The five most common ways to invest in real estate are flipping houses, buying rentals, vacation properties, commercial real estate, and real estate investment trusts (REITs). Regardless of your real estate investment strategy, we recommend joining a real estate investment group or working with a mentor when you’re learning how to start investing in real estate.
5 Ways to Invest in Real Estate
When deciding how to invest in real estate, you want to first outline your investment strategy, goals and budget, as well as the area where you want to invest. These will help you choose which types of real estate investments are right for you. Then check out tips from the pros on making your real estate investments a success.
For example, if you’re a buy and hold investor, you will most likely want to purchase rental properties that you can receive monthly rental income from. A fix and flip investor will usually purchase distressed properties, rehab them and flip them for a profit. And, if you don’t want to be a landlord, investing in a REIT may be the right option for you.
Below we outline five ways to invest in real estate:
1. House Flipping for Beginners
House flipping is a short-term real estate investing strategy that involves purchasing distressed, often undervalued properties that have the potential to have a higher after repair value (ARV) once they are rehabbed. The investor purchases the property, rehabs it and flips it, usually within 90 days.
A good return on investment (ROI) for a fix and flip property is typically 20 percent or higher. Over 207,000 homes were flipped in 2017, and the average gross flipping ROI was 49.8 percent. However, keep in mind that there are risks involved with fixing and flipping houses too, and it is rarely as easy as it appears on TV.
“One of the keys to success in fix and flips is knowing the market. Areas where inventory is low drives up prices and reduces your profits. Create a checklist of standard upgrades to use for all of your flips, and use the same color palettes in each home so you can buy in bulk and not have wasted overages on supplies. Using a cookie-cutter formula will eliminate the guess work in calculating renovation costs.”
– Anza Goodbar, Coach, Trainer, Speaker, Anza Goodbar
Potential Risks of Flipping Houses
Potential risks involved with fixing and flipping homes include:
- Going over budget and over your timeline
- Expensive carrying costs for every month you’re rehabbing the property
- Taking on a project that ends up being more complicated than expected and needs permits and specialists
Who Fix and Flip Investing Is Right For
Fix and flip investing is generally right for investors who have real estate or construction backgrounds and investors who want to be hands-on with the projects. They also need to be able to afford to pay the carrying costs. Flipping houses takes a certain type of investor who realizes that in order to reap an often large reward, some risks must be undertaken.
House flipping is typically right for:
- Investors with real estate or construction experience
- Investors who don’t want to be landlords
- Investors who have the time and resources to fund and supervise the projects
House Flipping Financing Options
Hard money loans are the most common type of financing for fix and flip investing. These short-term loans are typically interest only and have higher rates than conforming loans. They’re used to purchase and rehab a fix and flip project.
2. Buy and Hold Real Estate Investing for Beginners
Buy and hold real estate investing is a long-term strategy in which an investor purchases property with the intention of renting it out and keeping it over a long period of time, generally five years or longer. Investors typically receive monthly rental income as well as rental property tax benefits and deductions and appreciation as the property increases in value over a period of time.
A good ROI on buy and hold estate investments is typically over 7 percent. In fact, real estate investors have recently seen an average annual return of 9.06 percent. You can calculate your ROI by using your annual rental income, subtracting expenses and coming up with your net operating income. Then you divide that by your total investment in the property to figure out your rental return on investment. Some investors also look at a property’s cap rate to evaluate its rate of return.
“To maximize your ROI, invest in a moderately-priced property in a location that is not necessarily the best in the market. Look for neighborhoods that have had a consistent, upward trend for your first purchase to help secure future return on investment. Property prices should be low enough and rent should be high enough for the investor to see a steady flow of money month-to-month.”
– Sacha Ferrandi, Founder and Principal, Texas Hard Money
Potential Risks of Investing in Buy and Hold Real Estate
Although historically, real estate investments have risen in value over the years, there are still some risks involved.
Some of the potential risks of investing in buy and hold real estate include:
- Tenants may not pay rent and you will be stuck paying a mortgage on your rental property.
- There are also additional expenses involved with owning rental properties, such as rental property insurance.
- You need to spend the time to manage the property yourself or spend the money to hire a property manager.
Who Buy and Hold Real Estate Investing Is Right For
Buy and hold properties are generally good real estate investments for both beginners and experienced investors. Investors who purchase buy and hold properties usually have a long-term investing strategy in mind and want to own a tangible asset that typically appreciates over time.
