Real-estate investing offers a way to earn money while building for your financial future—but it’s also an easy way to lose your shirt if you’re not careful.
If you do your research and commit to tried-and-true systems, you can make your money back and then some.
That’s why we want to go through 8 ways you can make money by investing in real estate. They’re all different, and we certainly don’t suggest you try all 8 methods. But this is a great launching point if you’re just starting out.
How to invest in real estate in 8 ways
Here are the 8 ways you can invest in real estate. The method you choose ultimately depends on your financial situation and what you hope to achieve. If you want to learn more, check out our article on real estate investing myths.
#1: Real-estate investment trust (REIT)
If you’re looking for a way to invest in real estate that’s lower risk than buying property, this is the method for you.
Real estate investment trusts, or REIT, act like mutual funds for real estate. Think of them like a basket. In the basket are different properties you can invest in. Instead of investing in individual ones, you invest in the entire basket along with other investors. REITs are typically managed by a company (i.e. a trust).
Your investment goes towards buying and developing the properties to turn into eventual profit. Investors get paid dividends with REITs like a normal fund.
REITs are typically managed by a company (i.e. a trust). They also come in a variety of different forms. You can invest in REITs that focus on healthcare buildings like hospitals or retail buildings like shopping malls.
Overall, REITs are a great place to start if you’re looking to get your toes wet in real estate investing. Not only do you not have to worry about paying enormous amounts for a property, but you get started today with a broker. They are an excellent and low-risk way to diversify your portfolio into real-estate. And you never have to think about it just like a normal index fund.
For more, check out our article on mutual funds to learn how to start investing with a broker today.
#2: Rental property
Admit it: You’ve flirted with the idea of buying a single-family home and renting it out for passive income.
If you’re careful about the property you buy and the person you rent it to, it can be a great way to make some money while you pay off the mortgage for the property. And as rent prices rise each year, your mortgage will remain relatively fixed—increasing your earnings as a result.
However, you need to keep in mind the phantom costs of purchasing a home. These are the unseen but consequential costs such as regular maintenance and repairs that many would-be homeowners don’t consider when they first purchase a house.
And since you’ll be the landlord of the property, you’re on the hook for any issues that might arise when your tenet calls you at 3am complaining about a burst pipe.
Also, many folks assume that landlords can set any rent they want. That’s not true. They can only set rent at a price that the market will support. If the local economy begins to struggle, you could be forced to rent the property at a rate that’s less than your mortgage. You’d start losing money every month.
If you’re willing to put in the work to be a good landlord, here is our article on how to buy a house.
House-hacking sounds like you’re trying to access the mainframe of your house in a cheesy hacking montage.
But it’s actually a lucrative way to make money in real estate.
Here’s how house-hacking works: You purchase a multi-flat building. Then you live in one unit while you rent out the other ones. This allows you to generate money via rent while you cut down on your own expenses by living on the property.
This is similar to purchasing rental property. But instead of being on the hook for maintenance and repairs for one property, you’ll be responsible for all of your units. This can be a big drawback for those looking to get involved in house-hacking.
However, if you have the funds to hire repair people or property managers (or if you just want to do it yourself), house-hacking could be a great way to make some cash in real estate.
#4: Flipping property
Flipping properties seem straightforward: Buy a house, renovate it, and then sell it for more than you bought it for—and more than it cost to renovate it.
However, would-be house flippers should know that this is one of the most time, money, and energy consuming ways to make money in real estate. Not only do you need the money to purchase a property, but you also need to put in the sweat equity to renovate a house.
Some of the best advice I’ve been given is to only consider flipping if I had a network of trusted contractors that I could rely on. Otherwise, it’s really easy for costs to get out of hand.
And even when you renovate a house, it’s not guaranteed that it’ll sell any better than before. Factors such as the real estate market, the economy, and the location play a massive role as well.
That said, it still has the potential to give you massive profits if you play your cards right.
#5: Short-term room rentals
Much like house-hacking, this method involves you renting out property you already live on. However, there’s a slight difference to this one: You don’t even have to own the property in order to rent it out.
With the advent of websites like Airbnb and even Craigslist, you can rent out different rooms in your house or apartment for cash.
And with the combination of the right listing and the right location, you can make a good amount of money from those sites—like this enterprising I Will Teach reader:
For more on how to get started with Airbnb, here’s the official how to article from the company itself.
#6: Real-estate funds
These act like REITs where you invest in a mutual fund with other investors in companies that actively manage different properties for you. The difference is that real-estate investment funds also include direct investments into real estate properties.
REITs act much like stocks and other equities, whereas real-estate funds are like your typical mutual funds.
“Real-estate funds generally increase in value through appreciation and generally do not provide short-term income to investors as do REITs,” explains Stuart Michelson, a finance professor for Stetson University. “Real estate funds gain value mostly through an increase in value of the assets.”
You should expect higher fees than a standard REIT.
#7: Online real-estate investing
This method relies on web platforms such as Fundrise to get your investment done for you.
These platforms allow real-estate managers to connect with potential investors to help fund the purchase or investment of different properties.
Think of it like Kickstarter for real estate. But instead of a dumb cooler that will never get delivered to you, you can receive returns like a typical stock or bond investment.
And with a web platform, it can be a much more intuitive experience.
If you’re interested, here are a few online real-estate investing platforms you can use to get started:
#8: Private equity funds
Much like mutual funds, private equity funds pool the money of different investors together in order to invest in property. Unlike an REIT or real-estate trust, though, these funds are typically only available to accredited investors who have a lot of money on hand to start investing.
To start, you need at least $100,000 to begin investing. That number can easily start to get in the seven-figure range depending on the fund.
As such it’s not as accessible to the layman as many of the other options on this list. However, it’s still worth noting just in case that applies to you.
Is real-estate investing right for you?
Real-estate investment can be an interesting and fun way to diversify your assets. If you play your cards right and do your research, there’s no telling how much money you can make through these investments.
But you have to be careful. Real-estate tends to be a very volatile market, and there are a lot of dangers that go into it if you don’t keep in mind certain elements. To learn more about this, be sure to check out our very best resources on the topic below:
- Real estate investing: The myths, facts, and ways to get started
- The Real Scoop on Real Estate (the first of a 7 part series)
- Don’t buy a house without asking yourself this question
- Real estate is an overrated investment