Real Estate Investing For Beginners: Make Passive Income

Our article on real estate investing for beginners will tell you some ways to start real estate investing and grow your wealth in long-term assets.

Long-term assets may not have quick liquidity, but the passive income created by real estate investing can change your future finances starting today.

You can invest in single-family homes and REITs using Fundrise or Roofstock, and with research and careful planning, becoming a real estate investor can be a savvy way to ensure a bright financial future.

Why Real Estate?

Real estate is a tangible asset that will always be in demand. Many real estate business ideas can make people money.

Historically, real estate investments will appreciate over time.

And unlike stocks or bonds, real estate is a physical asset that is not subject to the ups and downs of the stock market.

It is subject to property prices in your area, but real estate has consistently increased in value over the long term.

In addition, owning rental property generates rental income, which can provide a valuable stream of income during retirement.

Leverage, Control, & Tax Advantages

Real estate is an excellent investment because it offers a lot of leverage, control, and tax advantages for these income-producing assets.

Leverage

Using leverage in real estate investing means controlling property worth much more than your initial investment. In other words, you can use a small amount of your own money to control a larger asset and increase your net worth.

For example, let’s say you buy a $300,000 house with 20% down ($60,000). You have now used $60,000 of your own money to control a $300,000 asset. If the property appreciates by 5%, it is now worth $315,000. 

With more leverage comes a greater potential for risk, however. If the property value decreases by 5%, you will have lost all of your real estate investment.

Tax Advantages

The tax advantages that come with investing in real estate are very attractive. The two most common are depreciation and 1031 exchanges.

Depreciation is an often-overlooked tax deduction that allows you to write off the wear and tear of your rental property over time.

This can be a significant deduction, especially if you have a high-priced property.

1031 exchanges allow you to sell a property and reinvest the proceeds into another property without paying any capital gains tax.

Some strict rules must be followed to qualify, but 1031 exchanges can be a great way to defer taxes on your real estate gains.

These are just two tax advantages of investing in real estate. 

Control

Real estate investing gives you a lot of control. When you invest in the stock market, you have very little control. You cannot control the price of the stocks you own, and you have no say in how the company is run.

With real estate, you are in control of your investment and can make decisions that will impact your bottom line. You can decide how to use the property, who to rent it to, and how much to charge in rent.

You are also in control of any renovations or improvements you make to the property, which allows you to add value to the property and increase your rental income.

Real Estate Investing For Beginners

There are a few different ways to start investing in real estate for beginners. It’s important to research before deciding which route suits you.

1. Mutual Funds

Initial Investment: usually less than $10,000

Investing in a real estate mutual fund is one of the easier ways to invest in real estate for beginners. You don’t have to worry about finding and managing properties yourself. Instead, that is all taken care of by the fund manager.

Real estate mutual funds are a type of mutual fund that invest in REITs and operating companies that focus on land, buildings, or other properties–allowing you to earn more profit from each fund sale.

With a relatively small capital, you can gain exposure to real estate markets worldwide.

2. REITs

Initial Investment: $1,000 – $25,000

A Real Estate Investment Trust (REIT) can be an excellent way to diversify your portfolio, generate income, and get started in the real estate industry.

There are two types of real estate investment trusts, equity REITs and mortgage REITs:

• Equity REITs own, operate, and manage income-producing real estate properties, such as office buildings, shopping malls, and apartments
• Mortgage REITs focus on investing in mortgages and mortgage-backed securities

Before trying this type of real estate investing, there are some things to know:

1. The safest REITs are registered with the Securities and exchange commission(SEC) and publicly traded on major exchanges like stocks.
2. Public traded REITs usually pay out high dividends, providing a steady cash flow. However, these dividends are not guaranteed and can fluctuate based on the performance of the underlying properties. 
3. REITs are required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends.  
4. REITs are subject to the same financial disclosure rules as any publicly traded company, which means you should be able to find out more about these companies and their investments than you would if you were researching a private REIT.

3. Flip Houses

Initial Investment: Use the 70% rule – Real estate investors should only put down 70% of the after-repair value (ARV) minus repair costs when buying property

Flipping houses has become a popular side hustle to make money in recent years. The basic idea is to buy property, renovate it, and then sell it for a higher price.

