Getting Started with Real Estate Investing

October 6, 2019 Barbara Peterson

Most people feel intimidated when they think about getting started with real estate investing. We all know there is money to be made in real estate—whether it’s as an investor, real estate agent, or landlord. However, given the sheer volume of options available to get into the market, it can be difficult to know where to begin.

Luckily, you don’t have to be a real estate tycoon or a large property firm like JLL or Caldwell Banker to earn money in real estate. You don’t have to own, maintain, and lease a bunch of houses either. Real estate investing takes many forms and the wide-ranging opportunities available make it easier for more people to earn money today from the real estate market than ever before.

What is a real estate investor?

Real estate investing might sound overwhelming, but if you break it down into simple terms it explains itself. Real estate is simply some type of property which may consist of land or buildings. Investing is the act of financially supporting an asset with the expectation of making a profit or positive financial return. So, real estate investing is simply the act of contributing money to a building or piece of land with the expectation of eventually earning more money than originally contributed—either from rent payments or capital gains.

Why should I consider getting started with real estate investments?

It’s easy to picture the larger-than-life character of a real estate investor—Hollywood gives us lots of archetypes to choose from. But there is no one single type of real estate investor. They each have different specialties—investing in commercial buildings, residential properties, businesses, vacation rentals, and more. The sector itself contains many people who work in real estate full time. According to the Bureau of Labor Statistics, the Real Estate and Rental and Leasing subsector employees 2.33 million people full-time. And for many people, real estate investing is something they do in addition to another full-time job.

This makes sense, as most of us want to make more money. According to the Federal Reserve Bank of Atlanta, it’s a fact that wages in the United States are growing anemically, if at all. Cost of living is increasing as well. Going to the grocery store, paying rent, or spending money on transportation takes up more and more of our paychecks each year. Earning income through real estate investing can be a way for anyone to earn supplemental income to support their family.

Therefore, if you’re looking to invest in real estate, we have good news for you! You can dip your toe into investing and begin making passive income without quitting your full-time job. Entry into the real estate industry can be gradual, starting with learning more about real estate and the various components of the market.

Types of Real Estate

Let’s get started by talking about the major types of real estate and investment opportunities in each.

Residential Real Estate

Residential real estate is familiar to most people, as it includes the homes we all live in. Residential real estate can include single-family homes in the suburbs, a multi-family condo building downtown, a row of townhouses in Washington, DC, and many more.

Additionally, residential real estate is booming. The real estate industry measures its productivity by housing “starts,” which simply means the number of buildings that start construction within a given time period. According to the National Association of Realtors, last year, there were 876,000 housing starts for single-family homes, and 374,000 for multi-family buildings. Overall, new home construction is up 8% in the second quarter of 2019 compared to the same quarter last year according to Realtor.com. The cost of housing is highly variable, depending on where you live. The most expensive markets for a single-family home or condo include San Jose, San Francisco, Orange County, Honolulu, San Diego, Los Angeles, and Boulder.

Investors looking to buy residential real estate will need to do careful market research in order to ensure that their local real estate market will support the rent they need to charge in order to pay mortgage payments and keep up with maintenance and unexpected expenses.

Commercial Real Estate

Another major type of real estate, commercial real estate, includes real estate used for business purposes rather than residential use, though large multi-family housing units and apartment buildings can also sometimes be classified as commercial buildings. Low-slung strip malls anchored by grocery stores and 80-story high rises in Manhattan are a couple of other examples.

Regional economics can make analyzing the commercial real estate market from a national perspective a bit futile, but $318.5 billion of commercial real estate started construction last year. Multi-family apartment buildings (as a commercial entity) were the most stable asset class, closely followed by industrial-related real estate, according to a survey of National Association of Realtors members.

Recently, lots of news sites enjoy discussions on the death of malls, and the statistics support this conclusion. Malls reported a vacancy rate of 12.9% last year. However, commercial real estate industry professionals report optimism about several opportunities: affordable housing, senior health care facilities, climate-controlled storage, transit-oriented development, and port/warehouse leases.

Getting started in commercial real estate often requires a large influx of cash and significant risk, though many of the types of properties mentioned above are now available via crowdfunding real estate opportunities, a topic explored later in this article.

