Have you heard the Mark Twain quote, “Buy land, they’re not making any more of it”? That quote sums up why real estate investing for beginners is such a popular topic. There’s only a finite amount of land, meaning real estate can be a lucrative investment.
The thing about real estate investing compared to investing in the stock market, is that there is a higher level of difficulty for the simple reason that it takes considerably more cash to get your foot in the door. But with newer investments like REITs and crowdfunded platforms, it’s possible to start investing in real estate for less than $100.
To help you get a feel for some of the most popular options, I’m going to take you through some real estate investing basics. Then, I’m going to cover ways to start investing in real estate and tips for success.
Table of Contents
- 1. Buy REITs
- Pros and Cons of Buying REITs
- 2. Crowdfunded Real Estate
- Pros and Cons of Crowdfunded Real Estate
- 3. Invest in Rental Properties
- Pros and Cons of Investing in Rental Properties
- 4. Flipping Houses
- Pros and Cons of Flipping Houses
- Real Estate Investing Tips for Beginners
- The Final Word on Real Estate Investing for Beginners
- FAQs
Real Estate for Beginners: 4 Ways to Start Investing & Tips for Success
4 Ways to Start Investing in Real Estate
1. Buy REITs
Real estate investment trusts (REITs) own, operate, and finance commercial real estate. An REIT portfolio can hold specific types of commercial real estate, like apartment complexes, healthcare centers, office buildings, retail centers, hotels, etc. The focus of an REIT is income-generating real estate.
Until 1960 when Congress passed an amendment to the Cigar Excise Tax Extension, investing in commercial real estate was out of the question for your average, individual investor. But REITs allow average investors to start earning dividends from the profits of the company, and you can also sell your shares in the future as their value increases. Generally, REITs pay higher than average dividends, which is a major benefit, and you can reinvest your dividends for future growth.
Buying REITs allows you to invest in real estate and potentially reap the benefits without owning any physical property.
You can purchase publicly or non-publicly traded REITs. Publicly traded ones can be purchased through a brokerage, and they traded similarly to stocks. Non-publicly traded ones are a little less liquid and can be purchase through real estate crowdfunding sites (more on these in a second), like Fundrise.
One thing to consider about REITs is that the IRS doesn’t classify the dividends you earn on REITS to be “qualified dividends.” This is important because qualified dividends are taxed at a lower rate than ordinary income.
Pros and Cons of Buying REITs
Pros
- Very accessible: REITs are available through most major brokerages
- Affordable: You can purchase REITs for as little as $10 a share
- Higher than average dividends: REITs have historically paid out well
- Very passive: There’s little to no work for investors because you’re not responsible for managing properties or what’s in an REIT portfolio
Cons
- Liquidity: Non-publicly traded REITs are fairly illiquid
- Not hands-on: For real estate investors who want to get involved with their investments, REITs lack that involvement
- Dividend taxation: The dividends on REITs generally don’t meet the IRS definition of “qualified dividends,” which are taxed at a lower rate than ordinary income
2. Crowdfunded Real Estate
Crowdfunded real estate started as part of the JOBS (Jumpstart Our Business Startups) Act of 2012, which allows the public to fund private real estate projects. As a result, there is a growing number of crowdfunding real estate platforms like Fundrise, RealtyMogul, DiversifyFund, and CrowdStreet.
Developers list projects on these platforms, and individuals can browse through different projects and invest for as little as $500. Each platform has a vetting process to ensure the legitimacy of each project before investing.
Debt and equity investing are the two main types of real estate crowdfunding. Investing in debt may sound counterintuitive, but you earn some of the interest on a loan as it’s paid back. Equity investing is earning income on property as it turns profits.
Most crowdfunded sites require a multi-year commitment because they rely on investor money to fund and realize large-scale projects. Five years is about the average commitment, and you can pull your money out early, but you’ll pay a small penalty.
Invest in real estate with Fundrise
Fundrise lets you invest in eREITs for as little as $10, and with a larger initial investment you can browse projects and invest in them directly.
