What are Different Ways to Invest in Real Estate?

There are multiple ways to invest in real estate. These ways include buying rental properties, buying REITs, or Real Estate syndications. Each has its pros and cons to real estate investing. Some people like to dabble in a little of all types while some people like to stick with just one and scale their portfolio in one way that they have mastered over time.

Buying Properties

The first is the most obvious choice for investing in real estate and that’s buying properties. Though this may be the most obvious, there are still several different strategies for buying real estate for investing purposes.

Single-Family Long-Term Rentals

The first is buying a single-family home for long-term holding. This is the easiest route. There is typically a lot more inventory and financing geared toward this type of property is the easiest to find and also tends to have the best terms.

This is also the easiest way to get into real estate because most people live in the property first and realize that there is a great opportunity to rent out their current home. Either they want to downsize their living situation, they want to move away, or they want to give up the responsibilities of being a homeowner such as landscaping, maintenance, etc.

In this case, if you bought the home as a primary residence then you are getting the very best terms for your financing such as a better rate. If you decide to move and rent your current home out, your financing does not change unless you choose to refinance, then you would have to let the mortgage lender know that it is now considered an investment property.

One of the pros of owning a single-family investment property is that since they are the most common types of properties, your Exit Strategy is great. It is very easy to sell that property if you ever choose to.

Another reason is that with a single-family long-term investment property, as a landlord, your responsibilities are the lowest. This means that in terms of utilities and maintenance, the landlord is required to cover the least amount. The tenant will typically put all of the utilities into their name. They are typically required to maintain the landscaping as well. You can state in the lease what you are and are not willing to cover.

Single-Family Short-Term Rentals

Short-term rentals have become a very popular type of rental because they tend to have much higher profits, depending on your area. Since they are short-term rentals, then upkeep is much higher though as you will have to make sure you keep the property cleaned and maintained between every tenant.

These are very tax-friendly as well. I have had an accountant tell me that if you manage a short-term rental on your own, the tax deductions count toward your earned income, not against rental income. This would mean that if you had a long-term rental and you have enough deductions to decrease any taxable income you can end up paying no taxes on the long-term rental income but if you have short-term rental income then it can decrease your W-2 taxable income. This is beneficial because you can end up saving more in taxes through your earned income than you would your rental income. I am not a Certified Public Accountant so I can not verify this but this is what I was told. If you have any questions, please reach out to an accountant.

House Flipping

Another type of real estate strategy involving buying single-family properties would be engaging in flips. Flipping real estate is the process of buying a property that is distressed and fixing it up to be comparable to other properties in the area and then selling them again at a profit.

Some consider house flipping akin to another job or a business, and I tend to agree with them. I wanted to put this here so that you can see how you can combine these strategies to build your real estate investment portfolio.

House flipping is a skill. You develop management skills and build your network to create a great team. Depending on how involved you want to be you can even do some of the work yourself and develop your technical skills as well. I have not done a full “gut rehab” before but I have had experience rehabbing sections of my homes before renting. I have also done as much work as I can including changing out water heaters, ceiling fans, basic plumbing and electrical, and basic general carpentry. I have learned a lot over the years by fixing little things and they have added to my skills.

At the very least, when you get your hands dirty and understand a decent amount of the work that goes into rehabbing you will also grow your skill as a manager when it comes time to manage a rehab with contractors on your own.

You can combine multiple strategies into one, I know because I have done this myself. My wife and I have bought properties, lived in them for 1-3 years, and rehabbed the property slowly with our own experience and skills. For big projects, like rehabbing an entire bathroom down to the studs, I contracted out. Once the property is fixed up to our liking and we believe it is a competitive example of an investment, we rent it out long-term.

I have yet to get into the short-term rental space, but one day I will.

Multi-Family Rentals

Buying a multi-family rental can be very similar to the process of buying a single-family with some exceptions.

The first thing you need to understand about multi-family properties is that properties that have 1-4 units are considered Multi-Family Residential properties. For properties that are 5 units and above, they are considered Commercial properties.

Why does this matter?

It matters greatly because this is what determines whether your property is eligible for residential financing or commercial financing.

Residential Financing

Residential financing is the easiest to get, whether you’re looking for financing for primary, secondary, or investment financing. One of the best ways to get into real estate with low risk is to buy a multifamily property with residential financing for a primary residence and you live in one of the units and rent the other units out. This is called “House hacking.” The benefit here is that you get the very best type of financing, with the very best rates and a 30-yr term, if you so desire, and that will allow your payments to be as low as possible. Depending on how many units you have and what the market rent is, you could have your tenants pay for your housing expenses and then some.

