Investing in real estate is a popular way to try to make money, but you don't necessarily have to buy a property to accomplish your goals. Depending on the amount of money you have to invest and how involved you want to be in the process, there are different investment options available to you.
In this article, we'll show you how you could make money in real estate using various strategies and share the pros and cons of each — as well as how much you’ll typically need to invest — to help you decide which option is right for you.
1. Purchase rental properties
Investing in rental properties is probably the first thing that comes to mind when thinking about how to make money in real estate. It is a popular strategy — in fact, the U.S. Department of Housing and Urban Development (HUD), estimates that there are 48.5 million rental units in the U.S.
Buying a rental property typically involves saving for a down payment and working with a real estate agent to help find and purchase the property. Rental properties could include multi-family properties, single-family homes, or condos and townhouses, depending on what you're looking for. If the property you choose doesn’t have tenants, a real estate agent may also help you find tenants for a fee.
There are two primary types of renters – short-term and long-term – and the type and location of your property typically dictate which type of renters you’ll have. Short-term rentals can range anywhere from one night to several weeks, and you might find these types of rental properties in a community where summer or winter tourism is popular.
Long-term rentals are typically one-year leases that renew each year. Some tenants stay for only a year, while others can stay for much longer. In some areas of the country, travelers might also rent homes seasonally. For example, for "snowbirds" from the north, renting homes or condos in warmer climates for the winter is a regular way to escape the cold and snow.
Some landlords choose to handle property management, while others outsource it to professionals. While outsourcing can eat into your profits, it can also save you the hassle of finding tenants, collecting rents, handling calls for repairs, and other day-to-day requirements of owning a rental property.
Investment properties are best for investors who seek a stream of income from rents and could benefit from long-term appreciation in the value of the property. It’s also a good option for more hands-on investors, as it typically requires some work to manage a rental property, especially if you’re managing it without the help of a property manager.
Pros and cons of purchasing rental properties
- Property appreciation builds equity
- Loan amortization reduces your mortgage balance and builds equity over time
- Positive cash flow when revenue (rent payments) exceeds expenses, mortgage payment, and reserves (for future repairs and vacancy)
- Landlords can use depreciation to reduce taxable income
- Vacancies (aka no tenants) can leave you with all the expenses but no income
- Tenants may damage property and you have to pay to fix it
- You may have to evict tenants for not paying rent
- Major repairs (e.g. roof or HVAC system) can negate many months' worth of profit
2. Real estate crowdfunding platforms
If you like the idea of rental properties, but don't want the responsibilities of being a landlord, real estate crowdfunding platforms could be a good option for you. These platforms enable investors to start investing in fractional ownership of rental properties through real estate investment trusts (REITs). REITs are similar to mutual funds, but they include commercial properties instead of stocks.
Investors can often start investing with a real estate crowdfunding platform with as little as $500 — substantially less than purchasing a rental property. Depending on the platform you choose, you can choose to invest in single properties or a diverse portfolio.
These investments are typically best for investors who want access to a diversified pool of rental properties but do not want the responsibilities of managing them. There are a variety of real estate crowdfunding platforms for you to invest in, but here are four that are popular with our community.
Crowdstreet provides investors direct access to invest in individual commercial real estate deals with a minimum investment of $25,000. Crowdstreet is primarily for higher net worth individuals, as most of the investments it offers are for accredited investors. According to the U.S. Securities and Exchange Commission, you need an annual income of over $200,000 or a net worth of over $1 million to become an accredited investor.
If you meet those criteria, you can pick and choose where to invest your money with Crowdstreet based on deals that are attractive to you, rather than investing in a portfolio of properties chosen by someone else. Crowdstreet also offers managed funds and advisory services that select the deals for you. With these three options from Crowdstreet, you can get as active or passive as you'd like in picking the properties you invest in.
For more information, check out our Crowdstreet review.
Diversyfund is a real estate platform that specializes in apartment complexes. When you invest with Diversyfund, you have the option to invest in its Growth REIT. Investors of all experience levels are commingled in the same pool of money that invests in 100+ unit apartment buildings. You can open a Diversyfund account with as little as $500.
For more information, check out our Diversyfund review.
Fundrise offers four portfolios of a diversified mix of properties for investors to choose from. With a Fundrise “Starter” portfolio, you can get started with just $500. When your balance increases, your account is upgraded to the next level portfolio, which opens up additional features and investment opportunities.
Fundrise invests in a mix of property types, including single-family homes, apartment buildings, and commercial buildings. The highest tier of investors also has access to private equity funds focused on longer-term, higher-value real estate opportunities.
For more information, check out our Fundrise review.
Roofstock specializes in the buying and selling of single-family rental properties. With a Roofstock account, investors can choose to buy individual properties or a portfolio of properties with tenants already in place. Prices for individual properties vary, but you can invest in the portfolios with as little as $5,000.
Investors buy an entire property or portfolio, or they can purchase fractional ownership in select properties. Additionally, investors can submit a property that they'd like to purchase and Roofstock will provide their analysis and expertise to help acquire and rent the property.
For more information, check out our Roofstock review.
Pros and cons of real estate crowdfunding
- Professional management for passive investing
- Access to institutional-quality investments
- Minimum investment amounts starting at $500
- Choose between individual investments or pools of properties
- Able to diversify among multiple property types
- REIT income is taxed at ordinary income tax rates
- Net investment income surtax of 3.8% may apply
- Investments can be illiquid with an expected time horizon of five years or more
- Lack of control in how a property is managed and when it is sold
3. REIT stocks, mutual funds, and ETFs
REIT stocks, mutual funds, and ETFs operate like any other type of investments, except that they have a focus on real estate instead of other industries. These investments are typically highly liquid and can be bought and sold throughout the day, depending on the investment account you choose.
