It seems real estate moguls rule the world these days. So how’s a total newbie with little more than pocket change supposed to get a slice of that pie?
“I started investing in real estate when I was 24 as a way to diversify my investment portfolio. I bought my first house for $272,000 and today, 18 years later, it’s worth about $850,000,” says experienced Washington state agent Hao Dang, who’s sold over 76% more properties in the Seattle area than the average agent.
Buying a $300,000 investment property before you hit your mid-twenties is an ideal way to start building wealth and a retirement portfolio. But it takes smart financial planning to make a purchase that big at so young an age. Here’s how to start building toward that goal.
Do some soul-searching
Real estate is a different ball game compared to other investment opportunities which may offer faster returns and more liquidity (which is nice if you need cash in a pinch).
When you sink your savings into an investment property, it can take weeks or months to unload it in order to free up your funds — unless you’ve spent years building up equity that can be pulled out via a home equity line of credit (HELOC).
However, when you put your capital into real estate, your wealth grows at a slower, steadier pace than the riskier, more volatile stock market.
10-year stock market chart
10-year housing market chart
With the right strategy and a lot of luck, stock market investing will net you significant, short-term gains. But the right real estate investment could earn you a whole lot more if you’re willing to be patient, according to Dang:
“If I invested $100,000 in stocks, I’d see a 10% return of $10,000 a year. But if I put that $100,000 into real estate, say 20% down on a $500,000 home. With just a 5% return — which is conservative in real estate — I’m making $25,000 every single year on that home. That’s $15,000 more that I’m earning on the same amount of money.”
Think you’re ready to jump into real estate investing? Let’s take a look at four different ways you can get started, from dipping your toes in the water to more hands-on avenues.
1. Invest in real estate via investment crowdfunding
Most people are familiar with crowdfunding sites like Kickstarter, GoFundMe, and others that let you donate to new businesses in exchange for perks or the chance to help out a great cause. You may even know of investment crowdfunding sites (also known as equity crowdfunding) like Kickfurther and others that let you earn a profit from your investment.
But did you know that you can participate in real estate crowdfunding?
Real estate crowdfunding sites let you pool your money with other like-minded investors to fund real estate developer’s purchase of rental properties in exchange for a small percentage of the rental income.
How much you make depends on how much money you invest. And while you won’t be making huge returns, it’s a great gateway into real estate investing and an opportunity to learn the ropes while building your investing résumé.
Here are the key details you need to know on some of the top sites:
Fundrise
The lowdown: Fundrise lets you get started investing in real estate funds rather than individual property investments.
The company offers three alternatives to earn income from your investment:
- Supplemental income: offers higher dividends, but only moderate overall returns and a low appreciation rate.
- Long-term growth: you’ll get relatively low dividends, but in exchange you get greater appreciation and higher overall return in the long run.
- Balanced investment: a mix of both supplemental and long-term growth investments for a steady dividend and better-than-average appreciation and overall returns.
Minimum investment: $500 (current discounted offer)
Average return rate: 8.7% to 12.4% (historically)
Crowdstreet
The lowdown: Own a little piece of multimillion-dollar properties without requiring a multimillion-dollar investment.
Crowdstreet also offers three investment options:
- Funds and vehicles: gives you a tiny slice of a whole real estate portfolio rather than one single investment property.
- Individual deals: lets you invest directly in an individual commercial real estate property.
- Advisory services: rely on Crowdstreet’s in-house investment team to develop a strategy for investing your funds.
Minimum investment: $10,000 to $50,000; while the amount varies by project, few offerings are available for less than a $10,000 investment.
Average return rate: 29.0% internal rate of return (based on expectations of future cash flow)
RealtyMogul
The lowdown: A diverse platform for both new, small-dollar and experienced, high-dollar investors, including opportunities to invest in REITs.
This company has three primary investment opportunities:
- Equity investment: an equity investment in a single commercial real estate via a RealtyMogul-structured LLC. (NOTE: Some opportunities are available to accredited investors only.)
- MogulREIT I & II: long-term, diversified real estate investment portfolios that are SEC-registered, but not traded on the stock exchange, which offers limited liquidity on a quarterly basis.
- 1031 exchanges: lets you invest non-1031 funds in a 1031 exchange — which is a trading post for big-time investors to unload and acquire properties while postponing capital gains taxes.
Minimum investment: Varies by account and investment type; typically $5,000 or more.
Average return rate: Varies by investment type; for example, MogulREIT II has a 4.5% annualized distribution.
2. Turn part of your primary residence into a rental
Conventional wisdom says that your starter home should be small, affordable, and only as many bedrooms as you need for you and your family.
But for investment-minded first-time homeowners, it may be smarter to buy a bigger, more expensive home with multiple extra bedrooms, a house with a guest cottage on-site, or a multi-unit building.
In Dang’s experience, all that extra space is primed to become a moneymaker:
“A colleague of mine bought a five-bedroom, three-bath property with plenty of parking for $300,000 when he was 25 years old. He lived in one room and sublet the other four rooms on Airbnb for $500 a month — which covered his mortgage and other housing expenses — so he was able to live for free.
