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How to start in real estate investment

At some point, as you build your investment portfolio of stocks and bonds, you will likely reach a time when you think about how to start in real estate investment.

Stocks, bonds, and other asset classes are typically only available to private investors through a broker. In contrast, there are many different ways to invest in real estate. Some of these, like crowdfunding, are comparatively new, while others like owning rental properties have been around for centuries.

Real-Estate-Investing

 

Here I’m going to consider each of these in turn, and indicate how you would get started through each of these avenues.

Traded REITs

Properties

REITs, pronounced “reets” stands for Real Estate Investment Trusts. They have been around in the US since 1960 and are an easy way to get started in real estate investment.

Prior to the creation of REITs, investment in commercial real estate was only practical for high-wealth individuals or for institutions. One class of REITs is traded REITs that can be bought and sold on exchanges like other stocks and ETFs.

Pros – Very low minimum starting capital required, highly liquid, completely passive.

Cons – May not offer the highest returns, valuations are subject to market gyrations.

How to get started – Open a brokerage account if you don’t already have one. Select a few REIT ETFs that meet your criteria. Either buy as a one time purchase or set up regular purchases to achieve dollar-cost averaging.

If you don’t yet have a brokerage account, this article compares some of the main brokerage providers.

Non-exchange-traded REITs

Another category of REIT is the public non-exchange-traded REIT. As the name suggests any member of the public can buy into these REITs. There is typically an account minimum and because of the way these REITs operate, they incentivize their members to keep funds in their account for periods of many years. Often the best incentives are available if your holding periods match the periods for which corresponding real estate properties will be held by the fund.

Note: This article contains affiliate links


Diversyfund is a good example of a platform to invest in its non-traded REIT with a low account minimum of $500. Diversyfund is also a crowdfunding platform for real estate properties.

Pros: Low minimum capital requirement, high rates of return, completely passive.

Cons: Early withdrawal penalties or no early withdrawals allowed.

How to get started – Open an account with a platform like Diversyfund. They will guide you through the process of setting up and building your account.

Crowdfunding

Crowd

Crowdfunding is really an online version of community cooperative funding methods with some extra bells and whistles. There are a number of crowdfunding platforms that are dedicated to real estate ventures. All of these platforms require an investment minimum.

Where you see a lower minimum that usually means the crowdfunding platform is giving you access to non-exchange-traded REITs. Where you see the higher account minimums that often means you will be able to invest directly in real estate development projects.

To get the best returns you will often have to tie up your capital for at least 3 or 5 years. On the plus side, when projects are liquidated at the end of their life with the platform you will get your share of the capital appreciation assuming they were able to sell the property for a price higher than its cost.

With funds like Diversyfund, the minimum requirement is as low as $500. That will allow you to invest in the Diversyfund Growth REIT. However,, through the Diversyfund platform if you are an accredited investor with an account minimum of $25,000 you will be able to invest directly in specific real estate development projects.

Crowdstreet is another crowdfunding platform where you need to be an accredited investor with an account minimum of $25,000.

This article explains the requirements to become an Accredited Investor in a number of major countries.

Pros: High rates of return are achievable, completely passive

Cons: Very illiquid, your funds are going to be tied up for 3 to 5 years.

How to get started – Find a crowdfunding site that you like and offers investments you want. Then sign up.

This article explains real estate crowdfunding in more detail.

Real estate-related stocks

Stockmarket

There are companies involved in the real estate industry that provide services to that industry without actually investing in real estate properties. Good examples of such companies are CBRE, Redfin, and Zillow. These companies are all listed on US stock exchanges so you can buy their shares through a regular broker.

The stock prices of these companies tend to follow real estate as a sector so investing in these companies is a way of investing in the real estate industry.

Pros – Very low capital requirement, very liquid, completely passive.

Cons – Stock prices will fluctuate with the general stock market.

How to get started – Same as above for traded REITs – open a regular brokerage account and look for real estate service stocks.

