Investing in real estate can be a super lucrative way to generate passive or active income while diversifying your portfolio. Thanks to the wide range of ways to earn money through real estate, almost anyone can invest.
If real estate investing is a new concept for you, here are four strategies to consider that can help you generate new income streams, supplement your retirement, or simply make you a ton of money as a real estate investor.
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1. Buying rental properties
Buying and renting out a property, which can include a residential property like a single-family home or a commercial building like an office or apartment building, is one of the most common methods of making money in real estate.
It can generate passive income if the rental income is more than the property's expenses, including the cost of purchasing it, such as a mortgage. But it also offers additional benefits like tax deductions and the ability to benefit from property appreciation. Since real estate generally increases in value over time, the rental property could be worth a lot more 10 to 30 years from now.
Rental real estate doesn't usually generate a lot of money right away. The cash flow from a property may be only a few hundred dollars or fewer at first. But over time, that cash flow can grow thanks to incremental rent increases and paying down the mortgage with the rental income.
2. Owning a vacation rental
Short-term vacation rentals are a cash cow investment right now. The coronavirus pandemic gave a huge boost to the vacation rental business thanks to the growing number of people looking for more privacy, amenities, and space than hotels can offer.
Some investors have made entire businesses out of buying and renting vacation homes in popular vacation destinations across the country or in their local markets. But you can dip your toes into this industry by purchasing a vacation property for yourself and renting it out when you're not there, using a property manager. Just make sure you check into local laws about renting property on a short-term basis and investigate the supply-and-demand situation in the area before buying.
3. Buying a fix and flip
HGTV shows like Flip or Flop and Property Brothers have popularized and glamorized fix-and-flip real estate investing. However, this real estate investing strategy is more complex than it may seem. When you fix and flip a property, you are buying it at a discount, making repairs to improve the property and add value, and then hopefully selling it for more than you invested into it.
To do this well, you need to have intricate knowledge of how much repairs will cost and what the property will likely sell for once complete. In addition, you need a solid team to help you complete the renovation on time and on budget. This active investing strategy requires knowledge, money, and management to be successful, but if done properly, it can make a ton of money.
4. Investing in REITs
Of all these strategies, investing in real estate investment trusts (REITs) is by far the easiest and most accessible way for investors to start earning money. They don't require large sums of money to invest, nor do they require the investor to purchase or manage the property themselves.
These special types of stocks that invest in a wide range of commercial and residential assets are required to pay 90% of their taxable income as dividends, creating a reliable income stream for investors. Plus, since many REITs are publicly traded, they offer liquidity that traditional real estate investments can't, with the added benefit of being managed by professional teams.
