7 Ways to get into real estate investing

Becoming a landlord of a single-family home, condo, or multifamily property is one of the first scenarios first-time real estate investors think about. Simply put, you buy a property and  rent it out to tenants. Investing in income property allows you to earn income through monthly rent and profit on property’s appreciation if you decide to sell. A future value calculator can help you project your profits long term.

Pros

• Once you’ve purchased your initial investment property, you can begin to earn passive income through rented property.

• When real estate appreciates, your investment rises in value, so you’re building equity and earning passive income simultaneously.

• Rental income is not subject to Social Security tax, along with numerous other rental property tax deductions.

• The interest you pay on an investment property loan is tax-deductible.

• You have control over unit pricing and tenant selection. 

Cons

• Unless you hire a property manager, you will need to be prepared to take on several landlord responsibilities.

• If your adjusted gross income is more than $200,000 (single) or $250,000 (married filing jointly), you may be subject to a 3.8% surtax on investment income, including rental income.

• Investors love the tangibility of real estate as an asset—but that also makes it difficult to unload in compared to other assets, like stocks.

• Vacancies can cause significant losses. The longer your property is empty, the more you’ll pay in expenses and mortgage.

A real estate investment trust (REIT) allows you to invest in real estate without becoming a landlord. A REIT is a company with a minimum of 100 investors that owns commercial real estate, like office buildings or retail spaces. It uses investors’ money to purchase, operate, and sell income-producing properties. 

They fall into two broad categories: mortgage REITs, which specialize in commercial or residential, or a mix of both, and equity REITs, which often invest in a specific property type. They appeal to hands-off investors because they tend to pay high dividends. 

Pros

• REITs often pay high dividends, and you can automatically reinvest them. REITs are required to pay at least 90% of taxable income to shareholders, which allows them to avoid paying corporate income tax.

• If you can’t invest in commercial real estate on your own, a REIT makes commercial real estate investing within reach for everyday investors.

• Since real estate tends to hold its value in a tough economy, it can (but is not guaranteed to) produce a predictable income.

• REITs are a liquid investment. You can buy or sell a REIT anytime you want, as opposed to dealing with the process of offloading a property.

Cons

• REITs are often sensitive to fluctuations in interest rates.

• You’ll want to pay attention to property type. For instance, hotel REITs can take a hit in a poor economy, as can retail-specific REITs.

• REITs are bought and sold on major exchanges, and new investors should stick to publicly-traded REITs. Trusts that aren’t public can be challenging to research, not easy to sell, and difficult to value.

If you like the diversification of a REIT, consider a mutual fund that invests in multiple REITs and real estate operating companies using portfolio managers and expert research. 

Pros

• Because pros manage them, you’ll avoid the group-think risks of an REIG or a general partner (such as in a RELP) that has all the control.

• The funds provide retail investors with analysis and research information.

• You’ll usually have access to a broader selection of assets than with buying REITs alone. 

Cons

• Mutual funds may be less liquid than REITs and carry higher management fees.

• They are sensitive to interest rate changes.

• Sector-specific funds can be more volatile than broader stock market index funds, like the S&P 500.

A real estate investment group (REIG) appears similar to a REIT in that both invest pooled funds into different types of real estate or debt and distribute income back to their investors. But where a REIT must have a minimum of investors, a REIG has no size restrictions, and there are no minimum distributions or other thresholds to meet. 

There might be a lead who helps manage the assets, but most responsibilities are group-held. In this way, a group will buy or build a set of buildings, and investors can buy them through the company. The company that operates the group manages all the units.

Pros

• You can invest in large real estate deals, and through the knowledge of the group, learn more about real estate investment strategy.

• An REIG manages the investment for you, so you invest minimal time.

• When pros run the group, they can diversify the group's investments to manage risk. 

Cons

• Fewer regulations may mean the group has less experience and doesn’t manage well, increasing your personal risk.

• REIGs have bylaws that might include higher fees that cut into your potential profits.

• Depending on the group’s agreement terms, it could be difficult to pull out your investment if you need it or want to reinvest it elsewhere.

Lending matchmaker platforms, or crowdfunding platforms, connect real estate developers to investors who want to finance projects through debt or equity. In return, the investors expect monthly or quarterly distributions and pay a fee to the platform.

Pros

• Real estate crowdfunding diversifies your portfolio to minimize your overall risk.

• Investments once available only to the ultra-wealthy are made accessible.

• In contrast to direct ownership, this passive investment vehicle liberates your time to focus on other investments or projects.

Cons

• These investments can be highly speculative, and the return might be lower than direct ownership.

• Crowdfunded investments can’t easily be offloaded.

• Developers completely manage the properties and make all development decisions, and investors have no control over the process.

• Many platforms are available only to accredited investors, which the SEC defines as people with an income of $200,000 or higher, although there are platforms with lower thresholds.

A real estate limited partnership (RELP) is similar to an REIG in that it is formed to buy and hold a property or portfolio of properties and is privately held. It distinguishes itself from a REIG in that it only exists for a certain period. A general partner, such as a property manager or development firm, pairs with outside investors, who provide financing in exchange for a share of ownership as limited partners, much like an LLC for rental property.

Pros

• You can invest in any type of real estate asset class. Some RELPs specialize in a property type, and some don’t.

• RELP profits are distributed to partners based on ownership percentage, and profits are shared by the general and limited partners according to an agreed-upon split.

• Investors can buy into larger deals than they could on their own and gain big returns in boom years.

• A RELP doesn’t pay taxes on its income since it’s structured as a pass-through entity. The income or loss is claimed on your income tax returns at the individual level.

Cons

• A RELP isn’t a liquid investment. You’ll have to wait until a property is sold and profits are shared to get your money back.

• Limited partners (investors) don’t have control over the business operations.

Low interest rates and a roaring real estate market have even more hands-on real estate flippers snapping up properties. Flippers employ the BRRRR method to buy properties that may need significant updates and repairs and turn them around as quickly as possible to sell for a profit.

Pros

• Those who have the time and know-how, or access to low-cost labor (such as a partner who’s a contractor), can maximize their profit by minimizing labor costs.

• Hands-on investors find this kind of work on a tangible asset to be rewarding and fun.

Cons

• Unexpected costs can eat into your profits. The most successful flippers can accurately assess their costs and cash flow.

• Your entire investment in that property is tied into selling it. If you run into a buyer’s market, you risk losing your money.

Bungalow is the best way to invest and manage your real estate portfolio. We work with you to identify, purchase, fill, and manage residential properties—so that you can enjoy up to 20% more in rental income with a lot less stress. Learn more about Bungalow.