Investors can choose to diversify their portfolio across different segments, or they can choose to invest in a particular industry or segment of the market. These segments can include health care, residential, timberland, mortgages, and more.
This group of investments also includes non-traded REITs. These investments are registered with the Securities and Exchange Commission (SEC), but they are not listed on the stock market. They can charge high upfront fees and are often illiquid for longer periods of time. However, they could potentially offer unique tax advantages that reduce or eliminate taxes on returns.
Publicly-traded REIT stocks, mutual funds, and ETFs are typically best for investors who want to add real estate to their portfolio but prefer the liquidity of a publicly-traded investment.
Pros and cons of investing in REIT stocks, mutual funds, and ETFs
- Publicly-traded REITs can be easily bought and sold through a brokerage
- Can purchase a broad index or specific niches of the real estate industry
- Ability to add publicly-traded investments to a retirement account
- May require more time and effort to research investment
- Non-traded REITs can be highly illiquid and charge upfront fees
- Rising interest rates negatively affect REIT values
- Real estate stocks, mutual funds, and ETFs could potentially be more volatile than a broader stock index
4. Fix and flip homes
With the popularity of real estate-focused TV shows, many people have learned how to start a business by fixing and flipping homes. Fix and flip investing typically involves buying a distressed property or foreclosure below market value, and then renovating and selling it at a price comparable to the neighboring homes.
Flipping houses generally requires a large amount of cash, loans, or both. The money can come from a buyer’s personal funds, investors, banks, and hard money lenders. Hard money lenders may be willing to lend when banks are not, but they often charge higher fees and interest rates than a bank.
This type of real estate investing is pretty hands-on. Investors typically have to renovate the property on their own or with the help of a contractor to increase its value before it can be listed for sale.
While the property is being renovated, the investor must pay carrying costs on the property. These typically include utilities, insurance, property taxes, and other related expenses. Additionally, if they borrowed money to finance the transaction, they'll also generally owe interest on the borrowed amount.
Fixing and flipping homes is best suited for active investors who have in-depth knowledge of the real estate market and enough capital to pay for the purchase and renovations of a property.
Pros and cons of fixing and flipping homes
- Potential for large profits when the home sells
- Typically quick transactions from purchase to sale
- An investor controls when and where to invest
- Expensive to buy the property and pay for carrying costs and renovations
- Competing bidders can drive up prices and reduce profits
- Local market values may change between purchase and sale
- Profits are usually taxed as ordinary income
5. Real estate wholesaling
Real estate wholesaling is a popular approach for new investors. It typically involves finding opportunities and selling them to real estate investors who have the money to purchase a property. Wholesalers generally earn a referral fee every time they find a property that their investor is willing to purchase.
The process of wholesaling usually involves finding motivated sellers and getting them under a contract to sell. This is often done by searching public records for high-equity houses, sending mailers to certain neighborhoods, or making phone calls to homeowners.
The sales contract gives the wholesaler exclusive access to the property for a certain period of time, though they usually do not purchase the property. Instead, they use this time to locate investors who may be interested in purchasing it. When they find a buyer, the wholesaler sells the contract to the investor, who then completes the transaction and pays the wholesaler a referral fee.
This strategy is best for investors who have time to build an investor list and can search for properties that fit their criteria.
Pros and cons of real estate wholesaling
- Does not require a lot of money to get started
- Can make thousands of dollars in one transaction
- Wholesalers do not have to be a real estate agent
- Investors may buy multiple properties from a wholesaler
- Must spend time building a list of investors to work with
- Time and resources required to locate potential sellers
- Limited time to find an investor who can close on the deal
- Do not get paid unless an investor buys the contract
FAQs about how to make money in real estate
Can you make a lot of money in real estate?
It is possible to make money in real estate, but as with any investment, it’s also possible to lose money. Real estate investors can potentially make money in two ways – monthly rental income and property appreciation. It’s important to note that it can take a significant amount of capital to purchase enough real estate to generate a large monthly stream of income.
For investors who want to make a lot of money in real estate, flipping homes and wholesaling could potentially offer higher returns on investment in the short-term than other approaches. The flipper earns a profit from the sale of the home, while the wholesaler profits when an investor buys one of the opportunities that they identify. It's important to do your due diligence, no matter which approach you choose.
How can you invest in real estate with little money?
Many real estate crowdsourcing platforms have investment minimums as low as $500 for new accounts. Additionally, investors can choose to invest in REIT stocks, mutual funds, or ETFs through their brokerage account with small amounts of money. These investments can potentially provide passive income and potential appreciation, though they also come with the risk of loss.
Investors who have more time than money could also consider wholesaling real estate properties. Wholesaling allows investors to earn a referral fee from buyers for identifying properties that fit their investment profile. These referral fees could be thousands of dollars or higher, depending upon the agreement with the buyer and the type of property.
Is investing in real estate a good way to generate passive income?
Yes, real estate investing could potentially be a good passive income stream. However, you may also lose money in real estate. Many investors turn to rental properties, REITs, and other strategies to create a recurring stream of passive income from their investments.
The bottom line
Real estate is a valuable option to diversify your portfolio and a popular strategy for making money. There are many different ways to make money in real estate, from REITs or crowdsourced investing to buying properties to hold as a rental or flip for a profit. Picking the right investment strategy for you depends on how much time and money you have available. Remember that all investments come with the risk of loss.
As you gain more experience, your approach may evolve and a different strategy may appeal more to you. To learn more about real estate investing options and how to get started, read our Beginner's Guide to Real Estate Investing.