5 tips to get you started

Real estate is the top choice among Americans for the best long-term investment, according to a Gallup poll. Real estate investing is an especially popular strategy for high-net-worth individuals, who often have enough capital that they don’t need to worry about high mortgage rates or occasional dips in the market.

But real estate investing isn’t just for the wealthiest folks. Everyday people can boost their income through it, too. There are several ways to start investing in real estate, not all of which require a sizable down payment or a mortgage loan. Some avenues are more beginner-friendly than others, but we’ll cover all your options, so you can dive into the housing market with confidence. 

One of the pros of investing in real estate: “Real estate makes an excellent investment because it offers multiple ways of generating returns,” says Dave Meyer, VP of Data and Analytics at BiggerPockets and host of the “On the Market” podcast. 

Some real estate investments require your time and energy, while others are passive. Some have a high barrier to entry, while others only require a few hundred dollars. But each option provides a way to diversify your portfolio and potentially build wealth through multiple avenues. Here are some options if you’re just starting out.  

REITs are companies that own and operate commercial real estate properties to produce monthly income. When you purchase shares of an REIT, you’ll receive dividends from the income generated by the properties (hotels, shopping malls, apartments, etc.) in that company’s portfolio. If the value of the shares increase, you can also profit from the sale of your shares. Many REITs are publicly traded, and these tend to be less risky than non-exchange traded REITs, although dividends may be higher with private REITs. 

You don’t need the skills to manage a property when investing in REITs, and you don’t need to put 15% down or go through the mortgage underwriting process. But you’ll have less control over your investment, and the opportunity for returns may not be as high as what the right rental property may provide. Still, if you don’t have the capital for a rental property, “REITS are a great way to start investing in real estate,” says Meyer. 

Real estate investment platforms connect investors seeking hands-off real estate investments with developers and others in the real estate industry. Many of these are real estate crowdfunding sites, which pool the funds of several investors to purchase a real estate asset. The minimum investment can be as low as a few hundred dollars for some platforms, while others are only open to accredited investors. Some options to look into include:

“Rental properties are an excellent way to build long-term wealth, but the complexity of operating them is low,” says Meyer. You may opt to buy a multi-family building and lease individual units to tenants. Or, you could buy a vacation home and rent it out to guests on platforms like Airbnb. 

Bear in mind that getting a mortgage is more difficult when you’re using the loan to buy an investment property. You typically need to put at least 15% down and pay a higher interest rate. However, there is a way to take advantage of residential financing options when buying a rental property. 

“My favorite approach for beginner investors is to use an owner-occupied strategy, commonly known as house hacking,” says Meyer. The strategy involves buying a multi-unit property and living in one unit while renting out the others to cover your mortgage. By living in the property, you can qualify for an FHA loan, which allows you to get started with a lower down payment. “You can put as little as 3.5% down and buy a fourplex,” says Meyer. “It’s a great way to learn the business, reduce living expenses, and generate strong returns. It’s how I got my start, and I’d recommend it to almost anyone.”

If you love renovating homes and have experience working with contractors, you can buy a distressed property that needs TLC, fix it up so it’s move-in ready, and sell it for a profit. But you need to have a good understanding of the renovation costs and the potential sale price. Price increases for building materials have slowed, but costs remain elevated. And if you need a mortgage, you should be especially conscious of your profit margin with today’s high rates.

That said, “Flipping is working surprisingly well right now,” says Meyer. “Price corrections are most dramatic in the ‘fixer upper’ category, while prices for renovated properties are holding strong. This gives flippers a bigger potential margin.” But there’s still a risk of losing money on a house flip, especially if you’re new to the strategy. “Flipping can be tricky for new investors if you’re not familiar with managing renovations, contractors, and controlling costs,” says Meyer. You’ll also want to focus on renovations that truly increase a home’s value.

Like REITs and crowdfunding platforms, real estate mutual funds offer the chance to diversify your portfolio through passive investment in real estate. In other words, investing in a real estate mutual fund is a hands-off strategy that keeps your eggs in multiple baskets. But the potential return may not be as great as with an active real estate investment. 

Real estate mutual funds use the money from a group of investors to purchase mostly REITs and real estate stocks. When you purchase mutual fund shares, you may receive dividend income, but you’ll primarily earn money when you sell your shares at an appreciated value. If you’re looking for a shorter-term investment, a REIT may be a better option. 

Mutual funds are professionally managed, so you’ll benefit from the fund manager’s research and experience, but you’ll also pay management fees. You can buy shares from an online brokerage. Popular options include the Baron Real Estate Fund and the Cohen & Steers Real Estate Securities Fund. 

Returns from real estate investing can surpass other investment avenues, according to Meyer. “In addition to market appreciation, you can also profit from cash flow, loan paydown, and it has significant tax benefits. These factors combined give real estate investors outsized returns compared to other asset classes.”

Some of those tax benefits include deductions for operating costs and depreciation, which can significantly reduce your taxable income. When you sell a property, you may also use a like-kind exchange to reinvest your earnings into a similar property, which allows you to defer paying capital gains tax. 

The tax benefits aren’t as significant for passive opportunities, like REITs and real estate mutual funds, but these investment options still provide portfolio diversification since they can still generate positive returns while the stock market is down. They also provide a hedge against inflation because property values and rent prices tend to increase with inflation. Active real estate investing provides these benefits as well, and then some. 

Active investing in real estate can also be a labor of love. You might enjoy being a landlord, furnishing a short-term rental, or renovating a kitchen to your standards during a house flip. You also might appreciate having a tangible asset that you can see, touch, and even sleep in — you can get some personal use out of a rental property and still qualify for tax benefits. A weekend away in a mountain chalet doesn’t sound bad. 

According to Meyer, “The best way to get into real estate investing is by purchasing a rental property that produces positive cashflow.” House hacking is ideal for beginners because of the less stringent financing requirements. But if you only have a few hundred dollars, you can still invest in real estate through passive opportunities. 

Real estate investment comes with many benefits, but it’s not without risks. This guide covers your options, but you’ll want to research individual opportunities and always perform due diligence before making an investment decision. 

Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.

This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as the Home and Financial Services Editor for the Hearst E-Commerce team. Email her at lauren.williamson@hearst.com.