4 Ways to Invest in Real Estate

real estate investingYou love investing and at this point nearly all of your money is in the stock market. You know it’s important to diversify but aren’t sure if real estate investing is right for you.

While real estate investing certainly isn’t for everyone it can be very lucrative. If you’re wanting to expand your investment horizons here are 4 different ways you can invest in real estate.


Rental Houses

Purchasing homes and renting them out is a great way to produce extra monthly cash flow.

To do this you have to purchase a house that has a combined monthly mortgage payment, home insurance payment, and property tax payment lower than the rent the property commands.

The downside of owning rental properties is dealing with tenants. You’ll need to screen renters before letting them move in. You’re also bound to hear sob stories at one point or another so you’ll have to learn to be firm with renters. If you’re the type to easily give in to people you may be better off letting a property management service oversee your rental properties.

Depending on who you talk to rental properties can be very lucrative. And, if you do the upfront work of finding those hidden gems you can let a property management service do the rest and rental properties can be a form of semi passive income.


Flipping Houses

Flipping homes can be a bit risky but also extremely rewarding. And, since property values are back on the rise this is a good time to get started flipping homes. Flipping a house is the sum of purchasing homes under market value, fixing them up, and then selling for a profit.

To be a successful flipper you need to hunt down those bargain homes – the less work you have to do the better. The ideal flip home would be one that only needs minor cosmetic repairs. You could then make the home look more aesthetically appealing and sell for profit.

When you decide to flip homes you have to prepare yourself for the possibility that the home may not sell fast – or for much of a profit. You take a big chance when flipping homes which is why you have to pay special attention to the homes location, needs, and price. However, if you have the knack for flipping houses you could find this to be one of the best investments you’ve ever made.


Rent a Portion of Your House

If you aren’t sold on the thought of purchasing a home only to recoup your money little by little, you could first test the waters by renting a portion of your house. You have a couple of options to do this.

First you could rent a spare room in your home or you could rent the basement. If you’re yet to purchase your first home and like this idea you could even buy a duplex and live in one apartment and rent the next.

The advantages to renting a portion of your house is that you get to watch your tenant closely. It’s less likely that a tenant will try to stiff you for the rent payment when you’re in the same household. Renting a portion of your house also gives you the ability to get a feel for what it’s like to be a landlord without making such a huge monetary investment.

Our friend Michelle recently wrote about renting a room to a stranger, which is a great read if you’re considering this option.


Real Estate Investment Trusts (REIT)

If you think real estate is a great investment but don’t want to get quite so hands on you could take your real estate investing to the stock market.

Real Estate Investment Trusts (REIT) are great ways for you to invest in real estate without being actively involved. An REIT is a fund that is setup to invest in mortgage instruments, bonds, and stocks in the real estate niche.

There are a few different types of REITS; equity, mortgages, and hybrid. An equity REIT invests in properties, a mortgage REIT invests in mortgages, and a hybrid is the mixture of the two. All three typically offer high yields.

If you’re strapped for time investing in REITs is probably the way to go.

Some of the more popular REITs include American Capital Agency (NASDAQ: AGNC), Annaly (NYSE: NLY), Realty Income (NYSE: O).


What Do You Think?

These days you can invest in just about anything and you should do what feels right for you. Personally, I love real estate, but I know not everyone else does.

If you have been thinking about trying your hand at real estate investing it’s good to know that there’s more than one way to go about it. Nevertheless it’s important to do your due diligence before beginning with any new investment.

If you were to invest in real estate which route would you go?

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  1. Todd says

    Nly and Agnc aren’t a way to invest in real estate. They are complicated and risky financial plays based on leveraging mortgage backed securities.

  2. says

    I would probably start with renting out a portion of my home first before I moved on to purchasing a rental property. I would think it would be easier to understand the landlord issues and obligations better than jumping in to owning a property.

  3. says

    Rental property is great for building cash flow. Just be careful and make sure the monthly rent is enough to cover more than just PITI (principal, interest, taxes, and insurance). You still have to set aside funds for vacancy, maintenance, capex, property management, etc.

    A good rule-of-thumb is the 50% rule. Take the gross rent and divide that in half. That’s you rough monthly expenses. Take the remaining balance and subtract the mortgage payment. What you have left over is your net cash flow each month. It’s a conservative rule, but if the numbers work even after that, you’re good to go. Again, it’s a quick and dirty rule, but it works most of the time.

    • says

      Thanks for the tip. That’s a really great idea and I’d rather be safe than sorry. I am actually thinking of purchasing a home to flip and if that doesn’t work out, rent. I’ll keep the 50 percent rule in mind!

  4. says

    I plan on getting into house flipping and investment properties. I’m really fascinated by real estate and imcurrently doing whole real estate which involves putting houses under contract for cash buyers. It’s just a way for me to build capital to start purchasing my own properties.

  5. says

    These are great strategies. When I graduated high school I thought controlling rental property was the only lucrative way to wealth, but I didn’t understand all the strings that were possibly attached to it. The classes I took made it see so easy! Now, I am totally open to other ways of real estate investing. Here are some experiences to hopefully help people avoid mistakes I made:

    1. I made my first real estate investment in an office condominium. My first renter probably was the worst renter I could have selected. He paid top rent, but he was also high risk because he had very bad credit. But, I needed the money because I had very little reserves to cover vacancy after I purchased it. Needless to say, after 3 years of chasing money I let him go. I negotiated with him for 1 month to move out, so I wouldn’t have to get lawyers involved. I took the rental loss, but in the end it was less expensive than an Unlawful Detainer.

    2. Negotiate the loan to make sure that you can cover vacancy and expenses if you run out of reserves. Make sure to have reserves. Do not have a balloon on the mortgage unless you know FOR A FACT that you can pay off the mortgage. The financing terms put me in a bad position because it came to a point where I had no cash flow and ran out of reserves. My mortgage was also due (balloon), so I had to refinance. Luckily, I got a bail out. If i didn’t…I would have had done a Deed in Lieu of Foreclosure.

    3. Cash Flow is key. I took real estate investment classes that really encouraged leverage and saw cashflow as moot because during the boom it was all about equity. While leverage can be great, leverage also hurt many people during the real estate bust. After the bubble and my personal experience, I’ve made a commitment to insure that my future real estate investments will cash flow even if it means I have to put more money down.

    I’m still learning, and I will most likely make more mistakes. But after speaking with many different real estate investors and learning about their horror stories, their experiences have definitely given me a different perspective on owning rental properties.

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