June 5, 2019

How to Become a Real Estate Investor

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Investing in real estate doesn't just mean buying houses anymore. Learn some great ways to get started with as little as $5—and the common mistakes to avoid.

Investing in real estate is easier now than ever before. Your options range from simply putting down some money to buying a home. Keep reading to learn more.

Buying REITS

Real Estate Investment Trusts (REITs) are companies that own and operate real estate assets, such as residential and commercial rentals, which generate regular income. Since they are invested in property, which can appreciate in value, REITs can generate substantial returns over time.

Buying shares of REITs is just like purchasing a stock. Investors get individual shares within the trusts, which are much cheaper than if those same investors were to buy buildings directly.

All REITs are required to pay at least 90% of their income to shareholders, and many choose to pay 100%. Returns are often paid out either monthly or quarterly from the collected rental income.

To start investing in REITs, you'll need to register with a brokerage service. Here's our top choices for online programs.

CrowdFunding

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Real estate investments are now accessible to everyone thanks to online crowdfunding platforms. We cover several of the most popular below.

For Beginners

Fundrise
This is one of the only real estate crowdfunding services open to all investors, regardless of income level.

All of Fundrise's investments are in its own eREITs, which are assembled groups of real estate companies that actually own the properties within the portfolio. Investors buy shares of the companies, which are then managed automatically.

What to Know

  • Open to everyone with a $500 minimum investment for a starter portfolio
  • Pays both quarterly and when properties appreciate
  • Recommended minimum 5-year investment

RealtyMogul REITs
Non-accredited investors choose to invest in either MogulREIT I or MogulREIT II, both of which are privately traded (accredited investors have more substantial offerings).

What to Know

  • Open to all investors with $1,000 - $5,000 minimum investment
  • Money is inaccessible for the first year; it costs 1% to 2% to withdraw before three years
  • Distributes monthly or quarterly depending on the REIT

Rich Uncles

Rich Uncles is currently not accepting new investors. Business owners said they expect the platform to open again in a month.

This REIT investment platform is the cheapest of the bunch, with a required minimum investment of $5.

Rich Uncles is another crowdfunded property manager. With shareholders' invested money, the service purchases new properties and collects monthly rent, which is then distributed back to investors.

What to Know

  • $5 or $500 minimum investment depending on chosen REIT
  • Student Housing REIT is available to everyone
  • Pays in monthly dividends

For Accredited Investors

An accredited investor, as recognized by the U.S. Securities and Exchange Commission, is someone who can prove they:

  • Earned $200,000 or more in income over the past two years ($300,000 if married)
  • Have a net worth of over $1 million, excluding their home

If you meet these stringent requirements, you can invest with the services listed below.

Why do these programs require accreditation?
According to the SEC, accredited investors are seen as "financially sophisticated" and therefore are able to better deal with significant losses.

PeerStreet
This crowdfunding service invests exclusively in debt, allowing investors to receive quicker returns than many similar programs.

Investors purchase shares of loans that go toward backing multiple types of real estate, from multifamily to commercial properties. As the borrowers pay these loans back, PeerStreet distributes dividends made off of the payments' interest bi-monthly.

What to Know

  • $1,000 minimum investment
  • Only offers debt investments
  • Average length of contract is between 6 and 24 months

Becoming a Property Owner

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The most basic home investment is buying and maintaining a house. Ideally, as the home is taken care of, it will appreciate in value and eventually sell for more than you paid.

This inherently makes any real estate purchase a long-term investment that you can always sell again. Not all homes are guaranteed to appreciate in value, but those that do can turn a hefty profit for their sellers.

Even with tangible investments like homes, markets can shift and factors outside of your control can dictate the value of any piece of real estate, regardless of the condition.

You can also actively make a profit from your property by:

  • Renting out the space and becoming a landlord
  • Buying a home, fixing it up, and "flipping" it

Purchasing a property
The first step toward making money off of your property is figuring out exactly how you plan on doing so. Know your own limitations in terms of what you can or cannot do before taking on the task.

