5 Simple Ways to Invest in Real Estate

Hey everyone. So in this article, we are going over five great ways you can start making money in real estate right now. So I'm a real estate broker and I've been in the industry for five years, so I'll share my perspective on how anyone can begin investing in real estate, which is by far one of the best asset classes that exist.

The Federal National Mortgage Association predicts that home prices will rise 10.8% in 2022. Well, that being said, we can never really predict the future of the housing market. But we can see that historically real estate has been a very strong investment. 

#1.Buying A Primary Residence

So the first way that you guys can actually invest in real estate is just simply buying a primary residence and allowing it to appreciate nationally, the median single-family existing home price rose in the first quarter of 2022. With 70% of the markets showing double-digit home price appreciation, a lot of people are owning where they live and the US homeownership rate surged from 1.3% to 65.5%.

In 2022, which actually was the highest annual rise ever. On average homeowners have a 40x higher net worth than renters due to being more financially responsible by owning a home and of course making money through appreciation and home equity. Now, I will say that relying on appreciation alone is not the best because appreciation is never guaranteed. 

However, there are resources we can study to help us pick areas that are going up in value. I recommend using city dash data.com and keeping an eye out for historical price trends, population trends, income growth, as well as crime data. Of course, choosing a place to live is largely personal, but you can also do things like choosing the worst home in the best area. 

This allows you to bring in some sweat equity by doing some cosmetic fixes, which should increase the home's price significantly more than whatever the upgrade cost was. 

This is exactly what I did back in 2017 when they bought a pretty gross fixer-upper apartment in a really nice area. And that increased the price of the condo significantly. This is a technique that a lot of people do to make money with real estate. 

House Hacking

From there, you can actually lower your living costs by renting out an extra bedroom or two to tenants. This is called House hacking. And it's a great way to save on your mortgage and make owning a home much more affordable. 

I actually rented out the other bedroom for about $1,500 a month which cut the cost of the mortgage down by almost half. It is a trade-off between full privacy and keeping your wallet happy. But I'd say that for most people, it's well worth it. As you pay down your home part of the payment is going towards interest and part is going towards your own equity in the home. 

Yeah, think of it as a savings account that you'll recoup if you sell or if you do a cash-out refinance or home equity line of credit plus the fact that appreciation is hopefully increasing the value of your home.

Leveraged Gains

This means that you're seeing leverage gains. Here's the math, let's say you buy a home for $500,000. And you put 20% down or $100,000. So your total investment is $100,000. 

Right now, let's say the home value goes up by 3%. In one year, your house is now worth $515,000, meaning you essentially made the 10k. But the cool part is that you made that 15k By only investing 100k, meaning we have a 5x leverage or a 15% return on your cash that is super solid. 

And it doesn't even take into account any rent you're charging or the equity that you're building by paying off your mortgage. So overall, owning a home is a great way for most of you to begin leveraging your money and investing in real estate somewhat passively. 

Diversifying Your Portfolio

If you guys are investing in real estate, or you're looking for a way to diversify your portfolio away from the stock market. And if you're still cautious about getting to real estate or you don't have the ability, I'm gonna tell you about an amazing opportunity that checks all of the same boxes and more. 

In fact, I'm doing it myself and I'm talking about investing in art. It sounds strange but think about art as a physical asset that appreciates in value over time and can yield fantastic returns and hedge against inflation. 

How to Invest in Real Estate: 5 Ways to Get Started

In fact, contemporary art kind of shows you how to invest in price appreciation that's outpaced the s&p 500 For the past 26 years by saying 164% No wonder 85% of wealth managers recommend art as part of a wealth offering according to Deloitte. And look at the price appreciation when inflation is high, a whopping 23% Beating gold and the s&p.

Masterworks

Now the question is how do I get into this market? Well, I'll tell you how I'm doing it? is Masterworks. They're the premier platform for investing in art from names like Picasso, Banksy, and other iconic artists for just a fraction of what billionaires pay to purchase. 

