Real-estate investing offers a way to earn money while building for your financial future—but it’s also an easy way to lose your shirt if you’re not careful.
If you do your research and commit to tried-and-true systems, you can make your money back and then some.
That’s why we want to go through 8 ways you can make money by investing in real estate. They’re all different, and we certainly don’t suggest you try all 8 methods. But this is a great launching point if you’re just starting out.
How to invest in real estate in 8 ways
Here are the 8 ways you can invest in real estate. The method you choose ultimately depends on your financial situation and what you hope to achieve.
- #1: Real-estate Investment Trust (REIT)
- #2: Rental Property
- #3: House-hacking
- #4: Flipping Property
- #5: Short Term Room Rentals
- #6: Real Estate Funds
- #7: Online Real Estate Investing
- #8: Private Equity Funds
We’ll also break down the four myths of real estate investing. Let’s get started.
#1: Real-estate investment trust (REIT)
If you’re looking for a way to invest in real estate that’s lower risk than buying investment property, this is the method for you.
Real estate investment trusts, or REIT, act like mutual funds for real estate. Think of them like a basket. In the basket are different properties you can invest in. Instead of investing in individual ones, you invest in the entire basket along with other investors. REITs are typically managed by a company (i.e. a trust).
Your investment goes towards buying and developing the properties to turn into eventual profit. Investors get paid dividends with REITs like a normal fund.
REITs are typically managed by a company (i.e. a trust). They also come in a variety of different forms. You can invest in REITs that focus on healthcare buildings like hospitals or retail buildings like shopping malls.
Overall, REITs are a great place to start if you’re looking to get your toes wet in real estate investing. Not only do you not have to worry about paying enormous amounts for a property, but you get started today with a broker. They are an excellent and low-risk way to diversify your portfolio into real-estate. And you never have to think about it just like a normal index fund.
For more, check out our article on mutual funds to learn how to start investing with a broker today.
#2: Rental property
Admit it: You’ve flirted with the idea of buying a single-family home and renting it out for passive income.
If you’re careful about the property you buy and the person you rent it to, it can be a great way to make some money while you pay off the mortgage for the property. And as rent prices rise each year, your mortgage will remain relatively fixed—increasing your earnings as a result.
However, you need to keep in mind the phantom costs of purchasing a home. These are the unseen but consequential costs such as regular maintenance and repairs that many would-be homeowners don’t consider when they first purchase a house.
And since you’ll be the landlord of the property, you’re on the hook for any issues that might arise when your tenet calls you at 3am complaining about a burst pipe.
Also, many folks assume that landlords can set any rent they want. That’s not true. They can only set rent at a price that the market will support. If the local economy begins to struggle, you could be forced to rent the property at a rate that’s less than your mortgage. You’d start losing money every month, which can seriously hurt your cash flow.
If you’re willing to put in the work to be a good landlord, here is our article on how to buy a house.
House-hacking sounds like you’re trying to access the mainframe of your house in a cheesy hacking montage.
But it’s actually a lucrative way to make money in real estate.
Here’s how house-hacking works: You purchase a multi-flat building. Then you live in one unit while you rent out the other ones. This allows you to generate money via rent while you cut down on your own expenses by living on the property.
This is similar to purchasing rental property. But instead of being on the hook for maintenance and repairs for one property, you’ll be responsible for all of your units. This can be a big drawback for those looking to get involved in house-hacking.
However, if you have the funds to hire repair people or property managers (or if you just want to do it yourself), house-hacking could be a great way to make some cash in real estate.
#4: Flipping property
Flipping houses seem straightforward: Buy a house, renovate it, and then sell it for more than you bought it for—and more than it cost to renovate it.
However, would-be house flippers should know that this is one of the most time, money, and energy consuming ways to make money in real estate. Not only do you need the money to purchase a property, but you also need to put in the sweat equity to renovate a house.
Some of the best advice I’ve been given is to only consider flipping if I had a network of trusted contractors that I could rely on. Otherwise, it’s really easy for costs to get out of hand.
And even when you renovate a house, it’s not guaranteed that it’ll sell any better than before. Factors such as the real estate market, the economy, and the location play a massive role as well.
That said, it still has the potential to give you massive profits if you play your cards right.
#5: Short-term room rentals
Much like house-hacking, this method involves you renting out property you already live on. However, there’s a slight difference to this one: You don’t even have to own the property in order to rent it out.
With the advent of websites like Airbnb and even Craigslist, you can rent out different rooms in your house or apartment for cash.
