From a home mortgage to a nationwide real estate empire, there are several ways to invest 40K in real estate. Most of us can’t afford to buy the latter, but there are other possibilities. Here are a few ways to invest in real estate.
Look into real estate investment trusts if you want to invest 40K in real estate quickly and cheaply (REITs). Public corporations offer stock and bonds to buy and lease shopping malls, office buildings, residential buildings, and warehouses. REITs must distribute most of their after-tax income as dividends.
REITs simplify property ownership. You only collect dividends, which are often higher than stock-based investments, while management manages ownership and rental logistics. Like any public corporation, you can trade REIT stock using a brokerage account. REITs are the most liquid real estate investment. You can also buy REIT ETFs. Stash, M1 Finance, and Robinhood let low-income investors buy fractional REIT ETF shares.
Buy real estate in crowdfunding platforms
Crowdfunding real estate platforms are good for hands-on investors. These internet platforms let you invest in single real estate development projects rather than massive property portfolios.
Real estate crowdfunding platforms combine investor funds for development projects. They usually demand five-year or longer real estate investments. The platform may allow early withdrawals, but you may be penalized.
Platforms can charge. Fees and management charges can reduce your earnings. Remember that not all online real estate platforms accept you. Most demand $500–$25,000 deposits. Some need accredited investors with $1 million in assets other than their primary house or $200,000 in annual income.
Popular platforms Fundrise and Crowdstreet offer real estate funding and projects.
Buy a House
Most investors buy homes. Mortgage payments promote house ownership over time. If your local market is robust, you can sell your property for equity. Long-term house investment can grow wealth, but average annual returns are low. According to Black Knight, homes only appreciated 3.9% yearly from 1994 to 2019. After factoring in costs like maintenance and repairs, insurance, property taxes, and mortgage interest, your house is unlikely to significantly increase in value. According to Nareit, REITs have averaged 11.28% annual returns, whereas a vanilla S&P 500 ETF has averaged 10%.
This doesn’t mean you shouldn’t invest in a home. Government support for the mortgage market and first-time homebuyer programs let you buy a home for far less than other real estate purchases.
Buying rental properties is a big step in real estate investing. One of the most labor-intensive real estate investing strategies, rentals can provide continuous revenue flow and growth over time. Two ways to profit from rental properties:
These properties are usually rented for at least a year and should generate a stable monthly income if your renters are reliable. Buy a multi-unit or single-family home to rent out.
Like Airbnb, these houses accept short-term renters. When you’re away, list your full home or apartment or buy a short-term rental property.
Real estate investing with rental properties has more profit potential, but it involves a lot of work. You must screen tenants, pay for maintenance, repair, and handle other issues. Hiring a property management company will lower your returns but reduce these inconveniences. Rental property financing may lack the resources and cheap loan rates of primary residences. This may raise rental property prices.
Flip Real Estate to Invest
Real estate investing can be profitable without buying rental units. Flipping, like renting, is a typical tactic. It requires upgrading properties and finding promising neighborhoods to sell them at a premium. Renovation and construction increase risk and expense in home flipping. It’s harder than HGTV makes it seem. Renovations require building permits, and contractors or outsourced work may increase remodeling prices.
Look for homes in emerging neighborhoods that don’t need big upgrades to flip. Renting the property while home values grow might increase profits. Remember, the neighborhood you think would become hot may not, leaving you with a property that’s impossible to recoup.
Should You Buy Property?
Long-term real estate investments can outperform the stock market. REITs may be suitable for those with limited funds or who aren’t looking for a primary house because physical property investments can be risky and expensive. If you buy rentals or flip houses, know the dangers and have a plan to recoup your investment.
Remember: Short-term illiquidity makes real estate a large financial commitment. Ask a financial counselor about real estate investing. In some states (such as Texas and Vermont) you do not actually need a real estate agent’s license to buy, sell, and lend, on property. So look into the possibility of DIY real estate investing to save on those pesky finder’s fees, etc.