There are myriad investment options available to Americans looking to save for their future – stocks, bonds, mutual funds and exchange-traded funds (ETFs) are some of the most common choices. One investment possibility that some people forget about, though, is also one of the most basic at its heart – investing in real estate. For as long as people have divided up land, people have figured out ways to make money off of it, and it’s actually easier than you might think for you to join that tradition. There are a few ways you can invest in real estate, including some where you trade a bit of potential profit for a much simpler and less labor-intensive investment process.
For help figuring out how to best work real estate investment into your own portfolio, consider working with a vetted financial advisor.
Real Estate Investment Basics
Buying real estate is pretty simple – you find a property that is for sale, make an offer and go through with the sale if your offer is accepted. If you’re buying a home for the purpose of living in it, that’s pretty much it. If you used a mortgage to make a purchase you’ll have to pay back that loan over the course you agreed to, but that’s the only major financial aspect left.
If you are purchasing land or homes as an investment, though, there are a few more things you need to figure out. There are two basic ways to make money from a real estate investment. The first is to hold the property for a certain period of time – and to possibly make improvements to land and/or buildings you own – before selling it for more than you paid.
The other is to maintain ownership of the property and charge rent for others to use it. This could mean renting to someone as a primary tenant, leasing the space to a business (assuming it is properly zoned as such) or operating the space as a short-term vacation rental like an Airbnb.
Real Estate Investment Option One: Be a Landlord
The simplest way to make money from real estate is to rent out a home or homes that you own to long-term tenants. This could mean buying a second home and renting it, buying an apartment building or even renting a portion of the home you live in (perhaps a basement apartment or in-law suite with a separate entrance and kitchen).
This does take some work, though. First, you’ll need to have enough money to buy the property, which isn’t always easy. Second, being a landlord does come with responsibilities. You’ll be in charge of maintaining the building and responding to any problems your tenants have. Many landlords, especially those for whom this is a side source of income rather than a primary job, choose to hire a management company to handle renting and maintaining the property. That’s another cost, though, and has to be accounted for when figuring out whether this is a worthwhile investment for you.
Real Estate Investment Option Two: Operate a Short-Term Rental
Another option is to rent out your property for short-term stays, likely through a service like Airbnb. This is an especially attractive option if you own a house in a major tourist city or another place where people like to visit, such as along the shore, near a lake or in a quaint town.
There are obvious pluses to this option – if you have the right location, you can charge a lot of money for a rental relative to the amount of money you have to spend on upkeep. Plus, you can use the property yourself when you aren’t renting it. There are also downsides, though. Short-term rentals take a decent amount of work to maintain – you have to clean after each use and make sure to deal with any damage caused by tenants.
Real Estate Investment Option Three: Flipping Houses
Flipping homes is another way to make money through the real estate market, but it is likely the riskiest option discussed on this page. Flipping houses means buying a home, putting a significant amount of money and labor into improving it, then selling it for a substantial profit.
The biggest draw of this strategy is that there is the potential for a large pay day, and once the flip is completed, you’ll be done.
That said, this is a very complicated process and you should not consider getting into the house flipping business unless you and/or your investing partners have extensive experience in real estate and home remodeling. You’ll also need to make sure you do plenty of research into the market and end up with a product you can sell. If you don’t, you could end up being unable to sell the house at the profit margin you want, and you’ll end up with a very expensive millstone around your neck that can sink not just this investment but possibly your entire portfolio.
Real Estate Investment Option Four: Real Estate Investment Trusts
The thread tying the prior options together is that the investor actually owns a piece of property and uses it to directly make money. This has a lot of potential rewards, but as discussed above, that takes a lot of work. Using a real estate investment trust (REIT) means slightly less upside but a significantly simpler process – and requires less capital.
A REIT is a means of pooling money to invest in various real estate investments. You could own a small part of a huge apartment building and get the corresponding rent money – all while never having to speak to a tenant or deal with a management company. Essentially, REITS let average investors get some skin into the game without risking too much. The return isn’t as bountiful but can still be meaningful.
The Bottom Line
There are a number of options available for investors who want to become part of the real estate game. You can invest directly in property and make money from it in various ways, or you can buy into a REIT to get the benefits of real estate investing without having to do all of the associated work. Which option is best for you will depend on factors such as how much capital you have, how much risk you can tolerate and how much work you want to do to maintain your investment.
Real Estate Investing Tips
A financial advisor can help you get into real estate investing if you need help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
When buying a home, don’t forget about closing costs. These may seem small compared to all the other money you’ll be spending, but every penny counts.
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