If you’ve ever had a landlord, you probably don't dream of being one: Fielding calls about oversize bugs and overflowing toilets doesn’t seem like the most glamorous job.
But done right, real estate investing can be lucrative — even now that we've shifted to an environment of higher interest rates. Investing in real estate can also help diversify your existing investment portfolio and, eventually, provide a stream of passive income. And many of the best real estate investments don’t require showing up at a tenant’s every beck and call.
Understandably, many investors don’t know where or how to invest in real estate. Here are some of the best ways to make money in real estate, ranging from low maintenance to high.
Best ways to invest in real estate
1. Buy REITs (real estate investment trusts)
REITs allow you to invest in real estate without the physical real estate. Often compared to mutual funds, they're companies that own commercial real estate such as office buildings, retail spaces, apartments and hotels. REITs tend to pay high dividends, which makes them a common investment in retirement. Investors who don’t need or want the regular income can automatically reinvest those dividends to grow their investment further.
Are REITs a good investment? They can be, but they can also be varied and complex. Some trade on an exchange like a stock; others aren’t publicly traded. The type of REIT you purchase can be a big factor in the amount of risk you’re taking on, as non-traded REITs aren’t easily sold and might be hard to value. New investors should generally stick to publicly traded REITs, which you can purchase through brokerage firms.
For that, you'll need a brokerage account. If you don't already have one, opening one takes less than 15 minutes and many companies require no initial investment (though the REIT itself will likely have an investment minimum).
You can also gain exposure to a more diversified selection of real estate investments by buying into a fund that has interests in many REITs. You could do this through a real estate ETF or by investing in a mutual fund that holds shares of multiple REITs.
» Want to get started? Check out our guide to opening a brokerage account
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2. Use an online real estate investing platform
Real estate investment platforms connect real estate developers to investors who want to finance projects, either through debt or equity. Investors hope to receive monthly or quarterly distributions in exchange for taking on a significant amount of risk and paying a fee to the platform. Like many real estate investments, these are speculative and illiquid — you can’t easily unload them the way you can trade a stock.
The rub is that you may need money to make money. Many of these platforms are open only to accredited investors, defined by the Securities and Exchange Commission as people who've earned income of more than $200,000 ($300,000 with a spouse) in each of the last two years or have a net worth of $1 million or more, not including a primary residence. Alternatives for those who can't meet that requirement include Fundrise and RealtyMogul.
» Ready to start investing? Best real estate crowdfunding platforms
3. Think about investing in rental properties
Tiffany Alexy didn’t intend to become a real estate investor when she bought her first rental property at age 21. Then a college senior in Raleigh, North Carolina, she planned to attend grad school locally and figured buying would be better than renting.
“I went on Craigslist and found a four-bedroom, four-bathroom condo that was set up student-housing style. I bought it, lived in one bedroom and rented out the other three,” Alexy says.
The setup covered all of her expenses and brought in an extra $100 per month in cash — far from chump change for a grad student, and enough that Alexy caught the real estate bug.
Alexy entered the market using a strategy sometimes called house hacking, a term coined by BiggerPockets, an online resource for real estate investors. It essentially means you’re occupying your investment property, either by renting out rooms, as Alexy did, or by renting out units in a multi-unit building. David Meyer, vice president of data and analytics at the site, says house hacking lets investors buy a property with up to four units and still qualify for a residential loan.
Of course, you can also buy and rent out an entire investment property. Find one with combined expenses lower than the amount you can charge in rent. And if you don’t want to be the person who shows up with a toolbelt to fix a leak — or even the person who calls that person — you’ll also need to pay a property manager.
“If you manage it yourself, you’ll learn a lot about the industry, and if you buy future properties you’ll go into it with more experience,” says Meyer.
» Related: Understand different types of real estate investments
4. Consider flipping investment properties
This is HGTV come to life: You invest in an underpriced home in need of a little love, renovate it as inexpensively as possible and then resell it for a profit. Called house flipping, the strategy is a wee bit harder than it looks on TV. It's also more expensive than it used to be, given the current higher cost of building materials and mortgage interest rates. Many house flippers aim to pay for the homes in cash.
“There is a bigger element of risk, because so much of the math behind flipping requires a very accurate estimate of how much repairs are going to cost, which is not an easy thing to do,” says Meyer.
His suggestion: Find an experienced partner. “Maybe you have capital or time to contribute, but you find a contractor who is good at estimating expenses or managing the project,” he says.
The other risk of flipping is that the longer you hold the property, the less money you make because you may be paying a mortgage without bringing in any income. You can lower that risk by living in the house as you fix it up. This works as long as most of the updates are cosmetic and you don’t mind a little dust.
» Which is better? Real estate vs. stocks
5. Rent out a room
Finally, to dip the very edge of your toe in the real estate waters, you could rent part of your home. Such an arrangement can substantially decrease housing costs, potentially allowing people to stay in their homes as they continue to benefit from price appreciation on their property.