Buy and hold real estate investing is typically right for:
- Investors who want to build wealth through owning a portfolio of rental properties
- Landlords who enjoy being hands-on with their rental property and being a part of a community
- Investors who want to purchase apartment buildings, rent them out and have positive cash flow
- Owner occupants who purchase a duplex or triplex and live in one unit so it will be easy to manage
Buy and Hold Real Estate Financing Options
Buy and hold properties are typically financed with long-term investment property loans. These loans are tailored towards investors and are generally used to finance non-owner occupied properties with one to four units.
3. Investing in Vacation Rental Property for Beginners
One of the other ways to invest in real estate and still enjoy the property yourself is by purchasing a vacation rental property. An investor purchases a vacation rental property, uses it part of the year, and rents it out for short-term rentals the remainder of the year. These rentals offset some of the costs involved with owning the property.
The average ROI on a vacation rental property varies more so than with any other type of real estate investment. Some areas show returns in the single digits and others go up to 90 percent, especially for properties rented during special events such as the Super Bowl. ROI depends on the occupancy rate in the area, the purchase price of the property and how often and how much you rent the property for. Typically 70 percent or more is a good occupancy rate for vacation rental properties.
Potential Risks of Investing in Vacation Rental Property
Owning a vacation rental property can certainly be profitable, but like with any real estate investment risks are involved. You need to rely on an out-of-state management company to upkeep the property, you have additional expenses such as property taxes and vacation rental property insurance, and you still have to pay the mortgage when the property isn’t rented.
“Purchasing a vacation rental property is no different from any other investment in that risk is involved. Location is obviously a key consideration, because some locales are seasonal and you have to be able to afford the property when it’s vacant. For example, a property in a skiing area may be vacant during the warmer months.”
– Chris Dowler, Owner. Investor, Dowler Construction Services
Who Investing in a Vacation Rental Property Is Right For
Buying a vacation rental property can be right for investors who want the advantages of owning real estate, such as interest write-offs, tax benefits, etc., and those who also want to be able to use the property as a vacation destination. They also need to be able to carry a property’s costs during the off peak season.
Typically investing in a vacation rental property is right for:
- People who like to vacation at the same spot each year but want to offset those costs with rental income
- Homeowners who may not be able to afford to live in the vacation destination but can afford it due to rental income
- Investors who don’t want to manage the property themselves (because most vacation rentals are managed by management companies)
Financing Options for Vacation Rental Properties
Vacation rental properties are typically financed using a conforming loan, a portfolio loan, a multifamily loan, or in some cases, a short-term loan such as a hard money loan or a bridge loan. Some investors purchase them using all cash, although it’s more common to finance the property.
4. Buying Commercial Real Estate for Beginners
Investing in commercial real estate is a strategy mostly used by small business owners and experienced investors. Commercial real estate is property that is used for business purposes and is not used as a residence. Commercial real estate is typically more expensive than residential real estate, but has the potential to generate more cash flow.
A good ROI on commercial real estate is typically anything over 15 percent annually. Average ROIs vary depending on the type of property, purchase price, and location, but are generally over 10 percent. Commercial real estate investors typically make money through cash flow from rental income, appreciation and principal buildup by paying down their commercial loan.
Although investing in commercial real estate can be profitable, there are still risks involved. Investing in commercial real estate can be costly, and these costs can eat into your potential profits. If the property is vacant or a tenant doesn’t pay, you will need to be able to afford to pay the monthly mortgage payment.
Potential Risks of Buying Commercial Real Estate
Some of the risks of investing in commercial real estate include:
- Vacant property and still having to pay the operating expenses and mortgage payments
- Long leases, which may prohibit you from raising the rent to market price; the typical commercial lease is five to 10 years
- Operating expenses such as common area utilities, property taxes and whatever other property expenses you agree to pay when leasing the property to a tenant
“Commercial real estate leases tend to be more complicated than residential leases, and you will need an attorney to review the lease for you. Have a clear, rock-solid rental contract, and have it reviewed by an attorney or drafted by one, including appropriate provisions such as attorneys’ fees if tenants default on their lease or damage your property.”
– Andrew R. Shedlock, Attorney, Kutak Rock LLP
Who Investing in Commercial Real Estate Is Right For
Investing in commercial real estate can be good for investors who are business owners and want to invest in the space where their business is located. It can also be right for experienced investors who want to purchase retail stores, office buildings, and warehouses.
Investing in commercial real estate is generally right for:
- Small business owners who want to buy instead of lease the commercial space they are doing business in
- Experienced real estate investors, because commercial properties are generally more expensive than residential properties, have more complex contracts, and take longer to acquire tenants
- A group of investors who work together and purchase properties as a corporation, such as strip malls, office buildings, etc., with the intent of renting them out and holding them over a long period of time while receiving rental income and potential property appreciation.