Invest in mortgages

Mortgages

Another route to real estate investment is to buy into mortgage mutual funds or mortgage-backed-securities. Many of the familiar big-name investment firms offer these funds. In fact, these funds are often one variety of fixed-interest funds.

Like many mutual funds, mortgage mutual funds can either be open-ended or closed and they typically require a minimum investment that can be anything from around $1,000 and up. The mortgage mutual funds are often just a vehicle for investing in mortgage-backed-securities.

You can invest directly in mortgage-backed securities through your bank or your broker. The US entities issuing mortgage-backed securities are Ginnie Mae, Freddie Mac, and Fannie Mae. The securities issued by Ginnie Mae start in chunks of $25,000 and up while those issued by Freddie Mac and Fannie Mae are in chunks of $1,000 and up.

An individual investor who can meet the minimum capital requirement is able to invest in these kinds of funds usually through a regular retail investing broker. The funds can also often be purchased into a retirement account.

If you want to get serious in this field you can also apply to join a mortgage syndicate. You will need much more capital and there is an application process but this isn’t the way to start investing in real estate unless you already have silly sums of money at your disposition.

Pros – Well-managed funds have low default risks, can provide a reliable stream of income, can be purchased through a retirement account, completely passive.

Cons – Higher starting capital requirements. No way to benefit from real estate property value appreciation.

How to get started – As before, open a regular brokerage account and look for mortgage-backed-securities. You will probably find them under bonds or fixed-interest.

Wholesaling

Wholesaling

Now we are getting into areas of real estate investment that are less passive.

Wholesaling is where you act as a go-between trying to put developers and opportunities together. To make this work you, as a middleman, need to add some value to the deal.

The value you add can be through marketing efforts or by some form of repurposing of property use. In other words, seeing an opportunity that others can’t see or don’t have the time or desire to see and putting the seller and the buyer together.

You can see that wholesaling is much more like actively working in real estate than passively investing in real estate. It is possible to do this kind of this as a side hustle but it is much more viable as a full-time occupation. You are also more likely to find opportunities near where you live where you are plugged into the community and know what is going on. It may require connections with local property boards and building inspectors and familiarity with zoning laws.

If you are starting out and you have flair and energy and are able to spot good opportunities, make connections and bring parties together this can be a way to launch a career in real estate.

Pros – the sky’s the limit.

Cons – the sky’s the limit and it can get cloudy at times, likely to require time, energy, and flair, no or low starting capital requirement.

How to get started – If you don’t know someone putting these kinds of deals together you will need to do a lot of reading and learning. You will need to do a lot of reading and learning anyway.

Buy rental properties

Rental properties

This is what comes to mind for many of us when we think of investing in real estate. It is of course more active and less passive. You will need some capital to get you started. On the other hand, many people make a second career out of this and are very successful at it.

Once you do get successfully started you should be able to use the income stream and the capital you build up to take out more mortgage loans and buy more rental properties.

There are risks of course.

Since you own the properties you will need to manage them or have someone manage them for you. That means finding reliable paying tenants, keeping the occupancy rates high, and taking care of any major maintenance items. Like with all things real estate, the three most important factors are location, location, and location.

You are also exposed to the risks associated with the neighborhood of the properties. When a neighborhood is up and coming that means you should have an easier time finding reliable paying tenants and the value of the property will appreciate. But the reverse is also true.

Pros – Highly profitable if you get it right with your first properties.

Cons – Higher capital requirements, requires more management.

How to get started – Start small with a property that doesn’t need work and has standing tenants. Do your homework, read up on the subject.

Short-term rentals

Urban housing

You can also rent out properties you own on a short-term instead of on a long-term basis. This usually involves signing up with AirBnB or VRBO.

Much will depend on the location of the property whether short-term rentals will be viable or not. It requires much more of your time and effort to pursue short-term rentals than long term rentals.

Of course, you can use a management company but that will eat into your income. Also, you will have to furnish the property and the fittings and furnishing will get used and abused at a greater rate so you will need to budget for those costs too.

On the plus side, if all the stars are aligned there is a much higher profit potential with short-term rentals than with the long-term.