While this real estate investing can be a lucrative business, it is not without its risks. The goal is to make a profit, so make sure you have a renovation budget and stick to it.

Also, be realistic about the renovation and sale timeframe. It can take longer than you think to sell a property, so ensure you have the cash flow to carry the property for an extended period if necessary.

You must also be aware of the housing market and time your sale carefully. If you buy a property at the wrong time, such as when the Federal Reserve Bank raises the interest rates or renovates it to appeal to the wrong demographic, you may not be able to sell it for a profit.

4. Rental Properties

Initial Investment: Individual investors often use the 1% rule, which compares the purchase price and possible monthly cash flow

Many people choose to invest in properties to rent to generate additional income. There are some advantages to these real estate investments.

First, these investment properties tend to appreciate over time so that you can sell them for a profit. Second, you can use the rental property income to cover the mortgage payments and potentially earn a positive cash flow. Finally, you’ll build property equity as you pay the mortgage.

Of course, some risks are also involved with investing in these real estate properties. Research and choose a property that is likely to appreciate and generate substantial rental income. Also, be aware that real estate appreciation is not always easy to predict.

5. Rent A Room

Initial Investment: Varies depending on the cost of rent and the repairs/updates needed to the rental space

Another way for beginners to start real estate investing is by “house hacking.” House hacking means living in the investment property while renting out extra rooms to tenants and acting as a property manager.

House hacking allows you to live in a property for less than it would cost to rent an apartment while also generating income from the rental units. It is a great way to save for your home.

Investors who use the house hacking strategy can usually buy a property with up to four units and still qualify for a residential loan. You can also deduct many of the expenses associated with the property, such as mortgage interest, insurance, and maintenance costs.

There are a few things to remember if you’re considering renting a room in your home. First, you’ll need to check your local laws and regulations to ensure it’s legal to rent a room in your house in your area.

Look at your homeowner’s insurance policy to see if there are any restrictions on renting rooms in your home. You’ll also want to screen potential tenants carefully and ensure you have a solid lease agreement.

6. REIGs

Initial Investment: Depends on the REIGs that you join

An REIG is a group of investors who use their pooled resources to invest in real estate deals. The group members pool their money and resources and then jointly purchase real estate or multiple properties. 

The group may also provide loans to members who want to raise capital to buy property independently. If you’re interested in joining an REIG, you can contact your local real estate investments club or group. You can also look for REIGs online.

The main advantage of investing in real estate as an REIG is that it allows investors to pool their resources and spread investment risk across multiple properties. This can provide stability and security that can be difficult to achieve when investing in real estate on your own. 

In addition, REIGs can offer investors the opportunity to gain experience and knowledge about the real estate market by working with other experienced investors.

7. Crowdfunding

Initial Investment: As low as $10 with Fundrise

Online real estate crowdfunding platforms have revolutionized how people invest in property. These platforms allow investors to pool their money together to buy property, which can then be rented out or sold for profit.

They typically have lower fees than traditional real estate investment firms and offer a more hands-off approach for investors who don’t want to be involved in property management.

Fundrise is one of the leading online crowdfunding platforms for real estate. They offer many different investment plans, which allow investors to choose the level of risk and return they’re comfortable with.

In addition, online platforms provide access to a broader range of properties and can be a great way to diversify your investment portfolio.

Investment Platforms

Several online real estate investment platforms allow the savvy real estate investor to purchase and manage properties without going through the hassle of traditional methods of making a real estate deal.

These platforms provide many benefits, including viewing properties worldwide, connecting with other investors, and easily tracking performance.

Online platforms are worth considering for anyone looking to invest in real estate to start adding to their wealth.

Fundrise

Fundrise is an online real estate investing platform that allows individuals to invest in private commercial real estate projects, like apartment complexes, single-family homes, office buildings, industrial properties, hotels, and shopping centers.

Investors can choose from various investment plans with different risk and return profiles. Fundrise has a team of experienced real estate professionals who carefully select and monitor each project on the platform. 