Financing Options for Commercial Real Estate
Commercial real estate is typically financed with a commercial loan. There are multiple types of commercial loans, including SBA loans, commercial bridge loans, traditional mortgages, and commercial hard money loans. These different loans finance things like apartment buildings, hotels, and office buildings.
5. Investing in a Real Estate Investment Trust (REIT) for Beginners
Investing in a real estate investment trust (REIT) is a passive real estate investing strategy. You invest in a private or public corporation that typically invests in portfolios of properties. Unlike buy and hold or fix and flip investing, you don’t get to choose what properties the REIT invests in. REITs are modeled after mutual funds and typically own real estate in a specific segment of the market.
They take investor funds and pool them together and invest in income-producing properties. Then they typically pay out dividends to these investors. Returns vary, depending on the type of REIT you invest in. However, the average ROI is 10 percent or higher, which is similar to buy and hold real estate returns. Typically, anyone can invest in REITs, either individually or through a mutual fund or exchange-traded fund.
Potential Risks of Investing in REITs
As with any real estate investment, there are some risks associated with investing in REITs. These risks include relinquishing control to the corporation to choose and manage the properties, as well as no depreciation write-offs that you may receive when you own real estate yourself. You may also receive lower returns because your initial investment can be lower than if you were buying a property outright.
Who Investing in REITs Is Right For
Investors who invest in REITs typically do so to avoid being a hands-on real estate investor. They’re generally looking for a way to diversify their portfolio and feel safe knowing an oftentimes large company is choosing their investments for them.
Investing in REITs is typically right for:
- Investors who want to be hands-off, have passive income and not take on the responsibility of being a landlord
- Investors who couldn’t otherwise afford to invest in the project or portfolio that the REIT invests in
- Investors who want to diversify their stock portfolio and have more liquidity than purchasing individual properties
“Buying shares of a REIT is an excellent way to diversify a portfolio with passive investments in various real estate sectors. REITs typically invest in Class A trophy properties that are out of reach of the individual investor. Shares of a REIT are also much more liquid than a private equity investment or real estate crowdfunding.”
– Jeff Rohde, Investor, Owner, JSottDigital.com
Financing Options for REITs
When you invest in a REIT, you’re not purchasing a property outright, so you won’t be able to take out a mortgage like you would when you buy a house. Instead, you can purchase a REIT using all cash, or by using an investment property line of credit or a HELOC.
How to Make Your Real Estate Investment Business a Success
Now that you know about the different types of real estate investments, you want to make sure your real estate business is successful. You can do this in a number of ways, including joining real estate investment groups, working with a real estate mentor, and networking at real estate industry events, all of which help you learn from the mistakes of the pros.
Here are five things to help you be successful when you learn how to start investing in real estate:
1. Join a Real Estate Investment Group
Real estate investment groups can be a great place to meet other like-minded investors, as well as industry professionals and vendors such as title companies, lenders, attorneys and accountants. By joining a real estate investment group, you can meet contacts who can help guide you on your first deal, help you secure financing, or write up a contract.
Typically, you can find investment groups on sites like Meetup and Craigslist. You can also join your local Chamber of Commerce to find out more about what’s going on in the real estate community in your area. Local real estate agents and other investors may also be able to suggest where to find real estate investment groups.
“To be successful, it is essential to understand the fundamentals of property investing, recognize the basics of good and bad investment properties, and have the right guide to follow through the Property Cycle and the Renter Cycle, as well as some of the pitfalls of rules, regulations and laws that could possible inhibit your ability to obtain your defined financial success. You can learn some of these things by joining local real estate investing groups and reading books and magazines on real estate investing.”
– Kimberly Smith, Author, Business Development, Avenue West Corporate Housing
2. Work with a Mentor
Another way to help yourself succeed as a real estate investor, especially if you’re just starting out, is to work with a mentor. Your mentor should be someone who has experience and is successful in the types of real estate investing you want to get involved with. You may be able to shadow an experienced fix and flipper and see what they do and learn what mistakes to avoid.
You can find mentors by joining real estate investment groups, asking for referrals from friends and family members, by attending real estate auctions and meeting other investors, or asking a local real estate agent or title agent for anyone they know who may be able to mentor you.
“By having an experienced mentor, you can avoid some of the mistakes that fix and flip investors often make, which is forgetting to include carrying costs. Flippers do not adequately consider the monthly costs of financing a property, property tax accruals, insurance, utilities and seasonal costs, such as lawn mowing and snow removal.”
