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5 ways to start investing in real estate in 2020

By Al Twitty | June 18, 2020

For many people, the word investing is synonymous with the stock market because it promises exceptional results. But, investing is a complex process that cannot be mastered overnight, and it comes with a learning curve. If you love the stock market, you probably need to diversify the portfolio to protect from market volatility. Or you want to generate an additional income stream without taking any risk. Irrespective of the reason, real estate investing is lucrative, and it's no longer a game for the big dogs. 

Real estate investment has never been the first choice for investors because of backroom deals and a predictable return rate. But, in the long run, it's a great way to build wealth. Today, investment is not limited to buying and renting a house or a commercial space – it has gone leaps and bounds. From purchasing real estate stock to investing in real estate crowdfunding, the digital age has brought a paradigm shift in how you build wealth.

If you're planning to expand your investment portfolio, here are five ways to invest in real estate. 

1.    Buy a real estate stock or invest in REIT

For those who deal in the stock market, it takes a few clicks of the mouse to buy and sell stocks. And, the same process applies when investing in REIT and real estate stock.

REITs (Real estate investment trusts) are private or public companies that own and operate real estate space like shopping complexes, office buildings, hospitals, residential complexes, apartments, etc. In short, they are the mutual funds for the real estate. 

Think of them as a luxury bouquet. The bouquet has different kinds of flowers (real estate properties). Instead of buying an individual flower, you buy the entire bouquet along with the other investors. 

The money you invest goes into the construction and development of the property for profit. Similar to the stock market, you're paid dividends with the REITs. Many REITs are listed on the stock market, and with a broker's help, you can get your toes wet in the real estate investing. 

If you're planning to invest in real estate stock or REIT, you need to search for a reliable broker offering exceptional services at a minimal commission. Therefore, it's always best to search for online brokers to compare their pros and cons. For example, if you live in Canada, search for 'trading platform Canada' or 'best online broker in Canada' to get the best and trustworthy platform for handling your real estate trades. 

REITs are an excellent way to grow your income without adding too much risk to the portfolio.

Reason to invest: 

  • Though there are stocks, they represent a real estate asset, and such an asset is not closely coordinated with the stock market, resulting in higher returns.
  • Most property-owning REITs lease their property for a long time, which can generate a steady flow of income. 

Risks associated:

  • Many REITs are prone to economic uncertainty. For example, a hotel REIT is sensitive to the recession, whereas a hospital REIT is not. 
  • Higher interest rates tend to downgrade the share prices of the REITs.

2.    Invest in real estate crowdfunding

The advent of technology has opened new avenues for real estate investment, and the latest buzzword is 'crowdfunding.' Today, it has become a popular way for developers to access the large working capital required for completing a project. Instead of bank financing or funding the project with their money, the developer raises the wealth by connecting with crowd funders like you in exchange for an equity interest. 

It creates a win-win situation for everyone because the developer raises money without the intervention of banks and traditional lenders, the crowd funder makes a lucrative return, and the property buyer chooses from an array of properties. 

You can connect with developers using the different crowdfunding real estate platforms. Like brokers in the stock market, these platforms work as intermediaries between the developer and investors like you.  Furthermore, the online platform ensures all the listings are legitimate, and they collect money on behalf of the developer. 

Reason to invest:

  • You can make investments as lows as $500. 
  • Most of the investment options are for a year and seldom cross 36 months. It reduces the long wait period associated with the purchasing of property.
  • Apart from yielding a high ROI, these projects result in a lump-sum return on selling the property.
  • Ensures asset transparency as you can choose the market and the property you are comfortable investing in. 

Risks associated:

  • Illiquid investment because you cannot immediately sell it for cash. You have to wait for the completion of the project. 
  • The execution risk is higher as most crowdfunded projects are backed by a single asset. Furthermore, an economic downturn and oversupply issues result in lower returns. 

3.    Flip properties

Flipping properties sounds simple: buy a cheap house, make cosmetic changes, put it back on sale, and earn large profits.

 It's harder said than done!

Imagine buying a house for $100,000 and spending $30,000 in renovations, and then nothing because you don't find a buyer. You end up paying the mortgage for your home, for the flip property, home insurance, and utilities.  And, all this cuts down your profit, which eventually affects the ROI. 

Flipping a property is worthwhile if you follow the 70% rule, which states that the maximum money an investor pays for the property is 70% of the ARV (after repair value) minus the repairs needed. 

For example, if the ARV of the home is $100,000, and the repair cost is $30,000, the investor should not pay more than $40,000f for the home.

(100,000 ×0.70) – 30,000 = $40,000

The rule gives you cushion to withstand the potential market volatility and help you earn profits. 

Flipping a property is not for the faint-hearted because it may not sell fast or at the desired price. You take big chances; therefore, pay special attention to the location and price of the property. 

Reasons to invest:

  • Potential to make excellent returns.
  • A safer investment as it keeps the capital at risk for a minimal time.

Risks associated:

  • Flip properties may not sell at a desired price and pace. 

4.    Invest in rental properties 

Whether residential or commercial, investing in rental properties is a great way to make extra cash flow every month. To make it a profitable asset, you need to buy a property with a combined property tax payment, home insurance, and monthly mortgage payment less than the rent of the property.  

Furthermore, rent prices go up almost every year with mortgage payment remaining the same throughout – resulting in higher earnings. 

You can make big profit margins by following the 1% rules, which divides the property's monthly rental with the purchase price. If the value is in the 1% range, the property will prove profitable in the long run. 

For example, if you purchase a home for $200,000 and the estimated monthly rental is $2250, it would provide a return of 1.125%. 

When investing in rental properties, you might have to consider other aspects such as vacancy rate and other variables. 

Reason to invest:

  • Generates high passive income.
  • The interest you pay on the investment property loan is tax-deductible.
  • Real estate values are stable than the stocks.
  • Generates incomes from property value growth.

Risks associated:

  • Illiquid asset as you cannot immediately convert it to cash.
  •  Irrespective of your due diligence, you will come across rude and messy tenants that are hard to deal with. 

5.    House Hackling

In house hackling, you purchase a multi-apartment building.  You live in one and rent out the rest. It allows you to generate monthly rental income by reducing your expenses as you live in the property. 

For example, you purchase a six-unit building for $400,000. With taxes and insurance, the mortgage payment is $3, 500 per month. You live in one unit and rent out the remaining 5 for $1,000 per month. You're generating a profit of $1,500 per month and reducing your living expenses. 

Reason to invest:

  • As you live in it, the property qualifies for primary residence financing, which means a lower interest rate. 
  • Higher cash flow generation

Risks associated:

  • You end up sacrificing your privacy and comfort as you live with the tenants. 

In the end

If you play your cards right and carry out proper due diligence, you can mint a lot of money through real estate investment. Ideally, diversifying the investment will prove fruitful in the long run. 

Weigh your options and carry out proper research before making a final call.

  • 2 comments on “5 ways to start investing in real estate in 2020”

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