Did you know that the real estate industry is considered one of the key contributors to the national GDP, pooling in an average 15% -18% to this national basket annually? Did you also know that the return on investments on real estate and property over the past century has outperformed almost every other investment class including stocks and the guaranteed government bonds? Having lived through the 2007/8 real estate bubble that burst into a financial crisis, you probably are familiar with the impact real estate industry has on the rest of the economy.
But what do these facts tell you about investing in real estate? That, with the right strategy, the residential, commercial, and industrial property space can be both highly satisfying and rewarding. And long gone are the days when the real estate industry was a preserve of the few members of the elite class and deep-pocketed realtors. Technology, lower mortgages, and ease of access to different types of loans have opened up the real estate space making it possible to invest from as low as $500 while promising even higher returns.
Real estate investing can be considered to be the art of selling or purchasing, owning or leasing of land and/or any structures on it with the sole purpose of generating profits. These investments are then broken into either residential, commercial or industrial niches depending on the intended use of the land and its accompanying structures.
In this real estate investment guide, we list some of the most rewarding opportunities currently available. But first, let’s understand how you can earn from real estate.
How do you earn from real estate investments?
There are four primary ways of benefiting from a real estate investment including:
Rent: This is by far the most popular way of earning from the real estate and involves generating incomes from leasing a property you own. It is a passive income earner and one that guarantees an almost steady income stream.
Profit margins: You can earn profit margins from real estate investments in either of these two ways: buying dilapidated houses, refurbishing them and selling them at a profit or by leasing a property and subletting for a higher amount and pocketing the extra amounts.
Appreciation in value: Land and buildings are always up-trending, the ever-rising demand for residential, commercial, and industrial properties has served to consistently boost the cost of these houses up. This explains why the real estate market has recorded the most appreciation of all classes of investments for the past 100 years.
Loan interest: Ideally, this method of profit generation involves lending real estate company money to help them pursue their ventures with the promise that they pay together with interest. Traditionally, this technique was a preserve of private equity funds. Technology has however birthed the all-inclusive crowdfunded real estate ventures.
Most rewarding opportunities in real estate investing
1. Be a landlord – build or buy a rental property
Building or buying rental properties that generates you steady monthly income is by far the most common form of real estate investment. It remains the most profitable of all forms of real estate management as well as the most flexible given that it can be practiced for both commercial and real estate properties and industrial complexes. The fact that you can do it semi-passively where you are involved in such acts as debt collection and maintenance or passively by engaging the services of a property manager further compounds its effectiveness.
It is however not the most welcoming or easiest venture to get into as it requires enormous capital investment upfront. You will also have to devote a significant portion of your time to overseeing the construction and running up and down filing up a battery of permits and seeking approvals from different country and city departments. And even if you hired a construction company to handle all matters regarding the property, you will still have to check up on them from time to time to check if everything is going on as planned. Not to mention that professional construction services only serve to push up the minimum capital investment required.
Gain from both the rental property and rental incomes tend to appreciate over time
You can minimize the risk associated with a rental property through investment
Simplistic acts like repainting or landscaping have huge impacts in increasing the value of property
Prohibitively expensive to most investors
Subject to taxation and homeowners fees even when unoccupied
Real estate crowdfunding is arguably the most unconventional form of property investment. It seeks to harness the power of technology in solving all the problems associated with the conventional rental property form of investment. It ensures that even small scale investor benefits from the ever profitable industry. Key among the leading players in this niche is Fundrise, a platform dedicated to the pooling of resources from real estate market enthusiasts from all walks of life. Fundrise then researches on and invests in what they consider the most profitable venture.
Depending on the amounts at hand, the crowdfunding company may consider buying residential and commercial real estate properties or even apartment buildings. The upside to investing with Fundrise is the fact that you don’t need to be an accredited investor as well as the fact that you can invest as little as $500. The Washington D.C-based company gives you the chance to contribute to their eFUND plans with the promise of quarterly dividends, dubbed redemption.
And while Fundrise may have pioneered the field as the first ever company to crowdfund its way into real estate investment, others are quickly joining up. Prosper and LendingClub, two San Francisco, California-based peer-to-peer lending companies that have for long specialized in advancing unsecured personal loans to different individuals have since joined the crowdfunded real estate space.
Low investments starting from $500 at Fundrise with no need for accreditation
Low annual investment fees, at 0.85%
You have the option of redeeming your investment at the full value within 90 days or signing up
Gives small scale investors access to the highly lucrative commercial real estate space
High annual earnings – these stood at 11% in 2017 and 8% in 2018
Returns from Fundraise and crowdfunded projects are taxed as ordinary income
Fundrise eREITs aren’t publicly traded making them hard to redeem after the 90-day expiry period.
