By Holly Welles
Updated September 2, 2020
Real estate is an excellent investment. It requires strategic decision-making when it comes to buying, renting, and selling properties. There's a reason Andrew Carnegie famously claimed that 90% of the world's millionaires get their wealth from real estate investment. One hundred years after his death, many experts still agree with his sentiment.
Fortunately, there's no single way to make money through real estate. Diversification can help new investors figure out their strengths and create a long-term strategy.
Discover five ways to build a profitable portfolio.
1. House Hacking
House hacking is a strategy for purchasing a multi-unit home and living in it while renting out the other rooms. The goal is for tenants to cover all or most of your living expenses, allowing you to live rent-free or earn a passive income.
One common strategy is to purchase a duplex, live in one section, and lease the other. House hacking may qualify you for an owner-occupied loan, but you'll likely need to live at the property for at least a year to qualify.
You also need to calculate whether the market rate for rent provides a solid return on investment. Using a rent evaluation tool like Rentometer will help you. If your mortgage payment exceeds the rent you can collect, it will not create profit.
2. Real Estate Crowdfunding
You're probably familiar with donation-based crowdfunding, where large groups of people contribute to efforts ranging from artistic projects to new gadgets.
Real estate crowdfunding is a similar concept, though it falls into two categories:
- Equity crowdfunding: Investors contribute money to projects to become partial owners. If the project succeeds, investors get a portion of the profits.
- Debt crowdfunding: An investor assumes a traditional lender's role and provides the funds to acquire a property. They profit from the capital and interest repayments on the loan.
Remember that some platforms have minimum investment amounts for those who want to participate. People who get involved in real estate crowdfunding anticipate returns on their investments, yet realize success is no guarantee.
3. Real Estate Investment Trusts
With a real estate investment trust (REIT), a company owns large-scale properties — such as office buildings and multifamily apartment buildings — and allows people to invest in them. With this method, you can benefit from commercial real estate profits without finding properties to purchase.
REITs distribute dividends regularly, such as monthly or quarterly. Plus, they offer excellent transparency for new investors. You can read press releases detailing a REIT's quarterly activity and use that information to develop a shortlist.
You can find both publicly and non-publicly traded REITs. The publicly traded ones tend to come with less risk since you can easily verify their values. To get started, you'll need to set up a brokerage account. Then, you can start building a portfolio.
4. Short-Term/Vacation Rental Investments
Sites like Airbnb and VRBO have made it easy for travelers to stay in furnished properties rather than hotels. Not surprisingly, investors jumped at the chance to purchase properties and make them available to tourists.
You'll discover both the pros and cons of this approach. Short-term rentals can bring in more gross income than a traditional long-term tenant. Plus, the rotation of new arrivals could prevent you from getting stuck with a bad tenant.
On the flip side, expenses could be higher for a short-term rental, especially if guests expect features like streaming subscriptions, high-end appliances, and luxury linens. You'll have to keep everything in excellent condition and replace damaged and worn items. Plus, some localities restrict short-term rentals of apartments and second homes, including Los Angeles.
5. Real Estate Limited Partnerships
A real estate limited partnership (RELP) is a private equity fund where a general partner assumes all the liability and decision-making responsibilities for a property. Investors are limited partners — or hands-off investors — who choose the amount of their financial obligation.
RELPs are typically best suited for experienced investors looking to tackle more complex commercial real estate dealings. Many RELPs are short-term investments with clear-cut timeframes, such as a neighborhood redevelopment project or building conversion. Once complete, the property value is typically higher than the initial cost.
Net profits and losses get passed on to limited partners, and those parties are responsible for reporting gains and losses on tax returns. It's smart to rely on an experienced accountant's services and keep careful records throughout the year. You don't want tax season to turn into a headache.
Do you want to start your real estate venture? Now is the time.
Research all the ways you can invest, from house hacking and crowding funding to more passive methods like investing in REITs and RELPs. Once you understand the pros and cons of each, you can choose the best place to keep your money.
Don't be afraid to reach out to an experienced professional, such as an accountant or broker. They can answer your questions and offer friendly advice.