And with the combination of the right listing and the right location, you can make a good amount of money from those sites—like this enterprising I Will Teach reader:
For more on how to get started with Airbnb, here’s the official how to article from the company itself.
#6: Real-estate funds
These act like REITs where you invest in a mutual fund with other investors in companies that actively manage different properties for you. The difference is that real-estate investment funds also include direct investments into real estate properties.
REITs act much like stocks and other equities, whereas real-estate funds are like your typical mutual funds.
“Real-estate funds generally increase in value through appreciation and generally do not provide short-term income to investors as do REITs,” explains Stuart Michelson, a finance professor for Stetson University. “Real estate funds gain value mostly through an increase in value of the assets.”
You should expect higher fees than a standard REIT.
#7: Online real-estate investing
This method relies on web platforms such as Fundrise to get your investment done for you.
These platforms allow real-estate managers to connect with potential real-estate investors to help fund the purchase or investment of different properties.
Think of it like Kickstarter for real estate. But instead of a dumb cooler that will never get delivered to you, you can receive returns like a typical stock or bond investment.
And with a web platform, it can be a much more intuitive experience.
If you’re interested, here are a few online real-estate investing platforms you can use to get started:
#8: Private equity funds
Much like mutual funds, private equity funds pool the money of different investors together in order to invest in property. Unlike an REIT or real-estate trust, though, these funds are typically only available to accredited investors who have a lot of money on hand to start investing.
To start, you need at least $100,000 to begin investing. That number can easily start to get in the seven-figure range depending on the fund.
As such it’s not as accessible to the layman as many of the other options on this list. However, it’s still worth noting just in case that applies to you.
4 real estate investing myths
I’ll be honest though: I think many people who invest in real estate are making a bad investment. It’s only exacerbated by all of the BS out there about owning a house.
Think about it. We’ve all thought about buying a four-bedroom house and a white picket fence on our own slice of the American Dream™.
What many don’t realize, though, is that investing in the four-bedroom house can quickly turn into the biggest money and time sink of their lives. In fact, buying a house is just another one of those invisible scripts that we blindly follow without giving it a second thought.
Invisible scripts are those guiding beliefs that are so deeply embedded in our day-to-day lives that we don’t even realize they’re there.
We’ve all heard them before:
- You need to make sure you get a college degree
- After you graduate, you need to get married
- After you get married, you need to have kids
And buying a house is one of those scripts — despite the fact that it’s one of the biggest, life-altering decisions you can make.
In fact, I receive emails every day from people saying, “I have a horrible financial problem. Plz help!” and 40% of the time, it’s directly related to their mortgages.
In chapter 9 of my New York Times best-selling book, I’m hyper-critical of people buying real estate because they think it’s a “good investment” or because they think they’re “throwing money away on rent.”
Those myths — and many others — are just that. Myths. And they’ve been so detrimental to many people’s financial situations that I feel like I need to dispel some of them today.
Here are the four myths of real estate you need to know before you even think about buying a house.
Real estate investing myth #1: “Purchasing real estate is a great investment”
One thing I always hear from people who are about to buy a house is, “Buying real estate is an investment! One day this house is going to be worth WAY more than it is now.”
Look, I get it. We’re always hearing stories from old farts who bought their homes way back in the Truman administration for just $30,000 and now it’s worth $450,000 or whatever.
When the truth is the people who say things like this don’t account for the invisible factors like inflation and maintenance.
Yale economist and Nobel Laureate Robert Shiller reported that from 1890 to 1990, the return on residential real estate was just about ZERO after inflation.
Realtors and homeowners are going to flood my inbox with hate mail for saying this, but real estate is the most overrated investment in America. Even Warren Buffett, one of the world’s wealthiest men, points out that houses don’t necessarily increase in value. By the way, he’s still living in the same five-bedroom house he bought in Omaha, Nebraska, back in 1958.
James Altucher wrote about why entrepreneurs shouldn’t buy a home, and he suggests the following:
“Take 1/20th of the down payment amount. Start a business.
Your investment might go to zero (which it might also do with a house) but it might also go up to 10,000% returns.
Eventually, as an entrepreneur, if you are persistent enough, you will get one of those 10,000% returns. And you will be persistent because you didn’t waste all the money and time that a house would’ve cost you.”
Real estate investing myth #2: “I’m throwing away my money if I keep renting!”
A reader once told me, “Ramit, I pay $1,000/month renting my apartment, so I definitely can afford $1,000 a month on a mortgage and build equity!”