– Susan Naftulin, Co-Founder and President, Rehab Financial Group
3. Network at Local Real Estate Industry Events
Networking at real estate industry events can help both new real estate investors and experienced ones. It helps you keep abreast of what’s going on in the industry, as well as what development projects are being built, new communities, etc. It also helps you meet other industry pros who you can bounce ideas off of and learn from.
Real estate networking events can generally be found by searching online by your area, as well as through postings at community centers, libraries, real estate brokerages and title companies. Your local municipality will usually have an online bulletin of what events are taking place in your neighborhood as well. Stopping by open houses can also provide good networking opportunities and more information about upcoming real estate events.
“As a newbie investor, I highly recommend getting involved with your local community and attending networking events. You can connect with mentors, potential partners, and lenders. The possibilities and growth potential are endless.”
– Iris Felder, Real Estate Agent, Re/Max Valor
4. Become a Real Estate Agent
Becoming a real estate agent can help you succeed in real estate investing because you are abreast of the trends, know what’s on the market, what’s selling and what’s going on in the neighborhoods you specialize in. If you already have real estate experience by being an agent, you may also have an easier time getting a hard money loan based on your experience. You will also already know what properties are selling for and how long it takes them to sell.
In order to become a real estate agent, you generally need to take a state-approved educational course and pass state and national exams. Then you hang your license with a brokerage in your area. Most brokerages provide in-house training programs and don’t require any experience to work for them. In return, you may pay monthly dues and/or split your commissions with them.
“Real estate agents usually have an extensive network of other agents, developers, and landlords, and have the opportunity to get in on properties before they hit the market. They also know how to calculate profit and assess properties objectively in the market. Inexperienced consumers often purchase properties emotionally, but real estate agents learn how to run the numbers and make decisions based on what works.”
– Julie Gurner, Real estate writer, Fit Small Business
5. Partner Up with an Experienced Investor
It can be challenging knowing what the good real estate investments are for beginners, so that’s why it’s beneficial to partner up with an experienced investor. There are typically a few ways to do this. You can partner up with an investor and provide some of the capital in exchange for their expertise, or, if you have construction experience but no investing experience, you could provide the sweat equity while they negotiate the deal and run the business operations.
You may need to prove yourself before an experienced investor will partner up with you (unless you know the person). This is why it’s important to join real estate investment groups and attend networking events, so experienced investors look at you as a familiar face in their same industry. You could also partner up with someone you already know and decide who will do what part of the business. Just remember to have a partnership agreement in place to avoid potential disagreements.
“By partnering up with an experienced investor, you will be able to quickly learn tricks and tips of the trade and avoid costly mistakes. Some tips include: don’t over-improve the property. Be competitive with your rental rate and you will decrease the number of days your property sits vacant. Rents are based on what your market will bear, not the monthly payment for mortgage, taxes, and insurance.”
– Nancy Wallace Laabs, Real estate broker, Investor, Kbn Homes
How to Start Investing in Real Estate Frequently Asked Questions (FAQs)
We are going to answer some of the most frequently asked questions about how to start investing in real estate.
How Can I Find Properties to Invest In?
There are a number of ways to find properties depending on the types of real estate investments you’re looking for. You can find buy and hold properties by working with a real estate agent, joining real estate investment groups, driving around neighborhoods, attending open houses and looking on Zillow.
For more information on choosing the right neighborhood and what to look for in a fix and flip real estate investment, check out our in-depth guide on how to find properties to flip.
What Are the Costs Associated with Real Estate Investing?
There are multiple ways to invest in real estate and each of them has different costs. For example, when you invest in a REIT, you’re investing in a public or private corporation that invests in portfolios of properties, so your costs will typically be lower than if you’re physically purchasing a commercial property yourself.
For more information on the cost of flipping a house, check out our in-depth guide on costs to flip a house.
Who Should Be on Your Real Estate Investing Team?
Once you learn how to start investing in real estate, you want to set yourself up with a team of experts. Some of these experts will include a real estate agent, an accountant, a real estate attorney and a lender such as Visio Lending. Depending on the types of real estate investments you invest in, you may also need a reliable contractor, landscaper, and property manager.
For more information on different types of real estate investing and which professionals you need on your team, check out our guide on ways to invest in real estate.
There are many ways to invest in real estate, including purchasing fix and flip properties, buy and hold properties, vacation rental properties and investing in REITs. Buy and hold properties can be good real estate investments for beginners. Real estate investment groups can be a helpful way to learn more about how to start investing in real estate.