At some point on your journey through passive income and financial independence, you'll think about investing in real estate.
You may be tempted for a while, but most people never invest in real estate because of a few things:
- It's time-consuming to manage a rental property (or do flips).
- A lot of capital is needed to get started.
- The perceived risk of real estate doesn't outweigh the returns.
If we can overcome those 3 objections, most people would actually invest in real estate, which is a good thing because real estate historically beats the stock market.
Real Estate Business vs Investment
The first thing to realize is that real estate is a complex financial sector where you can have a business or investments.
The business side of things include:
- Managing property (property management company)
- Fixing things such as toilets (plumber, electrician, carpenter)
- Lawn care (landscaping)
- Taking phone calls and writing maintenance requests (Assistant or call center)
- Marketing to find deals (printer/publisher)
The investment side of real estate is a little different:
- Determine your risk tolerance and determine your portfolio allocation
- Analyzing or underwriting potential deals
- Allocating money to a project
- Collecting monthly or quarterly dividends
- Rebalancing the portfolio from time to time
- …repeating the process
Actually, investing in real estate looks a lot like investing in the stock market. You may be familiar with the general process of finding companies to invest in:
- Determine your risk tolerance.
- Decide how to allocate the portfolio based on that risk tolerance.
- Spend several hours of research on each company.
- Invest your capital.
- Spend a couple hours per week (per stock) researching the companies you own.
- Rebalance once or twice per year
As you can see, the actual investment part of real estate is just as time-consuming as investing in stocks. Since time should not really be a factor in your decision to invest in real estate, let's move on to the next one – capital requirements.
Investing in Real Estate From $10 to $10,000
The easiest and cheapest way to get some exposure to real estate is to invest via a REIT, fund, or crowdfunded deal. The most expensive ways are going to involve buying real estate yourself.
We'll get into both but will start with the cheapest first.
Real Estate Investment Trusts (REITs)
Minimum Investment – $10
A REIT, or real estate investment trust include a wide variety of real estate offerigns and are invested in an amazingly broad range of real estate. A REIT is required to distribute 95% of its earnings to shareholders and also pass a number of other tests in order to maintain its status as a REIT.
There are some exchange-traded REITs where you can theoretically buy just 1 share. There are private REITs with large minimum investments so you'll probably want to avoid thise.
The great thing about a REIT is you can get some exposure to real estate in your portfolio by simply buying into a REIT with your brokerage account. Unfortunately, the returns aren't quite as good as syndication or direct investments in real estate, but it does help increase diversity and decrease volatility in your portfolio.
There are 3 types of REITs – Private REITs, public exchange-traded REITs, and public non-traded REITs.
Public Exchange Traded REITs
These meet all the SEC requirements to be listed on a stock exchange, but they are still a REIT.
The benefits of these are they are highly liquid (a rare quality in real estate). The drawback is they have higher fees and most likely have lower returns due to the SEC regulations.
These are the most popular and least risky form of REITs.
Private REITs are not listed on an exchange. They also don't need to meet the burdensome requirements of the SEC.
In theory, the returns can be much higher due to the reduced regulatory burdens, but there are a lot of bad private REITs out there with massive fees.
The lack of liquidity can also make it very difficult for many investors to get their money out of a
Public Non-Traded REIT
These REITs meet the same regulatory requirements of their exchange-traded brethren, but they are not traded on an exchange.
Investors are more confident in them because they have to meet a higher regulatory and disclosure burden, but they are also stuck with a non-liquid investment. The benefit is that they may be less volatile since the value is not in any way related to the broader stock market.
Disclaimer on REITs
FINRA has a pretty big disclaimer about private and non-traded REITs and I need to make sure all the readers are aware of it. Non-traded REITs come with significant risk because they are illiquid, often have a lot of fees buried in their 150+ page offering curricula, and are very complicated investments for normal investors.
The biggest drawback of non-traded REITs is they don't have a specified selling period like most syndications do. Once the money is in, you don't know when you will get it back.
Make sure you understand what you're getting into before buying into a REIT.
Minimum Investment – $500
This is the newest game in town. Crowdfunding is where a group of investors can pool their money in a project and share the profits.
While this has existed for hundreds of years in other forms, SEC established rules over 100 years ago that prohibited it from being publicized. In 2012 that all changed and now we have a proliferation of “crowdfunding” which are just REITs or Syndications done online.
I personally really like two options – Fundrise and EquityMultiple.
Fundrise is Great for Non-Accredited Investors
Being accredited means you earned $200,000 (or $300k if married) for the last couple years OR have over $1m in net worth (excluding your primary residence).
Most crowdfunding sites require you to be accredited in order to use them (this is how the SEC rules are set up). But, a few players have found a way to allow non-accredited investors to join as well.
They use a new version of the REITs which have new sets of rules set up under regulation A+ to protect non-accredited investors.
What does this mean?
It means you can invest as little as $500 into real estate with less risk than buying into a private REIT.