Pros – high-profit potential.

Cons – takes a lot of work, higher management costs, and running costs.

How to get started – If you want to go rogue, sign up your property with AirBnB and move into your parents’ garage.

Land speculation

Vacant land

Rather than buying rental properties, you can buy vacant land on the speculation that it will appreciate in value and become attractive for a developer.

There are challenges with this approach. It can be more difficult to get a loan to buy vacant land and it can be difficult or nearly impossible to earn any income from vacant land. You will be paying off that loan until you sell it.

If your plan involves repurposing the land, then this may involve rezoning which is also a challenge. This is an area that requires local knowledge and local connections.

Pros – High-profit potential.

Cons – Very risky and speculative.

How to get started – You will need more capital to invest in land. Do your research. Know why you think a property is going to become more attractive than it is now and know what the risks are.

Buy, Fix, and Flip

Interior construction

To succeed at this you have to take it on more like a full-time occupation than an investing side hustle. It looks so easy when you see it on TV. Mistakes in this game can be very costly. There are more critical areas you have to pay attention to. You will need to know how the building inspector operates in the area where you are buying and possibly the architectural board if you are contemplating exterior alterations. Much will depend on the reliability of your contractors. The quality and dependability of the team you put together will be the key to your success.

Pros – High-profit potential

Cons – Much more like a job than a passive investment, a lot of room for mistakes which can be very expensive.

How to get started – Line up your team and start with something small and manageable, nothing too ambitious.

Buy foreclosures

House for sale

Buying foreclosures is more specialized than regular properties. This is also an area that requires more work and doesn’t resemble passive investment at all. Foreclosed properties are often also distressed properties. Especially in bad economic times, many foreclosures are left in a hurry, and the previous occupiers will often damage what they leave behind.

Most foreclosed properties are sold at auction by the bank that holds the outstanding debt on the mortgage. Bidding would usually start at the amount due to the bank plus fees and any unpaid taxes.

You have to register as a bidder beforehand to place bids at a foreclosure auction. Most foreclosure purchases at auction are with cash though some buyers are able to get loans and some are able to get mortgages. It usually takes longer to close on a foreclosed property and there is often more paperwork involved.

Pros – can be highly profitable.

Cons – a lot of work and it can take a long time to close.

How to get started – Some people do manage to buy their first home as a foreclosure and strike a great bargain in the process. Kudos to them. If you want to do this as a side hustle or a business you will need to read up and study.


Questions and answers


Q. What is the best way to start real estate investing?

A. That depends if you want it to be a passive investment, a side hustle, or your main occupation. As a passive investment buying traded REITs is the easiest while crowdfunding offers greater profit potential if you can tie up your funds for at least 3 or 5 years. As a side hustle buying rental properties is a good idea and if you want to be more active in it, put out part of your properties as short-term rentals if that is viable for the location. As a main occupation if you have no capital and you are creative try wholesaling but if you have some capital then fix and flip could be an option.


Q. How much do you need to invest in real estate?

A. You can start with $50 or $100 if you want to invest in REITs, $500 will get you started with crowdfunding, you will likely need 20% down on any property you want to buy, or you can start with the cost of smart business attire, a business card, and a smile if you want to start in wholesaling.


Q. Can I buy real estate with no money down?

A. You can if you borrow the down payment from some other source such as family or you may be able to negotiate no down payment if you get a mortgage with the seller. There have been periods when 100% mortgages were allowed for certain kinds of buyers. Those periods are often precursors to real estate bubbles leading to inevitable real estate collapses.


Single-page summary

Here is a single-page PDF summary of how to start in real estate investment.

How to start in real estate investment summary


I hope you found this article interesting and useful. Do leave me a comment, a question, an opinion, or a suggestion and I will reply soonest. And if you are inclined to do me a favor, scroll down a bit and click on one of the social media buttons, and share it with your friends. They may just thank you for it.


Disclaimer: I am not a financial professional. All the information on this website and in this article is for information purposes only and should not be taken as investment advice, good or bad.


