August 10, 2023

Revving Up for Real Estate Investing

Theresa Popp Braun, Ed.D, AFC®, CEPF®, National Director – Center for Education and Financial Capability, Regional Director – Midwest
Financial Education

You’ve set your sights on building wealth by investing in real estate. After all, Andrew Carnegie famously said, “Ninety percent of all millionaires become so through owning real estate.”

So, where to begin? There are multiple ways to invest in real estate. Your approach will depend on whether you want to be actively involved with your real estate investments or receive passive income from them, the level of risk you want to assume, amount of money you have available to invest, and your needs regarding liquidity (ease of converting your investment to cash).

Active Real Estate Investing

When you think about active real estate investing, think about owning rental properties, flipping houses, and house hacking.

Rental properties can include single-family houses, multi-family units, condominiums, duplexes, apartment buildings, warehouses, and business properties. You purchase the property and rent it to tenants, and they pay you rental income. If you really want an active experience, you can manage the property (and tenants) yourself. Alternatively, you can hire a property manager or management company to oversee daily operations.

When you flip a house, you make money by either buying low and selling high or buying a run-down/distressed property, fixing it up, and then selling it for a profit. In either case, it’s usually a relatively short-term commitment (less than a year). This type of real estate investing works best if you can do the “fixing up” yourself so you make more profit.

House hackers rent out part of their primary residence while living there themselves. The rent collected helps cover expenses associated with the property while equity builds in the property.

Passive Real Estate Investing

The most common passive real estate investing strategies include Real Estate Investment Trusts (REITs), syndication, and crowdfunding.

REITs own, operate, or finance various types of real estate that generate income and are a super easy way to invest in real estate, especially for beginners. Because many REITs are publicly traded on stock exchanges and individual shares are generally priced at less than $100, they are highly accessible to individual investors. REITs pay dividends (usually quarterly) on the shares you own, and you can also make money from your investment by selling your shares at a higher price than what you paid for them.

In real estate syndication (real estate partnership), private individuals or entities pool their money and a real estate syndicate or sponsor utilizes the money to acquire one or more properties. The private investors have no voting rights and usually receive tax benefits. Properties may also produce cash flow and increase in value over time, both of which are passed on to the investors.

Real estate crowdfunding is a relatively new opportunity in the real estate investing space and occurs through platforms. The platforms vet buyers who are looking for loans and the projects they want to fund. Normally, you’ll be investing in a single project and minimum investments run in the range of $1,000-$5,000. You make money by investing in the mortgage loan and receiving a share of the interest as it is repaid, or you invest in a property and receive some share of ownership. Then you receive a portion of whatever income the property generates or profits from the sale.

Real estate investing is a vast landscape and can put you on the path to building wealth over time. However, like all investing, it’s important to begin your journey by learning about this sector before jumping in, and you’ve just made a great start!

Next Step: Schedule free 30-minute calls with Accredited Financial Counselors from AccessLex Institute through AccessConnex to talk about financial considerations when it comes to owning or investing in real estate.