Other Types of Real Estate

Industrial real estate is another distinct form of real estate. The market is made up of warehouses, distribution centers, and other buildings or land associated with logistics and the transportation elements of the manufacturing supply chain. Often, these types of facilities are located near key transportation hubs, and can be in urban, suburban, or rural areas.

Land is another type of real estate open for investment. This could include vacant land or farmland. Vacant land offers many possibilities. Underutilized property can be a prime opportunity for an adaptive reuse project or complete rebuild.

Risks of buying real estate rental properties when getting started with real estate

As we all know, real estate investing can be incredibly complex. Buying a piece of property takes significant time and money, no matter what type of real estate you are investing in. Financing concerns, ensuring a clean title, getting appraisals, and many other roadblocks create a lot of work, and costs add up quickly.

One of the top concerns when buying a real estate rental property is securing financing from a mortgage lender. As an investor, you will typically need at least 20% as a down payment. Also, the bank will require a business plan or evidence of a rental market that will support repaying the mortgage. Funding for closing costs and additional money to prepare the building for tenants will also be needed.

Doing all this to get started with real estate investing involves real estate agents, mortgage brokers, and appraisers. But there are other ways to invest in real estate—opportunities that don’t require a lot of work and carry much less risk.

What is real estate crowdfunding investing?

Many real estate developers need financing for their projects. While a bank is a traditional place for a developer to seek financing, many reputable developers now raise capital through crowdfunding.

Crowdfunding for real estate projects is on the rise, thanks to a change in government regulations. The Jumpstarting Our Business Startups (JOBS) Act of 2012 included provisions that enabled businesses like real estate developers to ask a group of people (the crowd) to invest in their business activities. Rules and policies issued since 2012 have refined the federal regulations. This regulatory change opened the floodgates for a wide variety of crowdfunded real estate projects.

Crowdfunding for real estate is not as simple as a developer creating a Kickstarter campaign. Crowdfunding for real estate is regulated by the Securities and Exchange Commission (SEC) who sets parameters for who can invest and how much can be raised per project. Several companies make it easy for investors and developers to participate in the crowdfunded real estate market.

Fundrise

Fundrise is a pioneer in the crowdfunding real estate industry. The company got its start in Washington, DC, identifying buildings in disrepair that could be a valuable community amenity from both a financial and social perspective. It first invested in the Maketto building in the thriving H Street neighborhood. Maketto is part store, part restaurant, and part coffee shop, and is frequented by several well-known figures like Michelle Obama. Fundrise bought the building and then asked if any area residents would like to invest in the project. The neighbors bought all available 3,250 shares, some of which cost as little as $100. That first deal was less than 10 years ago, but the industry has evolved significantly since then.

Fundrise Portfolio Options

Fundrise has grown and now offers several different options to help investors get started with real estate without owning any property outright. Returns are earned primarily in two ways. Firstly, investors receive quarterly dividends. Secondly, your shares of the investment will appreciate over time.

Starter Portfolio. This is the lowest-cost investment option Fundrise offers at just $500 for the minimum investment. Fundrise ensures your happiness as an investor with a 90-day satisfaction period, allowing you to ask them to buy back your investment at the original amount.
Core Plan for Supplemental Income. The goal of this portfolio is to maximize quarterly dividends with less appreciation of the total value of the portfolio. At the time of this writing, there were 52 active projects in this portfolio.
Core Plan for Balanced Investing. The goal of this portfolio is to blend dividends and the appreciation of shares. At the time of this writing, there were 66 active projects and
Core Plan for Long-Term Growth. This portfolio pays out fewer dividends but maximizes the growth of your share value. At the time of this writing, there were 45 projects in this portfolio.

Investments in Fundrise provide many benefits. A big one is the relatively low amount of money someone needs to start investing. It’s only $500 to participate in Fundrise’s Starter Portfolio which is low compared to other crowdfunding platforms. In total, Fundrise has invested $2.5 billion in real estate and in the last five years, their average annualized returns have ranged from 8.76-12.42%.

Realty Mogul

RealtyMogul is another crowdfunding platform. It allows both accredited and non-accredited investors to use its services, although non-accredited investors are limited to RealtyMogul’s two REITs, or real estate investment trusts. Accredited investors are defined by the SEC, and need either an annual income over $200,000 or a net worth over $1 million, not including a primary residence.