“Today he’s got six of these properties, and he’s making $50,000 to $60,000 a month. That’s around $600,000 to $700,000 a year, just from Airbnb.”
The beauty of rental properties is that rental rates usually increase every year, but your mortgage payment will stay the same. This lets you make money and build wealth in two ways: first, by increasing your monthly income, and second, by paying down your mortgage principal, which increases your available equity.
While Airbnb is most famously known as a vacation rental site, it’s also a resource for leasing on a month-to-month basis. There are pros and cons to both options. As a vacation rental-owner, you have more flexibility if you want to put your rental status on hold. However, vacation rentals have a higher vacancy rate, which means a less certain passive income each month.
As a month-to-month lease, your income stays relatively steady. However, you have less flexibility to remove an unpleasant roommate — unless they break your house rules.
It’s simple to list your house for rent on Airbnb — and you’ve got a lot of control over your rental rate, your availability, and your house rules.
You’ll also need to do some work prepping your home for renters before you start hosting:
- Budget for rental incidentals, including cleaning services, maintenance costs, Airbnb’s cut of the profits, and so on.
- Install several industrial-grade washers and dryers to accommodate multiple month-to-month renters.
- Establish security measures to protect your personal property.
- Define your separate space, apart from guests.
Airbnb may have the name recognition, but it’s far from the only rental site around.
All of the alternative home rental sites have minor variations in their setup, rules, fees, payment structure — so it’ll take a bit of research to find the one that works best for you.
Just be wary of listing your house on multiple sites at once. Juggling rental schedules across several sites is a hassle — especially if you’re taking the short-term vacation rental route.
3. Invest in a REIT
Crowdfunding may be the latest buzzword in investing, but a group of small-money investors pooling their funds into a larger real estate investment isn’t a new concept.
The traditional way for neophytes to diversify their investment portfolios with property investment is through a real estate investment trust, more commonly known as a REIT.
By putting your money into a REIT, you’re actually investing in a property development company that owns, operates, or finances income-producing real estate, such as commercial office buildings or residential apartment complexes.
A REIT eliminates a lot of the risk of investing directly in a property that could potentially decrease in value, or turn into a money pit. However, as a shareholder, you have little input on when the REIT buys or sells properties at a profit or a loss.
REITs are a low-risk way to get into real estate investing, but don’t expect to make a fortune from your dividends. Recent data puts the profit you’ll see right around 4%.
One final warning — REITs are not all created equal.
Some are backed by the Securities and Exchange Commission (SEC), and some aren’t. And some are publicly traded while others are not. Each type comes with its own potential benefits and risks.
“I would only invest with a REIT that’s been in business for 20-plus years because they’ve already survived through two recessions, in 2001 and 2008,” advises Dang.
Private REITS are especially ripe for scams and fraud, so do extensive research before investing.
4. Fix-and-flip
Fix-and-flip is the trendiest of the traditional real estate investment options — one that reached a nine-year high in the first quarter of 2019.
It’s easy to see the appeal of flipping.
You buy an ugly house in as-is condition, invest a little time, money, and elbow grease in fixing the place up, then sell it for an average $60,000 profit.
But it’s not as simple as it sounds.
Flipping requires buying and selling houses at the fast pace of around 180 days (the nationwide average time for a flip, according to data firm Attom Data Solutions). That kind of turn around requires a lot of cash on hand.
The popularity of flipping has also drawn a lot more competitors into the game — including flippers with big-money backers who refurbish and sell multiple properties at once, and up to hundreds of properties a year.
Stiff competition for fixer-upper listings drives up the price, which cuts into your potential profit. And if you’re buying property at a bank auction (where many flippers find their inventory), you’ll need enough capital to outbid other flippers.
Plus, if you don’t have the home improvement skills to do the rehab yourself, you’ll pay top dollar for a quality construction crew — as competing flippers book up the best home-repair experts in your area.
Then there’s the fact that flipping is one of the riskiest traditional investment options.
Every missed construction deadline, every unexpected repair, every rookie installation mistake will cost you cash upfront, and additional months of mortgage payments.
If you don’t have extensive flipping experience, soon that dream of $60,000 in profit will shrink away to nothing — or even put you in a financial hole.
The good news is that you own this tangible asset, so if you can’t make a profit with an immediate flip, you can always hold onto it as a rental property until you build up enough equity to sell at a profit.
Winning with real estate investments
Whether you’ve got a huge bankroll or just a few thousand dollars to invest, real estate is a winning investment because it’s an appreciating asset. It also has a better long-term success track record over other riskier investment options, like the volatile stock market.
All you need to achieve a real estate investment win is a smart financial plan, solid research into your preferred investment option, and (for the more hands-on investment opportunities) an investor-friendly real estate agent who can spot a great deal on the market.
Header Image Source: (Clay Banks/ Unsplash)