Affiliate Disclosure: This article contains affiliate links. If you click on a link and buy something, I may receive a commission. You will pay no more so please go ahead and feel free to make a purchase. Thank you

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10 Comments

  1. Hi Andy,
    Great outline of the many ways to get started in real estate investing. I’ve often day dreamed at the idea of flipping houses. Unfortunately I am already deep in the red and from my understanding you need a pretty good starting capital to get started in those ventures and your post confirmed that notion for me. I find the idea of wholesaling to be quite intriguing as it requires no startup capital. Have you had any experience with that? Which of these ways to get started in real estate investing would you recommend for a complete beginner?

    • Hi Dev
      Thanks for the comment. I don’t have any direct experience of wholesaling myself. I think it is something that people who already have usually family connections in real estate start out doing. Often people who want to get into buying, fixing, and flipping start out wholesaling. Depending on where their skills and preferences lie, if they have success with wholesaling they may want to move on to fixing and flipping or they may decide to stick with wholesaling.
      If your strengths lie in negotiating and making connections then wholesaling may be best, but if you are more skilled at designing and managing projects then the fixing and flipping may be more your area.
      Most wholesaling deals involve finding properties that are distressed and need fixing but the owner doesn’t want to do the fixing. As a wholesaler, you seek to enter an agreement with the seller to sell at a specific price below the property’s true market value. You then look for a fixer to buy the property for somewhat more than you contracted with the seller. The fixer is hoping, after renovations and/or extensions to sell the property at the true market value or higher.
      The wholesaler niche is doing something, looking for suitable fix and flip properties, that a fixer doesn’t have time to do because they are busy fixing other projects.
      Other than the odd project that may come along, I don’t think wholesaling is really viable as an ongoing side-hustle, it is much more of a full-time endeavor.
      To your last question, if your goal is to diversify your investments by adding real estate then I would take a close look at crowdfunding.
      If your goal is to become more like a real estate developer then I would take a close look at wholesaling as a way to move on to fixing a flipping.
      If you want to build a portfolio of rental properties then maybe moving into your parent’s garage and letting your place out on a short-term basis might be a way to start.
      Where you start would obviously be a function of where you want to end up. Buying a few real estate-related stocks isn’t going to help you if your goal is to own and get rental income from whole sections of the town where you live.
      Thanks for the thought-provoking questions.
      Best regards
      Andy

  2. Investment in stocks has done so incredibly well during the pandemic. I have a friend that made £16000 profit over night due to investing in the correct stocks and £30 000 profit in two weeks and yes you guessed it he withdrew those profits and put it down as a deposit on a new flat he bought in London.

    Investing in stocks and property atm seems like the perfect combination.

    • I agree the stock market has been a very interesting place during the pandemic. I do think we are about to see a correction soon though. The mere fact that so many people who would normally not invest or trade in the stock market are doing so when the market is soaring to ever higher highs is a classic sign that we are nearing the top. Congratulations to your friend. I think he did a very wise thing taking his profits and using them as a down payment on a new flat.
      Thanks for the comment. Best regards, Andy

  3. Hi Andy,

    Since lockdown started, we have been losing money because of the work drying up. A lot of people all over the world have been in the same boat and some are becoming desperate. All these businesses that are shutting down, it is a crisis.

    So, we are looking at new ways to make money. The thing is, there are so many things being thrown at us including property or real estate investments. There have been lots of bitcoin, inline business, and other investment opportunities being shoved in our faces.

    As an expert, in your honest opinion, which one do you think we should go for in order to make money the easiest and simplest way, that doesn’t cost too much to start with?

    I know that’s a tough question to answer, but it would be great if you could help.

    Thank you for sharing and keep up the great work.