Once they buy a painting. It's securitized with the SEC bringing it into shares, then members choose the amount they want to invest making it an affordable way to diversify with art, and all three paintings that they've sold so far after offering have returned over 30% to investors net of fees past performance is not a guarantee of future results. 

But still, I think that's an amazing track record and it makes sense why masterworks are already valued at a billion dollars. A bonafide startup unicorn. I don't think opportunities like this come along often so I am really glad to be a part of it. 

#2. Buying Investment Properties

So another very popular way to invest in real estate is by buying investment properties and renting them to long-term tenants or doing short-term rentals on Airbnb. The average Airbnb host in North America made $41,026 In host earnings on Airbnb in 2021. Since 2017, National rent prices have increased from $1,037 to $1,326. Most states are up 10 to 15%.

In rents since quarter, one of 2020 and 34% of landlords have no college education, and 44% are between 18 to 34 years old. I suggest finding the area you want to invest in and you can do the same steps I talked about above with city dash data.com, which will help you pick a spot next you're going to want to work with a lender and real estate agent in the area who specializes in investment properties. 

If you're buying out of state this is super important since you likely won't be there in person for all the showings and inspections. And they can even help you with the cash flow projections. 

The 1% rule

Typically, you'll want to stick with the 1% rule, which says the monthly rent should be no less than 1% of the total purchase price. Meaning if you buy a place for $100,000, the rent should be at least $1,000 monthly. Yeah, the reason why this type of investing is so great is that it can actually be pretty passive meaning if you hire a property manager.

You won't likely have to do too much to maintain that income from your tenants. And if you want to do Airbnb, well, this can be pretty hands-on at first as you get the property renovated, furnished, and processes set up. 

BRRR Strategy

But with the proper management team in place, it can also be quite passive, and an even more, lucrative strategy that a lot of real estate investors do is called the BRRR, buy rehab rent out, and then refinance. Essentially you're buying undervalued properties, doing renovations to increase the price renting them out, and then doing a cash-out refinance.

If you do this correctly, you shouldn't be able to pull out all or most of the money you originally put in meaning you may have a cash-flowing property without any of your own money still tied up. People like fashion talk about this method all the time, and it's become extremely popular in recent years. 

Overall, there are tons of other benefits to investing in investment properties besides just making money especially when it comes to the taxes the government really encourages us to keep our money in real estate giving us 1031 exchanges step a basis of cost segregation, depreciation, and a ton of other tax incentives that make owning real estate very, very good. If you want to pay less taxes, I'd recommend learning as much about it as you can, it makes real estate investing that much sweeter. 

#3. Buying A Home With Sweet Equity

The third is buying a home that allows you to add sweat equity, fixing them up, and then selling for a profit. This option is by far the most hands-on because it requires a lot of technical expertise and time. on your end, you've likely seen this done in shows like Property Brothers and Flip or Flop. 

generally, a rehab costs about 10% of the purchase price of the house 58.3% of home flips were purchased with cash, and 5.9% of all home sales in 2020. We're flip homes, you can definitely make a living off of flipping houses as homes flipped in 2021 typically generate a gross profit of 65k nationwide. 

So here's the process, you begin by identifying undervalued homes that are for sale or reaching out to sellers of distressed-looking homes asking if you can buy their house. Now, this is easier said than done. But basically, the real money is made when you buy the property. 

Why because if you buy a property for more than it's worth, then you likely won't make a profit when you sell after that you need to renovate the property. And you can do this with a general contractor who brings his teams and makes the whole process a lot easier. 

Or you can actually manage the renovation yourself by hiring multiple subcontractors, for example, someone to paint someone to do the kitchen floors, all that stuff. This is much harder. But you do save a good chunk of change. After that, you sell the property. And if done correctly, you just put in a lot of sweat equity and you'll see a sizable profit. 

The Risks

It's one of the more risky ways to invest in real estate as a lot of it is out of your control and cleaning the markets, unforeseen repairs, and a lot more. It's a super cool way to start making cash flow by actively investing and flipping properties. I know a lot of people who absolutely crushed their flips.