Once a rental property is up and running, it can become a lucrative source of passive income. That being said, the end result still requires oversight from the landlord, meaning it isn't a complete hands-off investment.

Filing taxes as a landlord is drastically different than filing taxes as a regular wage earner. You'll have to classify the rent your tenants pay as taxable income you have received during the year, but can deduct expenses like mortgage interest and property taxes.

Some questions to answer before even beginning the property buying process:

  • How much money do you have available for a down payment?

  • What type of tenants are you hoping to attract?

  • Where will the home be located? What are the average rent prices in this area?

  • How many utilities are you willing to cover for your tenants?

  • Are you able to pay for a lawyer, contractors, maintenance staff, and the other professionals you may need during the rental/flipping process?

  • What will you do if the home sits unoccupied for an extended amount of time?

  • What will you do if a tenant trashes the property?

Answering all of those questions should help you figure out the type of property you're looking for. This could be a residential or commercial property.

Take a look at our breakdown of everything you need to know before buying a home here.

Residential

Pros

  • Usually cheapest type of property to purchase.

  • Able to fix up and sell quickly, also known as "flipping".

  • Typically easier to find tenants than commercial space.

  • Rent payments can go toward monthly expenses.

Cons

  • You must pay out of pocket for empty properties
  • Tenants live in the space, meaning there's a higher chance of property damage.

  • Large time commitment, especially if you perform repairs yourself.

  • Costs of lawyer, maintenance staff can add up.

Renting out a home
After a home or multifamily unit is secured and ready to be rented, your next step is finding tenants. This means listing the home online, showing potential renters the space, conducting credit checks, and drafting and processing rental documents.

Once you've secured tenants in the home, you'll be responsible for collecting rent payments and solving any maintenance issues, whether you hire an outside contractor or fix them yourself.

Once you begin making money from the property, you can begin using it to pay for the home's mortgage payments and other fees. Many landlords also choose to reinvest profits toward more rental properties, allowing one project to pay for another.

If you want to sell your rental property, you can wait until the tenants move out or show the property with them in the home. Talk to your tenants first and find out what they are comfortable with—angry tenants could leave the house a mess and make the selling process difficult.

"Flipping" a home
Buying a home with the intent of fixing it up and then quickly reselling it is both risky and potentially very rewarding for the right investors.

In order to make a profit, the final amount for which the home is sold must equal more than the cost to buy, renovate, and hold the house until it sells. This includes the interest you pay every month in homeowner's fees. It can take months to fully renovate a house so that it is ready to sell.

It's easy to lose money when trying to flip homes. If the home is in an "undesirable" area, if the market significantly cools down, or if a number of other things occur, the investment can actually end up costing more than you may make. Be patient and wait for a property within your means.

Commercial

Pros

  • Often more profitable than residential because the rent is higher.

  • Multiyear leases offer stability.

  • Businesses like to take care of their workspaces.

  • Possibility for triple-net leases, which minimize owner costs.

Cons

  • Can require a larger time, energy commitment than a rental home.

  • More expensive initial investment.

  • May have to pay for professional management, maintenance services.

  • Properties are open to the public.

Renting out a commercial property
Commercial properties are valued directly based on how many square feet can be used by a business. This may make the initial buy of a commercial building more expensive, but can pay off long term.

Commercial rent rates are typically higher than residential and leases often last for multiple years. Accredited investors also have the option of using a triple-net lease, which puts the entire burden of cost, including real estate taxes, insurance, and maintenance, on the renter.

Investors without triple-net leases and even those with often still have to hire property management and sometimes maintenance teams. Maintenance issues are different from residential as well; business owners typically take care of their properties, but customers can cause wear and tear.

Bottom Line

Whether you're looking to invest just $500 or become a landlord with multiple rental properties, you too can invest in real estate.

The most common methods are:

  • Purchasing shares of REITs
  • Crowdfunding real estate
  • Becoming a landlord

Once you've chosen your strategy and have a bit of money and willingness to see things through to the end, it's time to start investing.

Disclaimer: Opinions expressed here are author's alone. Please support CreditDonkey on our mission to help you make savvy decisions. Our free online service is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content.

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