So I asked her, “Well, how nice is your apartment?”
She admitted that the hardwood floors were old and the kitchen was very outdated.
“So will you want a house like that,” I asked, “or will you want a nicer place — one with recessed ceilings, newer appliances, and a balcony large enough for entertaining?”
She looked at me as if I were an idiot. “Of course I want a nicer house.”
“Okay,” I replied. “But that will cost more than your current rent, right?”
When I said that, a lightbulb went off in her head. She hadn’t even considered that.
Chances are people who want to buy a house haven’t either. Of course, you’ll want a nicer house than the apartment you’re currently renting — ESPECIALLY if you’re committing yourself to a long-term investment like a mortgage. But that means your monthly payment will be higher.
Of course, that seems pretty obvious — but it’s only the beginning.
What many people often ignore when they say that they don’t want to throw money away on renting are the Phantom Costs.
Phantom Costs are things like:
- Property taxes
- Utilities (e.g., internet, electricity, gas, water, etc.)
- Home maintenance fees
- Toilet drains breaking randomly at 2 am forcing you to awkwardly ask your neighbor if you can use their bathroom before you spend a few hours Googling “24-hour plumbers”
These costs will add hundreds per month to your living expenses.
After all, you’re not just paying the mortgage each month. You’re also paying for the oven if it breaks down, or the hot water heater if it isn’t working, or that cockroach problem you inherited from the previous owner.
When you rent, you can just call your landlord if any of those things happen, and he or she foots the bill.
(By the way, the common response here is: “Landlords factor all of that into your rent. They wouldn’t rent out their place if they couldn’t make a profit!” This is incorrect. Landlords don’t charge what their cost is + a profit. Landlords charge what the market will bear. Some make a profit, but many of them are losing money each month.)
When you own, though, you have to fix those things or call someone else to fix them for you. And of course, that comes out of your own pocket.
Sure, the plumber here and the exterminator there doesn’t sound that bad … but imagine that in the course of owning a house, your roof breaks. All of a sudden, that’s $25,000 you need to invest in repairs.
So even if you have a mortgage that is the same as your rent — let’s say $1,000 — you still need to add 40-50% to that monthly amount to factor in the phantom costs. Now you’re paying closer to $1,500/month.
Check out this graph. It shows the true cost of buying a home over 30 years.
If you purchase a $300,000 house today, over 30 years, it could cost you almost $1 MILLION.
In the end, you’re not throwing your money away by renting — but you will throw your money away if you buy a house without knowing what you’re doing.
In the video below, I break down the myths of renting vs buying a house a bit more. Check it out.
Real estate investing myth #3: “If I cut back on enough avocado toast I can afford a house!”
Just… Stop it. Right now.
Real estate investing myth #4: “I can always leverage this house or take advantage of the tax savings”
This is effectively two myths in one — but they both boil down to one idea: People think they can guarantee that they will make money by investing in real estate.
I’m talking about leverage and tax savings, and BOTH can cause you to lose money.
So many homeowners point to leverage as a key benefit to their real estate investment.
For example, you can put $20,000 down for a $100,000 house, and if the house climbs to $120,000, you’ve effectively doubled your money.
That sounds great, but it’s ignoring one big thing: The price of a house doesn’t always increase (*cut to people who purchased a house in 2007 crying and nodding*). So unfortunately, leverage can work against you if the price goes down.
If your house declines by 10%, you don’t just lose 10% of your equity — it’s more like 20% once you factor in the 6% in realtor’s fees, closing costs, new furniture, and other expenses.
You need to be prepared to face this potential loss before you drop several hundred thousand dollars on a new house.
- Tax savings
People think that they can deduct their mortgage interest from their taxes and save a bunch of money.
Though you can deduct your mortgage interest, people forget that they’re saving money that they ordinarily would never have spent.
Think about it. The amount you pay out owning a house is much higher than you would for any rental when you include all those phantom payments I mentioned. So even though you’ll certainly save money on your mortgage interest through tax breaks, the net is usually a loss.
At the end of the day, both leverages and the tax breaks you get from buying a house just aren’t good enough reasons to justify investing in real estate.
Is real-estate investing right for you?
Real-estate investment can be an interesting and fun way to diversify your assets. If you play your cards right and do your research, there’s no telling how much money you can make through these investments.
But you have to be careful. Real-estate tends to be a very volatile market, and there are a lot of dangers that go into it if you don’t keep in mind certain elements. To learn more about this, be sure to check out our very best resources on the topic below: