airbnb and Booking.com offering diverse alternatives to traditional hotel accommodations, maintaining a second (or third) property as a short-term holiday rental can be a lucrative investment.
This option, however, is far from hands-off. After the process of buying, decorating, and equipping a holiday home, you’ll also need to be mindful of the work that goes into turning over a home for new guests every few days or weeks. Tasks like deep-cleaning, refreshing amenities, and replacing worn items involve both time and money that can eat into your profits if your rental isn’t steadily booked — which can happen in the unfortunate unforeseen event of a global pandemic, for example.
6. Long-term rentals
Long-term rental properties are those with tenants who sign extended leases, which means you’ll avoid the constant in-and-out traffic of vacation rentals.
Becoming a landlord is one of the most popular forms of real estate investing, and it is the approach Terrell most recommends as a long-term wealth-building strategy.
“With flipping, you’re basically improving the property, taking the cash proceeds and giving 30% to the government, then letting someone else have that asset and they get to build wealth with it,” says Terrell, noting that this is where it’s important to understand your investment goals.
“The best way is to buy and hold the home, but that’s a very long-term strategy. Some people just want the cash now.”
Aside from the costs of acquiring (and likely renovating) long-term rental properties, you’ll likely want the homes to be managed by a professional. Property managers find and vet tenants, handle home maintenance and repair issues, and generally allow you to remain hands-off. Their fee is typically 10% of monthly rental earnings, but it’s money well spent if the idea of passive income appeals to you.
“I think people with their first rental should manage it themselves just so they know how valuable a property manager is,” advises Terrell. “They’ll only want to do it for about a year, and then they’ll want to hire a property manager — and it will be the best 10% they’ve ever spent.”
7. Rent-to-own lease options
While renting-to-own (RTO) isn’t always the best strategy as a buyer, if you’re the one with a home to sell, entering into a well-structured lease agreement that provides your tenant with an option to buy can serve as a type of real estate investment.
RTO agreements are often utilized by buyers who need extra time to save up a down payment or earn approval for a mortgage loan, but unless a house is in need of repairs that a homeowner can’t afford to make, there’s little incentive for sellers to agree to a delayed purchase — unless you’re looking at the deal as an investment opportunity.
If you’re in good financial shape with the mortgage and you don’t need the equity as a down payment toward your next property, facilitating a rent-to-own deal can help a hopeful buyer while earning you a little extra cash in exchange for your patience.
8. Find a partner
Pooling resources with a friend, family member, or colleague who is also interested in real estate investing allows each of you to cast a wider net around potential investment properties. More buying power can help you get into:
- Multi-unit residential buildings
- Mixed-use properties with both residential and commercial space
- Out-of-state properties
- Funding someone else’s purchase via private loan
- Long-term rental homes
A word of caution: Resist the temptation to let familiarity with your investment partner(s) override due diligence. Be sure the legal framework is in place to protect everyone involved before mingling funds.
9. Take on multifamily homes
If visions of apartment complexes or sprawling condo buildings come to mind when you think “multifamily,” think again. A modest duplex counts as a multifamily home, and any property with four units or fewer will offer ample flexibility while remaining manageable for an independent real estate investor.
You’ll have several use options when investing in multifamily homes. You can live in one unit yourself and rent out the others (you’ll get some tax and insurance breaks if you do this); you can allocate certain units for use as long-term rentals and offer others for short-term stays; or you can simply commit to one rental strategy for every unit.
Real estate wholesaling can be a lucrative way to build capital, but this investment type falls late in our list due to the level of expertise you’ll need in order to be successful.
In short, wholesaling is when you find a great deal on a property, lock in the price, then turn around and sell it (before you actually close) to an investor, developer, or other willing party at a slightly higher price.
“If I can get the property under contract for $200,000, I might be able to sell it to an investor for $210,000,” explains Terrell. “I never actually close on the property, I just get a contract on it and sell the contract and I make $10,000 for the wholesale.”
The process sounds easy enough, but you’ll need to know where to look for these great-buy properties and how to put them under contract legally, and you’ll need to have a network of potential buyers to reach out to with your purchase opportunities, who will be willing to snap up the house before you’re on the hook to buy it at closing.
11. Buying and dividing land
Buying land is an exciting prospect if you’re in the market to build a custom home, but it can also be a profitable investment strategy — if you know what you’re doing.
Requiring high levels of expertise, subdividing land involves purchasing large tracts of undeveloped land and then dividing it down into separately saleable parcels. These parcels can potentially be put to use for either residential or commercial purposes, but there’s a great deal of legalese involved with zoning and the specifics of how land tracts can be divided.
Regulations vary by state and county, so you’ll need to do your homework before getting involved with land division as a form of real estate investment.
Real estate is an investment of money and time
Whether your goals are focused on the short-term, long-term, or as a healthy mix of both, there are numerous pathways into real estate investing. Doing ample research and talking to experts — and working with an experienced real estate agent — before you start dipping into savings will go a long way in helping to ensure you’re making the right choices for your lifestyle.
Above all? Be patient. To invest in real estate is to play the long game; allowing wealth to build over time.
“It’s a slow process,” says Terrell.
“Think of it as a snowball effect. You buy your first property and you’re going to earn hardly any money for the first few years, but then it slowly starts developing equity and you get a couple more houses. Then rents increase, inflation happens, appreciation happens; and the next thing you know, there’s a significant monthly cash flow happening while I’m sleeping.”
Terrell also notes that, monthly earnings aside, investing in real estate dramatically strengthens your net worth. When you have a selection of income-generating properties as assets, your buying power increases exponentially.
“The idea that the rich get richer? That’s why.”
Header Image Source: (Grant Durr / Unsplash)