Pros and Cons of Crowdfunded Real Estate
Pros:
- Very accessible: REITs are available through most major brokerages
- Affordable: You can purchase REITs for as little as $10 a share
- Higher than average dividends: REITs have historically paid out well
- Very passive: There’s little to no work for investors because you’re not responsible for managing properties or what’s in an REIT portfolio
Cons:
- Liquidity: Non-publicly traded REITs are fairly illiquid
- Not hands-on: For real estate investors who want to get involved with their investments, REITs lack that involvement
- Dividend taxation: The dividends on REITs generally don’t meet the IRS definition of “qualified dividends,” which are taxed at a lower rate than ordinary income
3. Invest in Rental Properties
Another way to start investing in real estate is through rental properties. The benefits here are initial cash flow and long-term capital appreciation that you can use to boost your retirement.
Some investors purchase single-family or multi-family homes to rent them out, and there’s also the option of investing in a multi-family unit that you can live in while renting out the additional units. The latter strategy is something called house hacking, and as long as there are no more than four units in the property, you can qualify for a residential loan.
No matter which approach you take, it’s essential to find a property you can afford. Rental properties can be a great investment, but you’ll eventually have to pay to fix broken appliances or utilities. There’s also the risk of having an empty rental or a renter who’s unable to pay their rent.
You can hire a property manager to help manage your rental, and they can take a lot of stress out of finding renters, collecting rent, and managing repairs. Of course, it’s an additional expense, but many landlords use a property manager because it makes their investment more passive.
Pros and cons of investing in rental properties:
Pros and Cons of Investing in Rental Properties
Pros:
- Cash flow: Collecting rent every month can become a steady source of income
- Long-term equity: The value of your property man increase over time
- Somewhat passive: Using a property manager can turn this into a much more passive investment
Cons:
- Costly: Vacancies, repairs, damages, and property taxes can add up quickly
- Investor responsibility: If you don’t use a property manager, you will assume a number of responsibilities, from making repairs to collecting rents
4. Flipping Houses
I’m going to say that this probably is the most popular thing for newbie investors, and not because it’s the easiest, but because it’s what we see on HGTV. I know you’ve seen the shows where a couple buys a house, fixes it up, deals with some setbacks, and then still banks a ton of money all in one deal.
Before you jump on this type of real estate investing, it’s important to understand that there is a higher level of risk because you have to be very accurate in your estimates of cost vs. benefit.
Buying a house isn’t cheap either, even rundown ones, so there are some major factors you’ll want to consider before trying to flip houses, There’s the initial cost of the property, the time and cost of the work, deciding to hire out or DIY, your flipping timeline, etc.
The reality is that buying and flipping homes are considerably more difficult than it looks on TV. You’ll be better suited for this type of investment if you have experience doing renovations and rehabs. The cost of fixing up a house and how long it takes to sell your flip can lower your profits, especially if you’ve taken out a loan to purchase the property.
I’ve just explained a lot of the downsides because it’s important you understand them. However, flipping homes can turn into a solid investment if you are good at estimating the costs and know what you’re doing.
Pros and Cons of Flipping Houses
Pros:
- High-profit potential: This is a real estate investment that nets lump sum profit, and it can be significant if you’d estimated your costs correctly
- Short-term commitment: You may be able to flip a house in a few weeks to a few months, instead of it taking years to realize your profits
- Can be fun: For hands-on, DIY types, flipping houses can be very rewarding
Cons:
- Risky: Because there are so many factors to consider, this can be incredibly risky if you don’t anticipate costly or time-consuming repairs
- A lot of work: Most flips require more than cosmetic repairs
- Highly illiquid until sold: Your money is entirely tied up in the flip until you sell the property
Real Estate Investing Tips for Beginners
I’ve just explained several ways to start investing in real estate, and there’s serious and legitimate potential in all of them. To help you mitigate the risks and get the most out of your investment, below are some tips for getting into real estate.
Tip #1: Consider your finances first
People with a lot of student loan debt, high credit card debt, personal loans, etc. should focus on paying their debt down first. You’ll need a solid cash cushion if you’re thinking about investments like flipping or rental properties. It’s also important that you’ve established your retirement savings first. Real estate is too risky if you don’t have your own financial house in order first.