3. Real Estate Investment Trusts (REITs)
REITs are ideally a crude form of the online crowdfunding in that they involve pooling in funds from different accredited investors and using them to acquire and manage profitable ventures. Like Fundrise, they too were established with the aim of helping small scale investors work around the complexities of the traditional properties and enjoy the benefits of investing in the real estate industry. Real estate investment trusts are essentially stock investments in a corporation that in turn uses these funds to invest in several real estate projects.
The difference between crowdfunding projects run by Fundrise and REITs is that Fundrise doesn’t require investor accreditation and takes money from anyone willing to invest in the company while REITs prove to be more complicated. REITs on the other hand are publicly traded making them more liquid than the crowdfunding site shares who have limited options when it comes to redeeming their investments.
Note that there are two types of REITs with one batch investing in physical buildings while the other offers real estate-related financial services such as mortgages and last. Hybrid REITs offers a combination of the two services.
Stocks are easily traded in exchanges
Relatively straightforward acquisition and liquidation processes
They distribute 90% of their profits to unit holders thus guaranteeing stable cash flow
Some offer diversified investment portfolios
REITs are stocks and thus don’t have access to leverage
The fact that they have 90% of their profits limits chances of growth
4. House Flipping
House flippers are to the real estate industry what day traders are to the equity and financial markets. Unlike the investors in rental properties and crowdfunded investments, these are traders are looking to buy a property and sell it as soon as possible. Flipping houses thus involves buying at a bargain and selling houses at the highest possible price and in the least possible time. And there are two different types of flippers:
Pure flippers: This refers to a crop of traders who will only invest in fairly decent properties that don’t require any improvements to make them sell. Pure flippers, therefore, will only buy houses with an intrinsic value and use their marketing skills to help the value further without making significant renovations.
Renovators: This class of flippers is more concerned with buying reasonably-priced houses, albeit in an unappealing condition, and making significant changes to it before pushing it to the market at a higher value. It takes longer to renovate the house and sell than it takes a pure flipper to offload house, but the net return for a renovator is higher.
Guarantees most return in the shortest time possible
It is a continuous learning process with every sale readying you for the next
Holding onto a property for such a short time guarantees flexibility
Getting to deal with a lot of people on a regular basis broadens your network
Requires previous experience in real estate valuation
Amounts in losses if the property doesn’t sell as fast one expected.
Subject to short term capital gains tax
5. Real estate ETFs
Exchange traded funds (ETF) is a collection of both stocks and bonds from a related industry. And there is plenty of them dealing with different real estate stocks and equities that are both reasonably priced and presented to clients in a highly diversified manner. One of the most popular real estate-themed ETFs today is Vanguard’s VNQ that invests in stocks issued by REITs. It is particularly interested in REITs that deal with the purchase and management of such commercial properties like office buildings and restaurants.
There are several other equally and effective ETFs that concentrate on numerous other fuels of real estate investing, giving you a chance to invest in the trade, albeit in indirectly. Some like IYR are dedicated to investments relating to the domestic real estate scene. Should you consider investing in an ETF, start by exploring their underlying real estate investment niches and only invest in one that features most markets you understand.
Provide diversification as funds are distributed over numerous stocks
Exchange trading makes them highly liquid
Don’t attract capital gains thus tax efficient
Broker commissions eat into possible profits
Not suitable for small scale investors
6. Real estate investment groups
What if you could invest directly into the real estate industry but have someone manage your rental property with the promise of guaranteed incomes even when your property remains unoccupied? That’s what real estate investment groups promise clients. It refers to a situation where a real estate company builds rental units, mostly residential properties, sells them to you but keeps on managing them on your behalf, thereby helping you establish the most ideal passive real estate income stream for you.
The management includes conducting maintenance, collecting rent, and sourcing new clients. By buying into this type of property, you are pooled in together with a group of other investors. The management then takes off a portion of all your rental incomes and pools it in a cautionary fund from which they draw their funds while they continue paying you in the months that your rental unit remains vacant. They function like real estate mutual funds with the exception that most of these groups are privately owned and managed.
A more hands-off approach to investing
Offers an almost guaranteed income stream regardless of whether it is occupied or not
You gain from actual rental returns and property appreciation
More liquid considering that most established firms will either buy your stake or match you with interested buyers
The management fees and cautionary funds eat up most of your rental income forcing you to settle on less than market rates
Huge privatization of management firms compound the risk of fraud and misuse of funds
7. Invest in a home construction company
Residential properties, single and multi-use family units, have been selling fast in the last decade. Their prices have also soared significantly and most experts can only link this to the limited number of units being introduced into the market today. This then presents you with the perfect opportunity to establish a home construction company, or in invest in an existing one, and ride this wave of high demand for family homes.