To date, more than $400 million has been raised through Realty Moguls’s crowdfunding services. Developers face a very selective process for their projects to be accepted on the platform. About one in every 1,000 properties that apply are selected for eligibility to crowdfund. The level of due diligence is a service Realty Mogul provides for accredited investors. In short, it allows someone to invest in a specific project and get started with real estate without all the upfront headaches.

Roofstock

Next, Roofstock is an online marketplace that currently operates in twenty-five states and focuses on single-family real estate investing. They offer several services that increase transparency between potential buyers and potential sellers. Their research and insights give buyers more information about whether their investment is tenable. Roofstock also vets property managers for the buyer, which enables the buyer to reduce their landlord responsibilities.

Lastly, they offer an investment opportunity for people who do not want to own an entire rental home or cannot finance the purchase of one. Roofstock One specializes in property share investments. An individual can use Roofstock to see if shares of an individual property are for sale and purchase a single share, instead of an entire property. Roofstock One starts at about $5,000 a share.

Crowdstreet

Crowdstreet is another crowdfunding platform to help you get started with real estate investing, and specializes in raising capital for commercial real estate developments. More than 112,000 investors are utilizing the platform, helping developers crowdfund their projects. Crowdstreet has three different services to offer a real estate investor.

Individual Deals. These deals allow investors to review and invest in each deal on their own. Crowdstreet has a platform allowing you to track all your investments and communicate with sponsors, as well as having all relevant information to make appropriate investment decisions.
Funds and Vehicles. Diversification is key, as most investors know. Funds provided by Crowdstreet allow investors to diversity in commercial real estate without doing the work and due diligence of an individual project.
Advisory Services. Finally, Crowdstreet’s in-house real estate professionals can build and manage a portfolio for investors who would like additional expertise to guide their decisions.

How do I get started in real estate investment through crowdfunding?

Let’s assume you have $10,000 to invest in a rental property to get started with real estate investing. Traditionally, this wouldn’t even cover the down payment necessary to obtain a mortgage for a single-family house or condo. Instead of finding a real estate agent and getting pre-approved for a mortgage, you decide to invest that $10,000 in a portfolio of real estate properties to diversify your risk and choose Fundrise.

After that, you review Fundrise’s various options and choose to invest in their Supplemental Income portfolio because you want more passive income on a more dependable timeline. This is the plan that focuses on steady income-producing properties like apartment buildings and retail leases. These properties are located around the United States, but primarily in urban areas.

Each quarter, you receive a dividend from Fundrise. The exact amount depends on the several intricate factors, and occasionally, when a building is sold, you will receive payment for your share of the appreciation value. Real estate is intended to be a longer-term investment, no matter the cash flow it can generate. Fundrise prefers an investor to stay for at least five years but allows liquidity of shares after an initial 60-day waiting period.

What income in real estate crowdfunding is possible?

People currently investing with Fundrise report returns of 8.7% – 12.4%. So, if you invested the $10,000 we discussed above, and Fundrise gave you 100% of that money in dividends each year, you would receive between $870 and $1240 in passive, supplemental income each year. If you reinvest your dividends, your returns will compound so they’ll be worth significantly more at some point in the future.

Whether or not you reinvest your dividends comes down to personal preference. Passive income is income resulting from cash flow received on a regular basis with minimal to no effort by the recipient. Many crowdfunding real estate investors’ goal is to use platforms like Fundrise to receive quarterly passive income, and eventually get to the point of enough passive income generated each quarter where they can quit their day job. This is referred to as investing for cash flow.

Other investors will decide that for them, reinvesting their dividends will allow them to grow their nest egg and retire early. Either way is great!

How to get started with real estate investing

Crowdfunding’s advent enables more people to take advantage of real estate investments while also remaining protected from risk. The SEC’s regulations governing crowdfunding set limits individual investments. They also set limits on how much an individual real estate project can raise through crowdfunding. The limits on individual contributions are designed to ensure investors don’t lose their life savings or go into bankruptcy.

Above all, crowdfunded real estate requires little effort for investors with returns that are nearly guaranteed. Diversified risk and a widened portfolio makes crowdfunded real estate investing a smart decision for most investors.

If you’re interested in getting started with real estate, we recommend investing with Fundrise or one of the other platforms we mentioned in this article. Have you tried crowdfunded real estate? If so, leave us a comment below and let us know what returns you are seeing!