Even though the COVID-19 pandemic has put a damper on the economy as a whole, the real estate market continues to be strong thanks to record-low mortgage interest rates, pending home sales were more than 6% higher in June than a year earlier, according to the National Association of Realtors. Existing home sales have rebounded quickly, and new home sales are expected to be higher this year than in 2019.
A booming real estate industry may peak the interest of both seasoned and amateur investors. Whether you want to dip your toes or go all in, here are some ways to get started.
5 different ways to invest in real estate
Consider a rental property
Perhaps the most classic way to invest in real estate is to buy a home and rent it out. There are more than 22 million rental properties in the United States, and the vast majority are owned by individual investors. The federal Department of Housing and Urban Development estimates that there are between 10 million or 11 million individual investors managing an average of two rental properties each, though many own only one.
But you don’t have to buy a new home to get involved. With the rise of platforms like AirBNB, you can even start with just renting a room in your own home instead of an entire property. AirBNB hosts, as the company refers to them, have earned a total of $80 billion on the platform.
There’s also a strategy known as “house hacking.” If you decide to live in the home you rent out — buying a duplex, triplex or quadruplex and living in one of the units, for example — you could be eligible for the same home mortgages that you would qualify for on a traditional single-family home. That includes options like FHA loans, which allow down payments as low as 3.5% and lower credit scores to qualify.
Opt for a REIT
You don’t have to own a home to invest in real estate. Investing in a Real Estate Investment Trust, commonly known as a REIT, gives you the ability to make money on real estate without the burden of caring for a property.
Wondering how this works? Like stocks, REITs can be publicly traded, or they can be privately sold through financial advisors. And like stocks, you buy a share in the REIT. The trust then buys rental properties and investors then get a share in the return. REIT investors earned a total of nearly $190 billion in dividend and interest income in 2018, according to the National Association of Real Estate Investment Trusts.
Start online
The internet has unlocked a plethora of new ways to invest in real estate. A notable recent development is crowdfunded investments, where people put out an open call to raise money for a project. Developers may use crowdfunded real estate investments to raise money from a variety of different people to build a project. The investors then receive a share in the profit.
This type of real estate investment remains small but is rapidly growing. In 2016, the crowdfunded real estate investment market amounted to roughly $4 billion, according to a report from accounting firm EY. This market is expected to grow to $9 billion by 2021, the firm predicts.
Be careful, though. There are limits on how much and how often you can invest in crowdfunded securities. The Federal Trade Commission also warns that crowdfunding campaigns can be subject to scams — taking your money without delivering results. Take care to invest in companies with a solid track record.
Look into real estate investment groups
Real estate investment clubs are often based in a particular city or state, and members pool their money to invest in buying or renting properties. Decisions are often made by a majority vote of the members of the club. These groups are typically not regulated by the Securities and Exchange Commission, and can be subject to fraud or scams as well, so use caution if you decide to get involved.
Flip houses
Flipping a house involves buying a property, renovating or otherwise fixing it up, then quickly selling it at a higher price. More than 50,000 homes were flipped in the first quarter of 2020, according to real estate industry data firm ATTOM Data Solutions, making up about 7.5% of home sales.
These home flippers bought properties for a median price of $169,700, and sold them for a median of $232,000 — leaving a gross profit of $62,300.
However, it takes a sophisticated business plan to make flipping work. The cost to repair a home can run between 20% and 33% of the after-repair value of the home, eating into your profit margin.
When you sell a flipped house, your buyer will likely be required to get a second appraisal that includes an inspection of the inside of the home. That is to help combat illegal flipping schemes where people try to sell a home at an artificially higher price without making improvements.
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