The construction boom and fast uptake of family homes is expected to continue into the next few decades giving you and your new company ample time to recoup all your initial investments alongside massive interests. If you don’t have the financial muscle or the technical know-how to establish a new construction company from the ground up, consider buying into the existing ones including LGI Homes (LGIH), Pulte Homes (PHM). You can then use either platform to rehabilitate old neighborhoods or establish new ones.
High scalability chance through expansion and even franchises
Presents you with a potential for higher profits down the line
The investor has the option of specializing or taking the entire industry head on
The requirements one must fill to qualify for licenses can prove prohibitive
Taking the business off the ground and turning profit may take time
8. Invest in a real estate mutual funds
The real estate industry remains one of the most attractive investment markets, and this explains the sheer number of real estate focused mutual funds out there. Two of the most interesting features of the real estate-focused mutual funds is their relatively low management costs and minimal initial investment required. Most will also maintain a public record of their investment portfolio and profitability record. Even more importantly, most combine their management team’s expertise and years of academic research in identifying the most promising investment opportunities.
Real estate mutual funds appeal most to anyone looking for a passive investment opportunity with reliable incomes and minimal capital investment. And when looking for the best real estate fund to invest in, it is important that you look beyond their profitability. Look at their size, their management, investment strategies, and the level of portfolio diversification. These play the biggest role in cushioning you from both short and long-term market shocks.
Mutual funds call for relatively affordable minimum investments
Most are expertly managed with guaranteed regular incomes and dividends
Their relatively low management fees have little impact on your incomes
They aren’t as lucrative as most other investment options
Most public mutual funds have been rocked with cases of mismanagement of resources
9. Invest in a Real estate focused company
You should also consider direct investments into real estate-focused companies. These could range from commercial/residential real estate developers and even hotels or resort management firms. And they do not necessarily have to be listed with the stock markets. Most of these are always raising capital for their next big projects by floating shares and other types of loan notes that post higher returns than most other investments in this niche.
Investing here, however, requires that you first conduct a thorough research about the specific projects that these realtors are involved in as well as their profitability. You will also want to look at the preferred investment company and go through such details as their historical performance, investment portfolios, and reputation. But given the promise of high and almost guaranteed return on investment here, you can expect most of the companies to call for a rather significant capital injection.
Post higher returns than most real estate stock and mutual funds
They offer and a near-guaranteed return on investment
Allow you to invest in specific industries that you are passionate about like hotels and stadiums
Calls for significantly high capital investment
They aren’t as available as most other types of real estate investment
10. Invest in contract flipping:
Contract flipping revolves around the concept of making money off closed real investment deals by connecting sellers to buyers. A contract flipper works more like a house flipper where they spend most of their time looking for fairly-priced houses.
However, unlike the house flipper who buys the house and renovates it before selling it at a premium, a contract flipper connects the seller to a buyer. This could be an agent, a house flipping company or individual buyers.
The contract flipper can work for either the buyer or a seller. But given the high probability of either party reneging on their deal and failing to appreciate the service, most contract flippers will require that the buyer or seller they are engaged with signs a written contract. The interesting part of this is that it doesn’t require any form of investment from your part.
Most will only call for time investment thus no significant risks involved
Unlike house flipping, contract flipping doesn’t tie your resources as you look for the home buyer
Highly passive income generation idea
Most homebuyers will prefer the free house listings to often pricey contract flipping
11. Rent a portion of your home:
You can also consider renting a part of your home, your entire second home, or sublet apartments. Instead of buying a bungalow as a family home, you might consider investing that in a duplex and then renting out one floor.
And if you don’t have enough to buy or build the building to let, you may consider renting out several apartments in some of the most populous neighborhoods and subletting them at a premium. This is most suited for individuals who already own homes or apartments and want to be directly involved in the real estate industry.
The direct involvement here implies that you will have to go out of your way to convince tenants to rent your space and deal with such issues as taxation and rates. However, unlike building rentals from the ground up, letting what you already own as well as subletting isn’t as capital intensive.
Subletting isn’t as expensive as building own rentals
Subletting is semi-passive and it doesn’t require your full-time attention
It is hard for a tenant to go rouge on rent payment when they live on the ground floor
It still ties you to the tedious landlord duties of following tenants around for rent and filing for rental taxes
No guarantee of full tenancy on all sublet apartments
12. Invest in vacation rentals:
The world is turning to technology and so is money-making in the real estate industry. And one of the most popular ways of cashing in the real estate industry today is through the online vacation rentals. In this case, you can choose to build and let out beach houses or extra rooms within your living space to holiday-goers. Unlike long-term leases like in the case of apartment rentals, vacation rentals are largely temporal and last no more than just a few days.