Adding roommates can also make a mortgage payment more attainable for younger people. But if you're not sure you're ready, you could try a site like Airbnb. It’s house hacking for the commitment-phobe: You don’t have to take on a long-term tenant, potential renters are at least somewhat prescreened by Airbnb, and the company’s host guarantee provides protection against damages.
Renting out a room feels a lot more accessible than the fancy concept of real estate investing. If you've got a spare room, you can rent it.
Like all investment decisions, the best real estate investments are the ones that best serve you, the investor. Think about how much time you have, how much capital you're willing to invest and whether you want to be the one who deals with household issues when they inevitably come up. If you don't have DIY skills, consider investing in real estate through a REIT or a crowdfunding platform rather than directly in a property.
» Real estate not for you? Consider investing in stocks instead
» Calculate potential returns: Investment calculator
» Looking for another low-cost way to diversify? Try building your portfolio with index funds
FAQs
Multiply the value of the home by 5%, then divide that number by 12 to get your breakeven point. If the monthly rent on a comparable home is below the breakeven point, it makes financial sense to rent. If the monthly rent is higher than the breakeven point, it makes financial sense to buy.
What is the 5 rule in real estate investing? ›
Multiply the value of the home by 5%, then divide that number by 12 to get your breakeven point. If the monthly rent on a comparable home is below the breakeven point, it makes financial sense to rent. If the monthly rent is higher than the breakeven point, it makes financial sense to buy.
What is the 1 rule in real estate investing? ›
What Is The 1% Rule In Real Estate? The 1% rule of real estate investing measures the price of the investment property against the gross income it will generate. For a potential investment to pass the 1% rule, its monthly rent must be equal to or no less than 1% of the purchase price.
How to invest $1,000,000 in real estate? ›
There are many ways to invest $1 million dollars of your own money in real estate, including through:
- Multifamily Real Estate Syndication.
- Purchasing Rental Properties.
- Fix & Flipping Properties.
- Purchasing Office, Retail, or Industrial Buildings.
- Private Lending.
- Investing in REITs.
Here are nine steps to follow for becoming a successful real estate investor:
- Learn about real estate and real estate investing. ...
- Research investment strategies. ...
- Research locations. ...
- Determine your intended role as a property manager. ...
- Create a professional plan. ...
- Secure financing. ...
- Make your first purchase. ...
- Flip or find a tenant.
The 80% rule means that an insurer will only fully cover the cost of damage to a house if the owner has purchased insurance coverage equal to at least 80% of the house's total replacement value.
What is Rule 70 in real estate? ›
The 70% rule can help flippers when they're scouring real estate listings for potential investment opportunities. Basically, the rule says real estate investors should pay no more than 70% of a property's after-repair value (ARV) minus the cost of the repairs necessary to renovate the home.
What is the 50% rule in real estate? ›
Like many rules of real estate investing, the 50 percent rule isn't always accurate, but it can be a helpful way to estimate expenses for rental property. To use it, an investor takes the property's gross rent and multiplies it by 50 percent, providing the estimated monthly operating expenses. That sounds easy, right?
What is the 0.8 rule in real estate? ›
This general guideline suggests that you charge around 1% (or within 0.8-1.1%) of your property's total market value as monthly rent payments. A property valued at $200,000, for instance, would rent for $2,000 a month, or within a range of $1,600-$2,200.
What is the 4-3-2-1 real estate strategy? ›
The 4-3-2-1 Approach
This ratio allocates 40% of your income towards expenses, 30% towards housing, 20% towards savings and investments and 10% towards insurance.
Federal tax benefits
Because of the many tax benefits, real estate investors often end up paying less taxes overall even as they are bringing in more income. This is why many millionaires invest in real estate. Not only does it make you money, but it allows you to keep a lot more of the money you make.
Do most millionaires invest in real estate? ›
Some of the most successful entrepreneurs in the world have built their wealth through real estate. In fact, it's estimated that 90% of all millionaires invest in some form of real estate. There are several reasons for this, but in today's article, we'll share seven reasons why millionaires invest in real estate.
Can I live off the interest of 1 million dollars? ›
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
How do beginners start real estate? ›
Best ways to invest in real estate
- Buy REITs (real estate investment trusts) REITs allow you to invest in real estate without the physical real estate. ...
- Use an online real estate investing platform. ...
- Think about investing in rental properties. ...
- Consider flipping investment properties. ...
- Rent out a room.
How to Start in Real Estate
- Get a real estate license.
- Find a brokerage.
- Join the National Association of Realtors (NAR).
- Pay your dues.
- Find a mentor.
- Get crystal clear on who your ideal customer is.
- Build your personal brand.
In my opinion, real estate is one intelligent option to consider in 2023, as it often has excellent returns, tax advantages and provides diversification even in the face of a challenging economic climate. Real estate also has the potential to compound your investment.