Pretty cool, right?
EquityMultiple is Better for Accredited Investors
On the other hand, if you have the capital or income to be considered accredited, I'd rather put my money in Equity Multiple.
It's a bit different because you actually select the project to invest in rather than investing in a REIT. The minimum investment is higher (usually around $5k or $10k) but the return potential is higher as well.
So, if you're looking to choose the specific project and can afford the higher minimums, Equity Multiple is a great option.
Doing a Live-In Flip
Minimum Investment – $10,000?
On the upper end of the $10k mark is buying your own property. You'll need a bit more in order to fund renovations, but you'll also be living in a home, so it kind of balances out.
The goal of this strategy is to buy a home that is livable (and therefore can be financed) but one that requires a lot of work to update and bring into the modern decade. Work could include upgrading the kitchen/bathrooms, adding hardwood floors, finishing a basement/attic, or building an addition.
This isn't for the faint of heart because you'll essentially live in a construction zone for a while. However, the potential for tax-free profit is huge.
Approach a live-in flip exactly the same way as a standard flip.
First, you'll need to find a livable property and also estimate the “after repair value” or ARV. You can do this by asking your real estate agent or reviewing comparable sales.
The next thing is to estimate your rehab budget. Do the work yourself to earn some sweat equity, if you have the skills. If not, get a good contractor in there to give you a price.
The offer you make should account for some profit. Take the ARV and subtract your profit goal and also subtract the repair costs. The total is your best offer.
Tax Benefits of Flipping
The great benefit of this strategy is the tax advantages. A typical flip is subject to all kinds of taxes on the profits. After 3 years of residency at the home, you'll get most or all of the taxes wiped out since profits on homes are not taxed up to a certain amount. I'm not a tax professional, so please consult one before buying or making offers.
This strategy is great because it's pretty low-risk. If the numbers don't work and you can't sell for a profit, simply stay in the home! You need a place to live in anyhow.
If you can sell for a nice profit, sell it and buy your next live-in flip. You could put more money down and have a lower mortgage or you could invest the money into the stock market or other investment.
But, Real Estate is Risky, Right?
Yes, it's true. All investments are risky and real estate has its share of risks. There is no way to sugarcoat it, and anyone who does is doing a disservice.
Stocks, real estate, and any other investment are risky and you can lose some or even all of your investment.
Investment is all about balancing risk and reward. The key is to accept well thought out risk then mitigate those risks to maximize your profit potential.
To reduce risk in the stock market you may diversify across 4 or 5 sectors, invest in reputable companies with a track record, and dollar cost average.
Real estate is no different.
Invest in Different Types of Real Estate in Different Markets
Most people think about investing near wherever they live, this may not actually make much sense. The best thing to do is find a market where it makes sense to invest, then start investing there.
You should also pick more than one niche to invest in. The fact is, there are around 800 different niches in real estate, which means there is no reason you should be focused on just one kind of real estate.
Invest With Reputable Companies
You can diversify geographically by investing with reputable companies such as Fundrise or EquityMultiple.
Not only will you get that diversification, but you'll get some peace of mind knowing you're working with someone really experienced.
Alternatively, if you want to invest more passively with someone local, make sure they are very experienced and have a track record of doing these kinds of deals and handling investor funds.
It's Never The Right Time to Invest in Real Estate
Back in 2009, 10, and 11, everyone said the economy was crap, bad time to invest. For the last several years I've been hearing the economy is too hot, bad time to invest.
So, apparently, it's never the right time to invest in real estate!
I think the opposite is true. Since the time is never right, the time is always right. But, only if you do it right.
Focus on investing smaller sums of money every year rather than spending all of your money up front. By doing this, you are not as exposed to massive swings in the market.
You can put a few hundred bucks per month into something like Fundrise. If you do it continuously for years, you'll have a huge amount of money invested in real estate without even trying.
Alternatively, if you had a lot of money to invest, try to resist the urge to dive in.
If you had enough money to invest in 5 deals, maybe you investing in one deal every 6 months to average it out.
Regardless of how you do it, if you apply the principle of dollar cost averaging to real estate, you should do better than if you just dump all your money in randomly.
What's Holding You Back?
Please leave your comments below. I'd love to know what else is holding you back from investing in real estate!
Author bio: Eric Bowlin is a real estate investor and online entrepreneur who writes about real estate at IdealREI.com.
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Great article. I’ve done a couple of single family homes and 1 raw land investment. I made a 50% return on land, holding for 5 years (sold post recession, could have made 300%). The houses I bought were both low income, so cash flow positive immediately, but a pain to self manage for about a $1000 profit on both annualized. Ended selling both for a small capital gain loss. Still both sides of my grandparents retired early due to real estate investments.
Sounds like you have some great experiences with this! I can relate with the low-income housing. The cashflow is great, but the management can certainly be a hassle. Thanks for stopping by and sharing your experience investing in real estate!