With low-interest rates and favorable tax rules, there is no better time to invest in real estate and realize passive income and increasing equity, with many real estate investment types available.
Real estate has historically consistent returns, but finding success can be challenging. Here we cover the most popular real estate investment options and tips to succeed.
Real Estate Investment Types
Real Estate Syndication
With real estate syndication, individual investors can participate in larger real estate projects that may be otherwise inaccessible due to insufficient capital or know-how. A multifamily property might require a hefty investment, but with syndication, individual investors invest in a similar project for as little as $50,000 contributed through an overarching sponsor company. The sponsor coordinates all the project legwork, including identifying properties, performing renovations, property management and rent collection, and property sale. Meanwhile, the project investors can enjoy passive income from their cut of rental collections or a property sale, depending on the deal’s terms.
Pros of Real Estate Syndication
Real estate syndication offers individual investors passive income with minimal time investment. Along with rental income, the syndication should benefit from increased property equity at sale time, which may benefit investors. IRS rules also provide many opportunities to maximize real estate syndication income, including depreciation, mortgage interest, and a lower capital gains tax rate.
One of the best things about syndication is that it requires no active investor involvement after researching and choosing a sponsor and committing to a project. The sponsor arranges for property management and any other project oversight.
Cons of Real Estate Syndication
One of the biggest syndication risks is something investors have some control over — the sponsor. Be sure to research the person or firm you are considering and ask plenty of questions before committing to the deal.
If you are interested in investing in a real estate syndication, read our post on What to Look for in a Commercial Real Estate Syndicator.
Real Estate Investment Trusts
Real Estate Investment Trusts (“REIT”s) are companies that own or finance income-producing real estate properties and then payout at least 90% of taxable property income to shareholders.
Most REITs operate on major stock exchanges, with investors purchasing company stock and stockholders receiving dividend payouts. Many people purchase REIT stock through their 401(k)s or other investment plans.
Pros of REITs
REIT investment is accessible to anyone who manages their 401(k) or other investment accounts, making it one of the most popular strategies to make passive income from real estate without much time commitment.
Even though you may use the same platform to purchase REITs as other stock purchases, real estate generally weathers market fluctuations more steadily than equities.
Cons of REITs
REITs commonly specialize in a particular property type, so investing significantly in one can be risky. For example, REITs that own office buildings or hotels took big hits during the COVID-19 pandemic, while self-storage REIT properties or open-air shopping developments better weathered these years.
Just as investors usually see the best returns after several years of property ownership, so do REIT investors. While they pay regular dividends, accumulating a significant investment return can take a few years. You should only invest in REITs if you do not plan to access the money for a few years, although you can still retrieve your funds.
Rental Properties
Being a landlord has long been a stepping stone to financial security, and rentals continue to be in demand. But rental property ownership requires significant capital and time investment. It will likely be successful if you pay cash or get a great deal that allows room for markup.
Fortunately, investors can find properties at various price points. Leasing a home or apartment building may seem like the best investment opportunity, but commercial leases and short-term rentals also offer passive income. You can also turn your home into another revenue stream for very little up-front investment — if you can tolerate opening your homes to others.
Pros of Rental Properties
Rental property ownership lets investors enjoy a two-fold source of financial gain. After expenses, the monthly rental payments and set-asides for future expenses should provide a regular monthly income. Second, the owner can realize later gains from increased equity when selling the property. A reliable tenant’s steady rent payments provide a great source of predictable monthly income on a property that grows in value.
Cons of Rental Properties
Being a landlord can be hard and even unpaid if you do it all yourself and have trouble collecting rent — it may not feel like passive income. Property managers find tenants, hire maintenance staff, and reduce the owner’s workload, but these expenses decrease profits.
Rental properties bring many of the same risks of homeownership, including costly unexpected repairs. Owners should not think of the monthly rent above any mortgage and expense as pure profit — an emergency fund is still necessary.
House Flipping
House flipping can require significant capital and time investment. House flippers buy distressed or undervalued homes, then sell for a profit, but not all flippers heavily invest and remodel entire homes, which requires significant capital investment, time, and effort. Flippers usually hold on to the property for a bit longer, allowing work to be completed and the property to become market-ready.