The income from these real estate projects is wholly passive. And just like in the case of rentals, you don’t necessarily need to own these houses. You can chose to let and sublet these vacation homes at a premium or enter into an agreement where you invest in marketing their rentals as they pay you a commission for every booking you bring their way.
Most online vacation rental programs like Airbnb will do the marketing for you
These programs will also automate payment processing – with little room for delays and skipped payments
You get to earn extra if you offer additional services like food or serve as a tour guide
These homes and rooms are only marketable during the holiday seasons
There is no guarantee the vacation home will be fully booked throughout the holiday seasons
Why invest in real estate?
Passive incomes: Most forms of real estate investing are largely passive or semi-passive income generating streams. Whether you are building rentals or investing in a real estate-focused company, technology and the availability of numerous real estate management firms have made it possible for you to concentrate on more important factors and have them managed by these professionals.
Highly rewarding: The real estate market is arguably one of the most lucrative forms of investment currently available. When its aggregated return on investment over the last 145 years was measured against what most individuals consider lucrative investments like stocks and treasury bills, real estate posted a higher overall return on investment.
Ease-of-access to funds: Given the ridiculously low interests offered on savings accounts by banks, every individual, private institution, and even the banks are always looking for ways to invest their disposable income in more lucrative ventures. You, therefore, cannot claim a lack of access to finances as long as you have a solid real estate investment business plan.
Minimal risks: Most of these forms of investment are insured thereby reducing the level of risk your investments are exposed to. The industry is also massively regulated, effectively reducing incidences of fraud and conmanship.
The country economy is ever growing, albeit gradually, just as the population of its inhabitants. And these two are the primary drivers of demand in the real estate industry. Over the years they both have consistently pushed up the need for both residential and commercial properties, making this the most opportune time to venture into real estate.
The ease of access to loans, numerous passive and semi-passive real estate investment options, and the ability to minimize risk through insurance help create a conducive investment environment. Before committing to one or several of these real estate investment options we advise that you consider gaining as much information about the niche to check whether it matches your client descriptions.
How much do I need to start investing in real estate?
If you hope to start a real estate construction company or buy/build rental property, a substantial amount have to be invested. But if you are to invest in the more revolutionary crowdfunding real estate ventures like Fundrise and Rich Uncles you can invest with as little as $500.
How do I earn from Fundrise?
Fundrise offers two types of returns in the form of quarterly dividends distributed from profits earned through the utilization of your cash as well as the appreciation of your real estate shares. The company will also send you periodic cash advances if and whenever they decide to offset some of their assets under management. Plus, they promise to review the value of your shares based on the value of their underlying asset quarterly or semi-annually.
Is real estate investing right for me?
Yes, everyone stands to benefit from real estate investments. The fact that it is probably the most lucrative investment plus most of the investment options here don’t require prior experience in real estate makes it the most suitable for virtually anyone looking to invest or diversify their options.
How much of skills and resources do I need before I start investing in real estate?
No, unless you want to start flipping houses or establish a construction company, both of which require a tad bit of previous exposure in the industry. The rest that can be done through such proxies as property managers and Fundrise and don’t require you to have previous skills or experience in the industry.
Am I too late in getting into property investments?
Most investors that ventured into real estate right after the 2007/8 bubble burst, at a time when most residential and commercial properties sold for pennies, have earned 500%+ on most of these investments. But the industry is still on recovery mode and the demand for property is constantly exceeding demand, pushing prices up, and your possible returns on investments expected to be even higher.
How do I decide on the best investment strategy?
Based on your previous real estate industry experience (or lack of it) and the amount of disposable income at hand, you will find some of these investment options more appealing compared to others.
Which is better between real estate and stocks?
The performance of different stocks may outperform the real estate investments in the short term, but real estate ventures always have the last laugh. The high volatility witnessed in the stock and equity markets will often see the value of stocks constantly fluctuating between big wins and deep losses while the relatively stable real estate ventures assume an uptrend for the better part of their term.
Will my real estate investment guarantee stable and consistent profits?
No, even rental income that is often considered one of the most fluid forms of investment often fails the consistency test for the months falling in between the termination of tenancy and scoring another.
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Edith is an investment writer, trader, and personal finance coach specializing in investments advice around the fintech niche. Her fields of expertise include stocks, commodities, forex, indices, bonds, and cryptocurrency investments. She holds a Masters degree in Economics with years of experience as a banker-cum-investment analyst. She is currently the chief editor, learnbonds.com where she specializes in spotting investment opportunities in the emerging financial technology scene and coming up with practical strategies for their exploitation. She also helps her clients identify and take advantage of investment opportunities in the disruptive Fintech world.