By Karen Lynch | American Express Credit Intel Freelance Contributor
4 Min Read | November 30, 2020 in Money
If you want to start investing in real estate, you can consider a very hands-on or hands-off approach.
“Active” investors might manage their own rental properties or buy, renovate, and resell houses.
“Passive” investors might instead buy real estate company shares online or on the stock market.
How does real estate investing work? There are actually many different ways you can get started. You might pick up your checkbook and your tool belt, for example – or your smartphone and digital wallet. The options range from restoring and reselling houses to crowdfunding properties online.
Investing in real estate can help put money in your pocket or help diversify your investments beyond stocks and bonds. To meet your real estate investment goal, one of the first choices you’ll want to make is whether to be an active or passive investor. Active investing means hands-on involvement in buying and managing properties. Passive investing mainly involves transactions on paper or online in which you buy into companies that do the active part for you.
Let’s break down the different types of active and passive real estate investing.
You can be actively involved in real estate in big, medium, and small ways. Starting small lets you walk before you run, learning the ropes before deciding whether to get more involved. Options range from online room rentals to buying and managing commercial properties.
Room sharing: While renting out your second bedroom on a room-sharing marketplace is considered more of a side gig than an investment, experts say it can serve as an introduction to the management side of real estate investing. It can also be rewarding. In a recent survey, nearly half the people putting rentals on one room-sharing platform said they made over $500 a month.1
House hacking: Wading deeper into real estate investing, you could buy a duplex or other multifamily home, live in one of the apartments, and rent the other one to cover your own mortgage payments. Like room sharing, this can provide relatively low-risk experience in being a landlord – from marketing your property to screening tenants, fixing their problems, and collecting rent.
House flipping: Here’s where you get out that tool belt – or set up a network of painting, electrical, plumbing, and other contractors. Flipping means buying a house, renovating it, and then selling at a higher price. By one national estimate, house flippers sold at a price that was 36.7% higher than they’d paid, on average, in the first quarter of 2020.2 That figure doesn’t factor in the cost of improvements, though, which vary widely.
Renting out houses: Investing in single-family rental homes can pay off two ways: First, home values tend to increase over time and, second, you’re collecting rent from your tenants. Investment returns vary by location, which is true of most real estate transactions. On average, though, a 2020 analysis of single-family house rentals showed that rent payments alone represented an 8.4% annual return on the purchase price of the house.3 Your actual profit could be higher or lower because that analysis doesn’t take into account any upside in the home’s market value nor any downside from the costs of managing and maintaining the property.
Multifamily buildings and apartments: You could choose to manage these yourself or outsource many of the management responsibilities. Returns from investing in these properties were reported to be flat in the second quarter of 2020.4
Commercial and industrial real estate: Office buildings, storefronts, and warehouses also present opportunities for people looking to invest in a big way. For example, e-commerce deliveries have expanded industrial real estate investment opportunities in recent years, with warehouses becoming increasingly profitable properties.5
Most of the above types of real estate investments can also be made passively through real estate investment trusts (REITs) and more modern options known as eREITS – or crowdfunding.
REITs: These are companies that own, operate, or finance real estate. Most focus on specific types of property, such as apartment buildings or warehouses. When they are publicly traded you can invest in them and in their portfolios of properties by buying their stocks. Or you could buy into mutual funds and exchange traded funds that hold REITs. Investors usually earn dividends and typically benefit from any increase in the REIT’s share price. REITs have historically delivered competitive returns on investment compared with stocks, bonds, and other assets, according to the National Association of Real Estate Investment Trusts.6
eREITs and crowdfunding: These online platforms allow individuals to make investments in real estate companies and their portfolios of properties much like publicly traded REITs. While some of these are only open to “accredited” investors, which would require you to meet income or net worth requirements, others operate via smartphone apps and welcome anyone, with minimum investments as low as $500.7
Turnkey rental properties: You could also passively invest in “turnkey” rental properties. Turnkey property companies acquire, renovate, and manage rental properties for out-of-state investors looking to cash in on lucrative markets far from home.
You can potentially put money in your pocket or diversify your investment portfolio through real estate investments. How real estate investing works for you will depend on whether you prefer active investing, such as managing your own rental properties, or passive investing, such as buying real estate shares online or on the stock market.
1 “How Much Are People Making from the Sharing Economy?,” Earnest
3 “ATTOM Data Solutions Releases Best Counties for Buying Single Family Rentals in 2020,” ATTOM Data Solutions
4 “NCREIF Property Index (NPI),” National Council of Real Estate Investment Fiduciaries
5 “ARO 2020: U.S. Warehouse Lease Rates Set to Keep Rising,” Journal of Commerce
6 “What's a REIT (Real Estate Investment Trust)?,” National Association of Real Estate Investment Trusts
7 “What Is an Accredited Investor? Should You Become One?,” InvestorJunkie