The other, less-known house flipping type is purchasing foreclosure properties and selling them in a traditional buy-and-sell transaction. Prospective homebuyers may be unwilling to go through a challenging and lengthy short sale but will buy during a regular sale.
Pros of House Flipping
House flipping can give handy DIYers a great investment return. Given that much of a home’s value comes from the appeal of paint, new appliances, and a little know-how, there is a real chance of profit.
For flippers who buy distressed properties without intending to remodel, much of the process can happen virtually. If an investor becomes a real estate broker and eliminates some commissions that would be paid to another, the possible profit increases.
Cons of House Flipping
The market can quickly change, making a property hard to offload, and flippers must stay aware of their community’s demands and real estate climate. Unexpected costs can add up quickly for flippers hoping to renovate or remodel, and these projects can require significant work, time, and capital.
The large sums of money involved can be tied up, preventing investors from taking advantage of other opportunities. If the property sells slowly, it can be hard to withdraw the invested funds if an emergent need arises.
Agricultural Land Leasing
Owning and leasing agricultural land is often overlooked in real estate investing but can yield passive income. In US areas with booming agricultural business, crop and animal farmers seek leasable land.
Agricultural land leasing can be much less time-intensive than traditional residential rentals because the farmer will do most of the property work — from building and maintaining fences to fertilizing the land.
Pros of Agricultural Land Leasing
Especially with low-interest rates, investors can potentially purchase land at terms that make the mortgage payment less than the rental income. Additionally, the owner could enjoy increased equity and a tidy profit when selling the property.
Cons of Agricultural Land Leasing
Similar to being a landlord of residential or commercial properties, tenant vacancy is one of the greatest risks in this real estate investment type. Unless the land is divided into multiple units, there may be a rent payment feast or famine.
Although farmland value has generally increased across the country since 1988, there are times when the value decreased on its face and when adjusted for inflation. Investors looking to unload properties during these trends may experience a loss.
The United States Department of Agricultural forecasts farm income to continue increasing, indicating farmers can support the continued upward farmland valuation. But given the factors contributing to farmland value, investors should be educated about this particular market.
Tips to Succeed in Real Estate Investing
Once you have decided which real estate investment type works best for you, you will want to follow our recommendations to help your investment be successful.
- Be Educated
Federal tax code, local building codes, lending regulations, and state and federal real estate laws affect real estate investing. Knowing these rules upfront will reduce costly errors and help you keep more profit.
Those without a talented mentor may want to consider joining a real estate networking group to expand their knowledge through regular interaction with those in their interest field. University programs and professional licensing courses offer more formal education options. Consider taking a real estate broker course to learn the rules of buying and selling properties or contractor training if property flipping is your future. Or, delegate this to a trusted professional and form partnerships with brokers, contractors, accountants, and tax professionals for a less hands-on approach.
- Know Your Limits
Being aware of and honoring your budget, time, and knowledge limits can prevent many investing pitfalls. Understand a project’s costs upfront and plan to exceed the budget and expected time commitment. Avoid being forced to sell low and fast by keeping a fund to handle whatever the project throws your way.
Be careful not to overextend yourself, especially in projects that require active management or are too far outside your wheelhouse. There are professionals for a reason, and sometimes it is a better use of time and money to engage them.
- Choose Your Market and Master It
As your portfolio grows, refine it. Find your expertise area, whether you want to focus on a niche investment type or a specific geographical region. We have a limited supply of time and energy, so channel resources to learn market trends, consumer behavior, and regulations to forecast for a more narrowly defined field. This knowledge sets real estate investors up for long-term success by focusing on quality investments over quantity. Make meaningful, targeted investments rather than siphoning capital and time over multiple projects with lower returns and chances of success.
Make Real Estate a Piece of Your Portfolio
Real estate investment is a great portfolio cornerstone for an investor with a strategic mindset and a willingness to learn. While no investment is guaranteed, real estate has historically been a stable wealth source with great potential for increasing value. There are numerous real estate investment opportunities to fit investors’ budgets, taste for risk vs. reward, and desire to tie up funds long-term. Most real estate investments offer tax benefits not realized from earned income, making them a more efficient way to make money rather than relying on additional earned income.
Invest with intention using these tips to set yourself up for real estate investing success.