    All the best,

    Tom

    • Hi Tom
      I feel the pain and sincerity behind your question and yes many people are facing serious financial insecurities at this time. My totally honest opinion on safe investment at this time is that there aren’t any or at least none that will guarantee that you will not be looking at a loss in the short and intermediate-term. And by short term, I mean over the next few months and intermediate-term is anything up to a year.
      Interest rates are ridiculously low and there are massive inflationary pressures building up in the world’s economies which can only mean that inflation is likely to rise and the interest on a savings account or any kind of bond or certificate has almost no chance of keeping pace.
      The stock market is dramatically over-bought right now and there are many signs that we are at a market top. This means that a correction of around 10% or so in the next few months is on the cards. So if you put your money into indexed funds, which is the easiest low-cost approach to building a stock and ETF portfolio, you will likely see the value of that pullback significantly soon and it may be a year or more before you get back to where you started now.
      Real estate investment also has its risks. We don’t really know how commercial real estate will emerge after the pandemic is under control and office buildings can safely be fully reoccupied. Already many large organizations are making plans to reduce their office space footprints substantially over the coming years as their current leases expire. The flight from office space may not be as dramatic as some are foreseeing but the remote working genie is out of the bottle. We have seen how many kinds of office work can be successfully performed remotely so more remote working will be a feature of the workplace after the pandemic than was the case before and that can only mean organizations economizing on office space.
      I think the prospects for residential real estate are somewhat brighter, as the pandemic experience is likely to inspire people to move away from urban centers.
      All these other things like bitcoin or other cryptocurrencies are pure speculation and certainly joining in on any of these Wall Street Bet inspired short squeezes is a bad idea and likely to end in tears. Also, the fact that so many people are dabbling in stocks and options and making huge gains for the first time and stories about it are all over the place is a classic sign that the stock market is hitting a peak and will likely crash at some point. That doesn’t mean that some people won’t continue making a lot of money, I am sure they will. But at some point, the bubble will burst.
      In summary, I don’t think there is any safe way to guarantee a return. If you are willing to tie up your funds for five years, I would consider looking at crowdfunded real estate but only residential projects and I would really want to do my homework and not just accept whatever story is presented on the platform. If you want to keep your funds liquid then regular say monthly purchases of a few solid indexed ETFs could be a good way to go but you would have to accept that there could be a pullback. If that happens the important thing is not to panic. The small investor loses when the market corrects because they aren’t nimble enough to get out near the market top, but most people aren’t either, and they lose faith and finally bail right at or near the bottom just before the market turns back up. So if you are going to go this route you have to take a very long-term view.
      This is probably not the answer you were hoping for but this is my honest opinion.
      Very best wishes
      Andy
      Disclaimer: I am not a financial professional. All the information on this website and in this article is for information purposes only and should not be taken as personalized investment advice, good or bad.

  4. Hey Andy
    great article. I have invested in property myself so I know the technicalities involved and you are right that if you hire a propert management company it will eat into your income however I found that they relieve me of the stress of having to personally check my tenet and the apartment and I can make passive income.
    I have never thought of AIrBNB, Do you think they would be viable at this time of corona lockdown?

    • Hi Thabo
      Short-term rentals like AirBnB are only really likely to come back after the pandemic is under control and restrictions have been lifted or are unlikely to be imposed at short notice. I think that time is already on the horizon. The lockdown has lasted so long for many people that there will be massive pent up demand for travel. It may not be just now, but I do think that short-term rentals like AirBnB will see a huge surge probably starting about 6 months from now.
      Good luck and best regards
      Andy

  5. I’ve wanted to start a movable short-term business for some time now but never had the chance to consult with someone who has previously done it.

    Having that type of conversation will only benefit me in the long run, and I know you’ll agree on that.

    I’ve been mainly wanting to buy old campers, renovate them, and ultimately take full advantage of them by advertising them on Airbnb.

    Any advice for me on how to extract more profit from them? d

    • Hi, that is an interesting idea. The obvious thing to do would be to list your campers on an RV sharing site. It looks like there are two major players in this field. RVshare.com and Outdoorsy.com. The two companies seem to operate on a very similar basis, though Outdoorsy seems to have a slight edge with reviews. They each have slightly different regional strengths so much may depend on your location. On the other hand, if you are fitting out RV purely to rent them out then you would logically put them in the most lucrative areas. It looks like an exciting business.
      Good luck and best regards
      Andy

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