What is the 25 rule in real estate? ›
To calculate how much house you can afford, use the 25% rule—never spend more than 25% of your monthly take-home pay (after tax) on monthly mortgage payments.
What is the 10% rule in real estate? ›
A good rule is that a 1% increase in interest rates will equal 10% less you are able to borrow but still keep your same monthly payment. It's said that when interest rates climb, every 1% increase in rate will decrease your buying power by 10%. The higher the interest rate, the higher your monthly payment.
What is the rule of 35 in the real estate? ›
By law, lenders can't underwrite the loan unless they can determine the borrower will be able to pay up the loan. The whole idea behind the 35-percent rule of thumb is this: a borrower can afford no more than 35% of its monthly take-home pay.
What is the golden formula in real estate? ›
In case you haven't heard of the so-called Golden Rule in house flipping, the 70% Rule states that your offer on a property should be no greater than 70% of the After Repair Value (ARV) minus the estimated repairs.
This is a general rule of thumb that determines a base level of rental income a rental property should generate. Following the 2% rule, an investor can expect to realize a gross yield from a rental property if the monthly rent is at least 2% of the purchase price.
What is the Brrrr method? ›
The BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Method is a real estate investment approach that involves flipping a distressed property, renting it out and then getting a cash-out refinance on it to fund further rental property investments.
What is the 100 times rule in real estate investing? ›
Savvy real estate investors often pay no more than 100 times the monthly rent to purchase a property. In the case of the couple above, an investor following the 100 times monthly rent rule wouldn't pay more than $750,000 because the monthly market rent was $7,500.
What is the 4 rule in real estate? ›
This is a simple enough question and one many investors ask when checking on their progress toward retirement. The “4% rule” is a theory that states you should be able to retire and safely withdraw 4% of your savings every year and your money should last 30 years.
What is the cash flow rule in real estate? ›
The 1% rule
This rule states that there's a good chance you've found a cash-flowing property if it rents for at least 1% of the purchase price. For example: if you purchase a property for $100,000 it should rent for at least $1,000 per month to cash flow. $1,000 per month is 1% of the $100,000 purchase price.
What does 2 1 mean in real estate? ›
A 2-1 buydown is a type of financing that lowers the interest rate on a mortgage for the first two years before it rises to the regular, permanent rate. The rate is typically two percentage points lower during the first year and one percentage point lower in the second year.
What is the 5 and 2 real estate rule? ›
The 2-out-of-five-year rule states that you must have both owned and lived in your home for a minimum of two out of the last five years before the date of sale. However, these two years don't have to be consecutive, and you don't have to live there on the date of the sale.
What is the 30 percent rule in real estate investing? ›
You may have heard it—the old rule that says, “Homeowners shouldn't spend more than 30% of their gross monthly income on housing.” The idea is to ensure they still have 70% of their income to spend on other expenses. The intent is good. But is it realistic today? That depends on your financial situation.
What are the three C's of real estate? ›
They evaluate credit and payment history, income and assets available for a down payment and categorize their findings as the Three C's: Capacity, Credit and Collateral.
What is 1 3 5 goal setting real estate? ›
The 1-3-5 framework has you starting with a goal then breaking that goal into 3 priorities, and 5 strategies for each priority. The goal and priorities should be measurable targets; while the strategies are your plans to achieve each priority. If all 3 priorities are met, then your goal should be attained.
What Do These Abbreviations Mean in Real Estate?
| Abbreviation | Definition |
|---|
| 2/1 | 2 Bedrooms / 1 Bathrooms |
| 4/3 | 4 Bedrooms / 3 Bathrooms |
| 3/4 BATH | Toilet + Sink + Shower or Tub |
| 4/3/2 | 4 Bedroom / 3 Bath / 2 Car Garage |
220 more rowsFeb 18, 2013
4-3-2-1 rule
The front quarter of the standard site receives 40% of the total value. The second quarter receives 30% of the total value. The third quarter receives 20% of the total value; and the rear quarter receives just 10% of the total value.
What is 10 5 3 rule of investment? ›
The 10,5,3 rule
Though there are no guaranteed returns for mutual funds, as per this rule, one should expect 10 percent returns from long term equity investment, 5 percent returns from debt instruments. And 3 percent is the average rate of return that one usually gets from savings bank accounts.
What is the 5% rule for buying vs renting? ›
That said, the easiest way to put the 5% rule in practice is multiplying the value of a property by 5%, then dividing by 12. Then, you get a breakeven point for what you'd pay each month, helping you decide whether it's better to buy or rent.
What is the 7% rule in real estate? ›
The top 7% are hustlers. If they don't know something, they'll learn it. If the heat is on, they'll put in the extra hours to make it happen. You don't have to know everything, everyone, have all the money, or talent, but if you'll apply those two principles, you'll do very well in real estate.