Commercial Financing

Commercial financing is very different. They have higher interest rates and the terms are not as flexible and tend to be shorter. I have never seen a 30yr commercial real estate loan that also contains a fixed rate.

Also, you have to have a commercial business to get commercial financing, and navigating eligibility can be tough. I would recommend reaching out to a mortgage loan officer that specializes in commercial real estate for help.

The most common type of business to hold real estate, at least when you’re starting, is by getting an LLC, Limited Liability Company. As the name suggests, it limits liability to the owners better compared to other business entities. They are also considered pass-through entities that have pros and cons to them, but for the most part, it is beneficial and makes tax season a lot easier. I am not a lawyer, nor do I practice law. If you have any questions about the legalities of forming a business and what structure you should pursue, contact a lawyer.

Buying REITs

REITs are Real Estate Investment Trusts. They trade just like stocks on the stock market, and unless you do your research you would not know they were REITs on the surface, most of the time.

REITs are companies that buy and manage rental properties long-term.

One of the advantages of REITs is that they tend to pay out high-yielding dividends compared to the rest of the stock market and you can even find some that payout monthly. This is because to become a REIT the company has to restructure itself. In doing so, if the company pays out at least 90% of its profits in the form of dividends to its shareholders, the company gets away with not having to pay taxes entirely. This is a huge advantage to investing in REITs as a shareholder.

REITs are beneficial for investment portfolios because it is one of the easiest ways to invest in real estate without taking on the added risk of buying properties.

Depending on the REIT, you are getting great diversification by owning a REIT because these companies own dozens, if not hundreds or thousands of properties. If you buy one property personally, and your area takes a hit with the real estate market, your property could be vacant for a long time and you risk having to sell your investment before having any further financial burden.

Another benefit is that if you are already well versed in the stock market and have a good understanding of market strategies, trends, and metrics, the learning curve is very small to transition into owning REITs. This is because REITs have similar metrics to any other stock, it’s just that instead of looking into a tech stock or a utility stock, you are measuring the performance of a company that owns and manages real estate.

Another benefit of owning a REIT is that they are cheaper than buying properties. If you wanted to buy an investment property, unless you are going to live in it first, you would need to put at least 25% down as a down payment. This is the typical down payment percentage that lenders will require to buy an investment property. This means that until you get tens of thousands of dollars saved up or more, your investment journey is stalled.

With REITs, you can buy in at whatever the REIT stock price is, some sell for only a few dollars. You can take a few hundred dollars and diversify your investment portfolio quickly.

Also, if you set up a Dividend Reinvestment Plan (DRIP) on your brokerage account, any dividends that get paid out to you will automatically be used to purchase more stocks from that company. This is an amazing way to automate your portfolio and see it grow quickly.

Real Estate Syndications

Real estate syndications are companies that pool money together from investors. Certain criteria must be met before these companies can take your money because there are different definitions of what an investor is according to the United States government, more specifically the Securities and Exchange Commission.

These companies pool money together and then they seek to buy, and in some cases, rehab properties and rent them out for income.

This is much easier than owning and managing properties on your own, especially when these companies tend to be run by people that have a lot of experience with real estate.

Typically, you will get a certain amount of equity in the property, you receive monthly rent from the property, and when the company is ready to liquidate and sell the property, you get paid out at the end of the sale.

Syndications tend to have end goals in mind so they will have a window of investing. They will have a plan spelled out before you decide to invest stating the expected rate of return and their plan for liquidating the investment by selling.

This is still an opportunity that is easier with lower barriers to entry because whereas you might need a certain amount of money to buy a property in your name, syndication might be willing to take a lower amount in return for a corresponding amount of equity in the property. It depends on the syndication as some do have a minimum investment requirement.

This is another way to diversify your investment because these companies tend to pool enough money from enough investors to invest in properties worth millions of dollars. If these properties have a small number of vacancies, the whole investment is not affected as much compared to a vacancy in a single-family property.

Closing Remarks

As with any type of investment, there are pros and cons and you want to think about what is best for you or how much control you want to have. These are the different ways to invest in real estate, and while one may stand out to you more than others, there is no BEST. It is quite common to use multiple strategies.

My wife and I have rehabbed properties we have lived in, and rented them out as long-term rentals. We have bought multi-family properties, and invested in REITs as well. We love real estate and we love to diversify our portfolio in different types of exposure to real estate.

We like knowing that we own property and that every decision is our own. We like the rehabbing process because we can include our creative vision in improvements. We also like buying REITs to further diversify our real estate portfolio into niches that we do not currently own properties in such as medical, industrial, retail, and entertainment properties.

I hope this article has given you a great understanding of the possibilities you have to start your real estate journey and inspires you to begin your journey. If you already have, I hope this helps you branch out into other areas.

Very respectfully,