With average annual returns of 10.6 percent in the United States, investing in real estate is a great way to make your money work for you.
If you’re not feeling like becoming someone’s landlord, you don’t have to. Buying rental property isn’t the only way to invest in real estate in 2023.
Plenty of people these days are getting into the real estate market by house hacking. Others are turning to vehicles like real estate investment trusts (REITs) and real estate investment groups (REIGs).
If you’re handy but don’t want to deal with the hassle of managing a rental property, you can buy a house in need of some work, fix it up, and flip it.
Or you can go the traditional route and buy a rental property, but hire a property management company to handle all the nitty gritty of finding tenants, doing repairs and maintenance, collecting rent, and so on. Let’s take a closer look at your options for investing in real estate.
Buy Rental Property
If you have the cash, buying a rental property may still be the most common way to make money in real estate investing.
You can get a mortgage to buy a rental property with 15 to 25 percent down, a credit score of at least 620, a debt-to-income (DTI) ratio of 35 to 45 percent, and three to six months’ of mortgage payments in savings.
Of the money you earn on rent, you can expect to spend 30 to 80 percent of it maintaining the property, covering expenses during vacancy periods, paying the mortgage, and other expenses.
If you’re able to buy a rental property outright, you can begin to net positive cash flow right away, however.
Buying rental property has its disadvantages. You’re responsible for keeping the property in good condition, and that means you (or someone) will need to be available to either do repairs or hire someone to do repairs.
You’ll have to be willing to put in the work to find tenants, check their backgrounds, evict them as necessary, and collect rent and late fees. If you don’t have the skills or time to manage a rental property yourself, you can hire a property management company.
They’ll take a cut of your rental profits, but you’ll be able to sit back and collect passive income every month while focusing your energies elsewhere.
Rent Out Part of Your Own Home
What the kids are calling “house hacking” is actually something that people have been doing to earn extra money since time out of mind, renting out part of the property you live in yourself.
For example, you might buy a large single-family home with four or five bedrooms and two or three bathrooms, then live in one bedroom while renting out the others.
Or maybe you buy a duplex and live on one side yourself while renting out the other side. Perhaps you put a bed in the living room of your one-bedroom condo and rent out the bedroom on AirBnB or to a long-term tenant.
The money you earn could cover your living expenses and allow you to save for another property.
Invest in a REIT
You don’t have to even buy real estate to invest in real estate when you buy shares in a REIT. Buying shares in a REIT vs. buying real property is kind of like whole fund vs deal by deal investing.
A REIT is more like a mutual fund that invests in real estate, and you can buy shares of the fund, whereas buying real property allows you to control each individual asset in your portfolio.
While it might take a while to liquidate a piece of real property, though, you can sell REIT shares on the open market whenever you want, and you’ll get real estate exposure without the hassle of buying and managing property.
Join a REIG
A REIG is a group of investors who come together to pool their knowledge, money, and expertise into buying real estate together. You can buy into a REIG and become a member of the group.
Through it, you’ll own rental property, but the corporate entity will be responsible for managing and maintaining it. Through a REIG, you can invest in larger real estate deals with less money of your own. However, you’ll be working with other people, not merely buying shares in a fund.
Flip Property
Flipping property isn’t for real estate beginners. It requires reserves of cash, contracting skill, experience with property valuation, and knowledge of the local real estate market.
However, if you have those things, it’s still possible to make money from flipping houses, especially in areas where high property values will make your sweat equity more valuable.
If you want to invest in real estate, you should know your options. An investment in real estate can be a great financial move, as long as you choose the right investment vehicle for your needs.
