Investing in real estate has long been one of the most popular ways to earn passive income. As an investment strategy, real estate can be satisfying and lucrative in ways that other forms of investing can’t always offer, particularly for investors who are interested in generating long-term returns. Best of all, there are a variety of ways to invest in real estate, so whether you’re looking for something very low-maintenance or something more hands-on, chances are there’s a real estate investment strategy that will work for you. Read on for a look at the pros, cons, and practicalities of five of the most common real estate investment opportunities.
1. Real Estate Investment Trusts (REITs)
REITs offer investors something unique: the opportunity to invest in real estate without getting involved with physical real estate at all. Essentially, REITs operate like mutual funds in that they use investors’ money to buy and operate income properties such as office and retail spaces, hotels, and apartments. Many REITs are bought and sold on major exchanges, much like any other stock, and are therefore easily purchased through brokerage firms. Some REITs, on the other hand, aren’t publicly traded, but these are not typically recommended for new investors as they can be hard to value and aren’t as easily sold.
To qualify as a REIT, the corporation or trust must pay out 90 percent of its taxable profits as dividends (this allows the trust to avoid paying corporate income tax). For this reason, REIT dividends tend to be high, which is great news for investors who are interested in regular income. It’s also why REITs are an especially popular investment choice in retirement.
2. Real Estate Investment Groups (REIGs)
Occupying a kind of middle ground between REITs and hands-on real estate ownership, REIGs are geared toward investors who are interested in owning rental real estate but don’t want to be responsible for running or managing it.
In a standard REIG setup, a company purchases a set of apartment or condo buildings and investors join the group by buying units through the company. Individual investors can own however many units they choose, but all management and maintenance of the property are handled by the company behind the REIG. In exchange, the company receives a percentage of the monthly rent.
One unique advantage of REIGs is that they typically pool a portion of the total rent from all the units as protection against vacancies, which means that investors can still receive at least some income even if one or more of the units they own is empty.
3. Online Real Estate Platforms
Also known as real estate crowdfunding, online real estate investing has become increasingly popular in recent years. Like peer-to-peer lending options, online real estate platforms provide a direct connection between investors and real estate developers. The idea is that many investors join together to finance larger commercial or residential deals. Investors pay a fee to the online platform and take on significant risk in anticipation of receiving monthly or quarterly distributions.
Online real estate platforms are appealing in that they can offer high returns while requiring less investment capital than an outright property purchase. However, prospective investors should be aware that this form of real estate investing is particularly illiquid, which means that capital may be locked up for long periods. Also, many online platforms have minimum thresholds for household income or net worth, which can exclude many would-be investors.
4. Rental Properties
Investors have been making money from owning rental properties since long before the term “passive income” was popularized. This real estate investment strategy is more hands on than the preceding options, but it can be a great fit for individuals who like the idea of being more involved in their investment and have the relevant skills and time.
With this form of investment, an investor purchases a property—a house, a single condo, or a multi-unit building, for example—and rents it out to tenants. This provides the investor with regular income (as well as the significant gains that can come through property appreciation) and offers possible tax deductions for associated expenses.
However, buying a property does require substantial upfront capital, and there is often a great deal of effort involved in finding and managing tenants and maintaining the rental accommodation.
5. House Flipping
Sometimes dubbed the “wild side” of real estate investing, house flipping can offer high returns for investors with access to capital and significant experience in all aspects of the real estate market (particularly valuation, marketing, and renovation).
The premise of house flipping is simple: an investor buys a property, then resells it at a higher price. Sometimes, the higher price comes from value-added renovations, while other times, it comes from an increase in the property’s intrinsic value in a hot real estate market. The rewards of house flipping can be substantial, but so is the associated risk, as properties may prove to be more difficult to resell quickly than investors expect.