It’s no secret that the stock market has been giving investors a jagged — if not downright rocky ride in recent months. If portfolio losses have you looking around for other investment vehicles, consider casting your eyes toward real estate.
Real estate is one of the most stable investment options available for diversifying your portfolio. It helps millions of investors build a steady cash flow derived from rental payments or dividends. Read on to learn how you can develop a passive income stream as a beginner real estate investor.
Story Stages
1. Invest With REITs
You’re just starting with real estate investing, and perhaps the thought of taking on the responsibilities of a landlord is too daunting. In that case, you may want to start with a real estate investment trust. This approach gives you many of the benefits of real estate investing without the hassle of repairs and rent collection.
A REIT is a corporation that owns multiple properties and earns most of its income from real estate-oriented activities. Many REITs trade publicly on the stock exchange, similar to mutual funds. Typically they invest in commercial properties like offices and apartment buildings, but there are residential REITs, too.
Investing in a REIT offers individuals several potential benefits. You can own real estate without a mortgage, giving you more liquidity than if you purchased a property outright. REITs allow you to diversify your portfolio with a stable asset, yet you’re likely to receive higher dividend payments compared to common equities. That’s because REITs must pay 90% of their yearly taxable income to investors as dividends.
Best of all, they provide an easy on-ramp to real estate investing. With publicly traded REITs, you can easily open a brokerage account within a few minutes to choose which trust you’d like to invest in.
2. Use Online Investment Platforms
Much like REITS, online real estate investment platforms allow you to own real estate without the upfront cost of a down payment or repairs. There are multiple online platforms dedicated to serving different types of investors. Here are a few to consider:
- Roofstock: for residential real estate and rental shares
- Yieldstreet: for REITs and private market real estate investments
- EquityMultiple: for non-traded commercial real estate offerings for accredited investors
- Fundrise: for low-fee, low-minimum investing
These forms of real estate investing have a lower barrier to entry, making it possible for the average person to invest in real estate. For instance, Fundrise requires only a $10 minimum to start and imposes a minimal fee structure in order to maximize your returns.
3. Use the 1% Rule to Identify Profitable Rental Properties
In 2020, over 16.7 million rental properties were reported in tax filings with the IRS. It’s no wonder this form of investment is so popular. Many real estate investors get started by buying a new home and renting out their previous home to tenants. You may even buy a property with that intention from the start.
Rental properties can help you build a solid source of passive income, especially if you use your receipts to further expand your portfolio. As with Lifestyle Investing, Justin Donald says, “Choosing to do real estate, especially rentals, can provide you with a steady cash flow that you can invest into buying other rental properties and homes.” You may eventually earn enough passive rental income to enable a so-called job-optional lifestyle.
Naturally, to make money from owning rental property you’ll want to charge more for rent than you’re paying in expenses (mortgage, property management fees, taxes, etc.). A common way investors determine whether a potential rental property is worth buying is to use the 1% rule. If the property can rent for at least 1% of your total acquisition cost, then it’s potentially profitable.
For example, say you’re buying a home for $150,000 and plan to invest $50,000 to upgrade it. That makes your total acquisition cost $200,000. Invoking the 1% rule means you’d need to rent the home for at least $2,000 per month to potentially turn a profit. Always have your exact numbers to work with.
Now, the one percent rule isn’t a hard-and-fast rule. There are further factors, such as school district trends and local market changes, that will determine how valuable your rental property will remain. “If you’re considering an investment property,” advises Igor Popov, chief economist of Apartment List, “perform the same due diligence you would if you were going to live there yourself.”
4. Pursue Wholesale Real Estate
Real estate wholesaling real estate is another way to invest that doesn’t require much capital to start. Rather than buying a home to rent out or flip, wholesalers get a cut of a home sale by playing middleman between the seller and buyer. The wholesaler does this in five relatively simple steps:
- Identify properties — often distressed ones — whose owners are motivated to sell.
- Make an offer.
- Put the property under contract.
- Leverage their network to find a third-party buyer, usually an investor, who will buy the property for more than they paid.
- Transfer their contract to the buyer for the higher price and bank the difference.
Although you’ll earn less from wholesale real estate investing than someone who flips a home, the tradeoff is that it requires less from you. You avoid putting up hefty capital, and you’re not on the hook for renovations or repairs. Also, in most states, there are no licensing requirements for real estate wholesalers.
Finding the Right Real Estate Investments
Looking for smart ways to start investing in real estate? Whether you’re focused on the highest possible returns or lowest barriers to entry, there’s likely an approach that will suit your investment goals.
Wholesaling could provide an entry to home-flipping projects, which can yield a higher ROI. If your capital stash is small, there are ways to invest in real estate that don’t even involve owning the property outright. With due diligence and persistence, you’ll find a real estate investment method that works well for you. Once you find it, you’ll be on the path to building a lifestyle of greater wealth and freedom.
