Buying and owning real estate is an investment strategy that can be both satisfying and lucrative. Unlike stock and bond investors, potential real estate owners can use leverage to purchase a property by paying a portion of the total cost up front and then paying off the balance plus interest over time.

While a traditional mortgage generally requires a 20% to 25% down payment, in some cases a 5% down payment is required to purchase an entire property. This ability to control the asset once papers are signed encourages both real estate flippers and landlords, who in turn can take out second mortgages on their homes to make down payments on additional properties. Here are five key ways investors can make money in real estate.

1. rental property
Owning rental properties can be a great opportunity for individuals with do-it-yourself (DIY) and renovation skills and the patience to manage tenants. However, this strategy requires significant capital to fund maintenance costs upfront and cover free months.

Professional
Provides regular income and properties to appreciate

Maximizes capital through leverage

Many tax-deductible utility costs

Disadvantage
Can be cumbersome to manage tenants

Potential property damage from tenants

Lower income from potential vacancies

According to the U.S. Census Bureau, new home sales prices (a rough indicator of property values) rose steadily from 1940 to 2006 before plummeting during the financial crisis. Subsequently, sales prices resumed their ascent and even exceeded pre-crisis levels.12 It remains to be seen what long-term impact the coronavirus pandemic will have on real estate values.

2 Real Estate Investment Groups (REIGs).
Real estate investment groups (REIGs) are ideal for people who want to own rental properties without the hassle of operating them. Investing in REIGs requires a capital cushion and access to financing.

REIGs are like small mutual funds that invest in rental properties. In a typical real estate investment group, a company buys or builds a series of apartment buildings or condominiums and allows investors to purchase them through the company, thereby joining the group.

An individual investor may own one or more units of stand-alone housing, but the company that runs the investment group collectively manages all the units, handles maintenance, advertises vacancies, and interviews tenants. In exchange for performing these management tasks, the company takes a percentage of the monthly rent.

A standard real estate investment group lease is in the name of the investor, and all units pool a portion of the rent to protect against occasional vacancies. To this end, you receive some income even if your unit is vacant. As long as the vacancy rate for the bundled units is not too high, there should be enough to cover the cost.

Pro
More hands-off than rentals

Provides income and appreciation

Disadvantage
Vacancy risks

Similar fees to mutual funds

Vulnerable to unscrupulous managers

3. house flipping –
House flipping is for people with significant experience in real estate appraisal, marketing and renovation. House flipping requires capital and the ability to make or oversee repairs as needed.

This is the proverbial “wild side” of real estate investing. Just as day traders differ from buy-and-hold investors, real estate flippers differ from buy-and-rent landlords. Case-in-point real estate flippers often look to profitably sell the undervalued properties they buy in less than six months.

Pure real estate flippers often do not invest in improving properties. Therefore, the investment must already have the intrinsic value needed to make a profit without making any changes or they eliminate the property from contention.

Flippers who cannot unload a property quickly may find themselves in trouble, as they usually do not have enough uncommitted cash on hand to pay the mortgage on a property over the long term. This can lead to persistent snowballing losses.

There is another type of flipper who makes money by buying inexpensive properties and adding value by renovating them. This can be a longer-term investment where investors can only afford one or two properties at a time.

Professional
Commit capital for a shorter period of time

Can offer quick returns

Disadvantage
Requires deeper market knowledge

Hot markets cool unexpectedly

4. real estate investment trusts (REITs)
A Real Estate Investment Trust (REIT) is best suited for investors who want portfolio exposure to real estate without a traditional real estate transaction.

A REIT is created when a corporation (or trust) uses investor money to purchase and operate income-producing properties. REITs are bought and sold like any other stock on the major exchanges.3

A company must distribute 90% of its taxable income in the form of dividends to maintain its REIT status. In this way, REITs avoid paying corporate income tax, while a regular company is taxed on its profits and then must decide whether or not to distribute its after-tax profits as dividends.4

Like regular dividend-paying stocks, REITs are a solid investment for stock market investors who want regular income. Compared to the types of real estate investments mentioned above, REITs allow investors to enter non-resident investments such as shopping centers or office buildings that are generally not available for individual investors to purchase directly.

More importantly, REITs are very liquid because they are publicly traded. In other words, you don’t need a broker or wire transfer to cash out your investment. In practice, REITs are a formalized version of a real estate investment group.

Finally, when considering REITs, investors should distinguish between equity REITs, which own buildings, and mortgage REITs, which finance real estate and engage in mortgage-backed securities (MBS). Both provide exposure to real estate, but the nature of the exposure is different. An Equity REIT is more traditional in that it represents ownership of real estate, while Mortgage REITs focus on income from mortgage financing of real estate.

Pro
Essentially dividend paying stocks.

Core holdings are typically long-term, cash-producing leases

Disadvantage
Leverage associated with traditional rental properties does not apply

5. online real estate platforms
Real estate investment platforms are designed for those who want to join others to invest in a larger commercial or residential business. The investment is done through online real estate platforms, also known as real estate crowdfunding. It still requires capital to invest, although less than what is required to buy real estate directly.

Online platforms connect investors who want to fund projects with real estate developers. In some cases, you can diversify your investments with not much money.

Professional
Can invest in individual projects or portfolios of projects

Geographic diversification

Disadvantage
Tends to be illiquid with lock-up periods

Management fee

Bottom line
Whether real estate investors are using their properties to generate rental income or to stall their time until the perfect sales opportunity arises, it is possible to build a robust investment program by paying a relatively small portion of a property’s total value up front. And as with any investment, there is profit and potential in real estate whether the overall market is going up or down.