Investing in property is a smart financial decision for several reasons. Real estate tends to appreciate in value over time, is viewed as safer than investing in the stock market, and offers great tax advantages. But it’s also known as the ultimate "get rich slow" scheme.
Typically, it will take years before the capital an investor earns on their property becomes liquid, and large sums of money are needed up front to get started. Once your investments begin to compound, though, your portfolio will grow rapidly and your wealth will snowball.
As an investor, a general understanding of the buying and selling process will help immensely, so brushing up on the basics is highly advised. For example, the average realtor commission is 5.45%, but it is typically up to the seller to cover commission fees for both their own agent and the buyer’s agent. Working with a knowledgeable local realtor will make the home buying process much less stressful, and tools like seller net sheets will help estimate how much you’ll receive from selling your property (after expenses).
If you’re trying to figure out the best type of property investment for your personal goals, then continue reading. This article will cover 26 different ways you can invest in real estate — from rentals to REITs!
1. House Hacking
House hacking involves buying a duplex, triplex or fourplex, living in one of the units and renting out the rest. The monthly rental income the owner earns from their tenants usually covers the cost of their mortgage payments and property expenses—essentially allowing the owner to live there for free. House hackers usually start out with just one property, but after the first couple of years, they are able to buy more properties with a mix of their rental and W2 income. After a while, they can live solely off of the profits from their rental portfolio.
2. House Flipping
Flipping houses allows investors to purchase outdated properties at a lower price, renovate them and then sell them for a profit. Although this sounds easy in theory, it could quickly turn into a money pit if you do not have a solid understanding of all the repairs needed up front if the seller doesn't pay for them when you buy the property.
Ascertaining the home’s After Repair Value (ARV) and using the 70% rule will help determine how much you should pay for a fixer-upper. The 70% rule states: When buying a fixer-upper, an investor should pay 70% of the property’s ARV minus the repairs needed.
(ARV) x 70% = X
X - ($Repairs Needed) = What you should pay for the property
3. Hard Money Lending
Hard money lending is a good option If you have a large amount of capital but don’t necessarily want to manage a property. In this situation, the investor would earn income by acting as the lender and charging monthly interest to the borrower. Interest on hard money loans are typically higher than average (ranging from 7.5% to 15%), but the loan’s duration is normally shorter (around 6-18 months).
House flippers tend to seek out hard money loans because they are faster to attain compared to a conventional mortgage, and have fewer requirements surrounding the condition of the property.
4. Long-Term Rentals
Becoming a landlord is what many people imagine when they think of investing in real estate. Long-term rentals are usually leased out for a year at a time and provide the owner with a steady stream of monthly rental income from their tenants. Being a landlord is not a walk in the park, though, and you will be responsible for repairs, maintenance, and any issues that arise with the home.
To determine an investment property’s true ROI after expenses, use a rental property calculator and do your research. Before spending thousands on renovations and expensive furniture, know that your tenants might not treat the property as kindly as you would. Rather, you should aim to "tenant proof" the home with features such as durable carpet for if and when damages occur.
5. Vacation Rentals
Vacation rentals, a.k.a short-term rentals, have huge potential to generate significant cash flow. Owners can charge more per night than a long-term rental and do not have to deal with difficult tenants (at least not for very long). Plus, platforms such as Vrbo and Airbnb have made renting out your space to vacationers more accessible than ever before.
Vacation rentals do require a lot of upkeep, and you’ll need to clean it after each stay, so keep that in mind as you’re calculating potential ROI.
6. Equity REITs
REITs (real estate investment trusts) are companies that own income-generating real estate such as apartment buildings, hotels, shopping centers, etc. Most REITs are publicly traded on a stock exchange, although some are private.
Equity REITs are the most common type of REIT and offer investors the opportunity to buy into a portfolio of real estate assets without purchasing physical property. These investments usually produce high dividends, making them great for retirement accounts.
mREITs, or mortgage REITs, purchase mortgage debt, mortgage-backed securities and other assets and earn income from the interest. Although with mREITs you are technically investing in the financial market, mREITs provide significant liquidity for the real estate market.
8. Real Estate Funds
Like regular mutual funds, real estate funds are run by a fund manager who makes all the decisions on what the fund to invest in. Their portfolio can consist of individual properties, a collection of properties, REITs, or all of the above. The fund manager will take a percentage of all invested capital as their fee, which is generally around 2%. Although REITs pay out dividends, real estate funds produce income through appreciation over time.
9. Crowdfunding Platforms
Real estate crowdfunding platforms such as Fundrise and Realty Mogul have recently boomed in popularity. These platforms allow investors to purchase a piece of a larger property without managing it themselves. Unlike many REITs, the companies behind crowdfunding are not publicly listed and do not file with the SEC.