And I do really believe it is a skill that can be learned by anyone, a lot of investors will actually pair this flipping strategy with the burr method meaning on a case-by-case basis, they'll see if it makes more sense to flip the property for an instant payout or to hold on to it refinance and then just rent it out.

What is the best way to invest in real estate?

I will say the taxes on flips are likely going to count as short-term capital gains meaning you'll be taxed at ordinary income rates, which is very high for a lot of people. So that's why sometimes people will really just like to build a portfolio of investment properties and continually temporary when it's changing them into bigger and bigger properties. 

This helps avoid any capital gains tax and they'll just keep doing this until they die when as right now their heirs will get the property at the step up and basis. That means they aren't paying any taxes at all. 

#4. Real Estate Investment Trusts

Alright, so next up are REITs and the stands for real estate investment trusts. They allow you to invest in companies that invest in real estate assets. So essentially you get to invest in their portfolio and as a result, you don't need to buy a property yourself .

Historical Performance

a three-year out for REITs between November 2017 and November 2020 was 11.25%, which actually outperformed both the s&p 500 and the Russell 2000. REITs are required to pay out 90% of taxable income to shareholders, meaning their designs are usually higher than the average stock on the s&p 500. Only problem is this is taxed at your ordinary income level REITs have outpaced the s&p five hundreds total returns since they started tracking it in 1972. 

And the Self Storage REITs subgroup actually performed the best at a 16.7% average annual total return from 1994 to 2019. REITs are a super popular way to get into real estate without having to deal with buying a property yourself. And as a result, lots of people prefer a more passive approach to real estate like this route. 

So there are five different ways to invest in REITs private REITs which mean you need to be an accredited investor non traded REITs publicly traded REIT funds and read preferred stock I say read simply doesn't perform too well with rising interest rates as it makes borrowing more expensive and REITs are highly leveraged because well, they invest in real estate with financing.

So invest with care during these shaky times when we really don't know where the real estate market is headed. In fact, if you guys are investing in any s&p 500 index fund real estate is about 3% of the s&p 500. 

So you're technically already investing although you may want to buy an actual REIT if you want more exposure to real estate, there are tons of places online where you can look up analyses of different rates. So I suggest you do your own due diligence before investing. But overall, REITs are a great way to passively invest in real estate. 

#5. Real Estate Crowdfunding Platforms

Number five is real estate crowdfunding platforms. And some of the more popular ones are Fundraise crowd street, yield street, and more. Crowdfunding platforms like these are similar to REITs because they're both passive ways to invest. However, I will say that crowdfunding uses capital raised from a large pool of investors who use that to buy in this case, real estate.

A huge plus of crowdfunding is that you don't need to be an accredited investor for many of the platforms meaning the barrier of entry into private real estate is super low and accessible to most people compared to the other methods. I'll also say that while real estate crowdfunding has been shown to be less volatile than the broader stock market.

One potential disadvantage is that there are fees, right, like the developer of the platform needs to make a profit as well. And that tends to cut into the investor's profits, your investment also can't be sold off quickly. And you'll be taxed on any dividends that you receive.

Is it For You?

Overall, if you want a pretty safe way to diversify your portfolio with real estate, but you don't want to go through the hassle of actually fixing and maintaining property and crowdfunding platforms are a great choice to be able to invest without needing a lot of money. Of course, seeing that you don't need to invest too much.

It also allows you to have ownership in much larger properties than you normally would have access to and different sectors and locations to. If you guys want to invest in commercial real estate, but you don't have the funds too well, this is a great way that you can actually put your money into a crowdfunding platform and have that money invested directly into a ton of different types of real estate. 

The risks with ownership are also split between multiple investors and they also take care of all the logistics on their end. So it's a lot lot easier for you. Those are five different ways that you guys can get started investing in real estate today. Overall, I have very high conviction on the overall growth of real estate into the long term. And that's why I think it's one of the best asset classes to invest in for almost anyone.