All investors are diversified across multiple projects, which helps to mitigate risk. Investments made through Fundrise are typically long-term, but investors can choose to cash out their investment anytime. 

Fundrise has a low minimum investment amount and charges no fees for account management or withdrawals. Check out our Fundrise Review to learn more about investing in Fundrise!

Roofstock

Roofstock makes it easy for anyone to invest in income-producing physical properties without going through the hassle and expense of traditional channels like real estate agents, mortgage brokers, and property management companies for property ownership.

They are an online marketplace for real estate investing in single-family rental properties. It allows investors to purchase properties leased to creditworthy tenants with the option to choose from various property types and locations. 

A team of real estate professionals vets properties listed on Roofstock. Each property investment comes with a detailed Property Report that includes information on the neighborhood, local market conditions, the property taxes of the real property itself, and the tenant. 

Investors can choose to have their rentals managed by professional property managers or self-manage their properties if they live near enough. 

Learn more in our Roofstock Review!

Yieldstreet

With Yieldstreet, non-accredited investors can get involved in real estate investing without having $100K+ to buy a house.

You can invest in single-family and multi-family homes with as little as $2,500, but you can also invest in commercial and industrial developments.

There are more investment options for accredited investors, but Yieldstreet is a great option for new investors.

If you want to know more, read our Yieldstreet Review to get more info on your investment options. 

Crowdstreet

Crowdstreet is a crowdfunding platform that allows investors to invest in real estate projects with the potential for high returns and the ability to diversify their portfolios. 

Commercial real estate crowdfunding is a way for individuals to invest in large, income-producing properties such as warehouses, retail centers, and multifamily apartment complexes. 

With Crowdstreet, investors can browse and select from various real estate projects. Once they have selected a project, they can then choose to invest an amount of money that meets their investment goals and risk tolerance. 

Pros & Cons Of Real Estate

Pros

• Is a tangible asset
• Provides stability and security
• Can create passive income
• Provides leverage
• You can control your investment

Cons

• Is an illiquid asset
• Many expenses associated with owning real estate
• Takes time and effort
• Subject to market conditions
• May have to deal with problem tenants

FAQs

What real estate investing options should I pick?

Beginner real estate investors might consider investing in a real estate mutual fund or REIT through online brokerages.

If you’re looking for more control over your investments, you can also buy properties to rent or flipping homes.

What do I need to buy my first investment property?

It depends on what type of investment property you are going to purchase. For example, if you want to buy a fixer-upper to flip, you will need money for the down payment, renovations, and other associated costs.

If you want to purchase a rental property, you will need enough for the down payment and any repairs or upgrades that might be needed.

What are other ways to earn passive income that have smaller initial investments?

You don’t need $5oK to invest in real estate with some platforms, but there are other investments that are more affordable.

Other investments with smaller initial investments include ETFs, stocks, retirement funds, and more.

Robinhood is great for beginners, with hands-on investing in ETFs, stocks, crypto, and more.

You can get 2 free stocks if you sign up today, so check out our Review to see how you can invest with Robinhood.

If you’re looking got more hands-off investing, you can check out Robo-investing with Acorns and Betterment.

They can invest your money for you and make decisions based on your risk tolerance and investment goals.

What are some risks associated with real estate investing?

Real estate is often considered illiquid, meaning it doesn’t easily convert to cash precisely when you want it.

Purchasing an illiquid asset can be a drawback for some investors, as it can take time to find a buyer willing to pay the price you want for your property. However, it can also be a benefit, providing stability and weather any short-term market volatility.

It contrasts with stocks or bonds, which can be sold immediately on an exchange and fluctuates frequently.

Final Thoughts

Investing in real estate can be a great way to earn passive income and build wealth over time.

You can start investing in real estate today with as little as $10 through Fundrise, but check out all your option and even branch out to other investments.

Plus, if you’re looking for quicker money, consider short-term investments that can have ROI in less time than real estate.

However, it’s important to remember that there is risk involved in any investments, so it’s best to start slowly and do your research before investing large sums of money.

Look through your real estate options and more. With patience and diligence, you can be a successful real estate investor today!