10. Commercial Real Estate
Commercial real estate is leased out for business purposes, whereas residential real estate is leased out to individuals. Unlike residential contracts, commercial property leases usually last from 1-10 years. There four main types of commercial rentals are:
Double-Net (NN) Leas
Triple-Net (NNN) Lease
Commercial properties include shopping centers, office buildings, hotels, hospitals, gas stations, grocers, etc. These properties could be difficult for first-time investors because they are much more expensive than the average residential property and require significant maintenance. If you are up to the challenge, then make sure to determine your capitalization rate ahead of time to estimate the rate of return on your investment after operating expenses.
Cap Rate = Net Operating Income / Current Property Value
11. 1031 Exchanges
A 1031 exchange is an IRS regulation that allows investors to sell one property and buy another on a tax-deferred basis. Typically, an investor would have to pay taxes when swapping properties. However, if the deal meets 1031 exchange conditions, then they do not have to pay taxes on any capital gains until they sell the asset for cash. Using this method is a great way to quickly build your portfolio.
No, this does not mean the investor is "cold." BRRRR stands for: Buy, Rehab, Rent, Refinance, Repeat.
You can think of the BRRRR method as a cross between house-flipping and owning a rental property. Essentially, an investor buys a distressed property listed at a low price, renovates it, rents it out to a trustworthy tenant, and then refinances the property at its new appraisal value. With the cash-out refinance, the investor can then buy another distressed property and repeat the process.
13. Raw Land
Raw or vacant land can be a good investment that does not require tons of money up front and can produce high returns if done correctly. Investors can lease out the land, hold and flip it, or develop it. Owning vacant land also does not require much maintenance and does not have many expenses.
Buying a multifamily or apartment building provides a plethora of ways to make a return on your investment. Owners will earn monthly rental income and great tax benefits, as well as the resale value of the property. Moreover, with creative financing and some research, you may be able to find an apartment complex at a lower price than you imagined.
Mixed-use real estate is used for both residential and commercial tenants. A good example of a mixed-use property is an apartment building with retail shops on the first floor. Having this type of setup is smart because retail tenants have guaranteed foot traffic from the residents who live in the complex.
Wholesalers find underpriced properties and then quickly flip them to an interested buyer at a higher price. They do not rehabilitate the property first but rather act as the middleman. Wholesalers earn income by keeping the difference between the price they paid for the property and the price they sell it for.
17. Industrial Real Estate
Industrial real estate includes warehouses, manufacturing plants, research facilities, storage units, etc. Although this may not be what you immediately think of when it comes to real estate investing, industrial leasing has increased significantly in the past couple of years largely due to e-commerce.
Homesharing is when the owner of a property allows a tenant to rent out all or a portion of their home. Homeowners can use platforms such as Airbnb to rent out their space for extra income. Another option is to find a roommate and charge monthly rent, which will then cover the cost of your home loan.
A timeshare is a type of vacation property that has several owners who can each use the home at different times of the year. Although the time restrictions can sometimes be inconvenient, this can also be a way to dip your toe into real estate investing. If there is ever a year when you do not want to use the property at your allocated time, you can rent it out as a vacation spot.
20. Invest as a Partner
Finding several partners and investing in a property together can help those with limited funds break into the real estate market. By pooling your money together, your buying power and, consequently, the potential ROI will be much greater.
21. Mobile Home Parks
Mobile home parks are when an investor purchases a parcel of land and allows individuals to park their mobile homes on the land for a fee. These types of investments are relatively low-cost and low-maintenance.
22. Self-Storage Facilities
Self-storage is a booming industry because, well, people have lots of stuff and need somewhere to put it! Renting out a self-storage facility is a good option for investors who do not want to deal with typical tenant relations.
23. Tax Liens
If a homeowner fails to pay their taxes, then the government will place a lien on their property. Tax lien investors essentially buy the delinquent tax lien and earn profits as the owner pays back the interest. If the owner fails to pay back all of their delinquent taxes, then the person who bought the lien can take the deed of the property (which will also include taking on the property’s debts as well). Depending on the property at hand, buying tax liens can be incredibly lucrative.
24. New Construction
For those who have the capital, you may consider building a property from scratch and then selling it. Investing in new construction is basically the opposite of house flipping, and it's less risky because there is no damage to address up front. However, building a home from scratch comes with its own risks, so make sure you have the time and bandwidth to deal with such a project.
25. Buy a Home
We saved the most obvious way to invest in real estate for last — buying a home! The act of simply purchasing a home for yourself is an investment. If you’re specifically looking to make significant returns once you sell your home, a local real estate agent can help you find a property in the right neighborhood at the right price.