Tip #2: Location, location, location
Spend time researching the neighborhood or market your investing in, even if that’s through crowdfunded site or REITs. Look for places that are on the rise, not in decline even if the price looks good. If the investment is local to you, take time to visit the area so you can gauge what the market is really like.
Tip #3: Watch out for high-interest rates
Mortgage interest rates have been low since 2020, but you may see higher rates on investment properties. High rates mean a higher mortgage payment if you finance, and that’s tough on cash flow and makes it difficult to sustain a property that’s sitting unsold or vacant.
Tip #4: Take your time research real estate platforms
There are a lot of crowdfunding platforms out there, and there are real estate platforms popping up left and right for different facets of real estate investing. This gives investors lots of choices, but many of these companies are still very new and don’t have a proven track record. Fortunately, we got to see how crowdfunding sites like Fundrise would handle a market downturn in early 2020.
Tip #5: Accurately estimate costs
One of the nice things about REITs and crowdfunded real estate is that the costs are straightforward, but rental properties and flipping houses come with lots of unexpected costs. Never underestimate what those costs will be, and make sure you have a large enough cash cushion to protect yourself.
Tip #6: Set a realistic budget
A good estimate is the key to starting to invest in real estate, and it will help you budget accordingly. For example, you’ll be able to understand how much to save each month for a downpayment and how that will fit in with the rest of your expenses.
Tip #7: Draft a business plan
Investing in real estate is a business, even if you’re a beginner. Drafting a real estate business plan will help you determine you define your motivation, goals, and outline the steps you need to take to accomplish them.
Tip #8: Read as much as possible
You can’t read a couple of blog posts and know everything there is to learn about real estate investing for beginners. There’s just too much information out there. Here’s a list of recommendations for real estate investing books so you can grab a few and learn more.
The Final Word on Real Estate Investing for Beginners
Before anything else, think about your financial goals and how investing in real estate will help you achieve them.
Real estate investors make money in a few different ways, so the type of investing you do may affect your ability to reach your financial goals. That being said, here are a few questions you’ll want to ask yourself:
- Are you looking for a passive real estate investment?
- Are you trying to increase your income monthly income?
- Are you looking for an investment property, as in something that you might want to sell later on to fuel your retirement?
- Is real estate investing part of a potential business venture?
Buying REITs and crowdfunding is one of the easiest ways for beginners to get started. It’s passive, and you don’t need a large initial investment, especially if you go with Fundrise because you can start investing for as little as $10.
But if you want to get more hands-on and have the finances to take on a larger initial investment, purchasing an investment property to rent out can increase your cash flow and provide long-term gains.
The point is, consider your goals and current budget to make the best investment choice for you.
FAQs
Yes, you can actually start investing in real estate with $5,000 or less. Investing in real estate doesn’t always mean buying an investment property; you can also invest in REITs for far less.
With as little as $10 you can invest in real estate through a platform like Fundrise
Nice post. I’ve started with Reits ETF and now I am looking to got with REITs. Liquidity is something I want and doesn’t want to manage propertie on my own so REiTs are good for that but you can’t use the leverage you have with mortgage and property.
Great summary. I invested in real estate and it funds my retirement today. It took about 12 years before my real estate profits could support my lifestyle as a physician. You speak of needing a bank, but of the 5 apartment complexes I purchase, I only used a bank on one of them. I think it is the best investment available. It’s correct for you to leave out REITs in this discussion as they are not really real estate investing. REITs are stock market investing in the particular sector of real estate. The two should not be confused. They both track the same market, but they are not the same investment and they do not have similar returns. REITs are helping someone else be a real estate investor with your money and in return they will share some of the profits with you. You should be the real estate investor yourself and keep all the profits and tax advantages. I’m going to list this article on my Fawcett’s Favorites on Monday’s blog post. Thanks for providing good information.
Dr. Cory S. Fawcett
Prescription for Financial Success
Nice summary. My wife and I have also been talking a lot about this as of late.
We currently invest quite a bit into REITs now as a way to dip our toes in it.
We are currently in the same dilemma about wanting to be a landlord or not. Guess we will see.
-Chris
Hi Bobby, I am looking to invest in property and since its my first time I started looking for tips. I am glad I came across this resourceful article as it will definitely help me out in my home buying process. Thanks for sharing some great tips!!