5 Ways to Invest in Real Estate (From $60 to All-In)

Which investor are you: Hands Off Harry, Rockstar Reggie, or All-In Alex? Here's how to choose your path.

By now you may be getting excited about making your first real estate investment. 

Good news! 

If you are reading between Monday and Friday 9:30 a.m. to 4:00 p.m. Eastern time, then you can invest right now. 

How?

The most passive and liquid way to invest in real estate is by buying shares of a real estate investment trust (REIT). By buying shares of a REIT you will own a small piece of a company that owns and operates real estate. 

REITs are just one of the many ways to invest in real estate. 

Let’s dig in to the many options.

Ways to Invest in Real Estate: From Passive to Active

1. Owning shares of a REIT.

2. Investing as a limited partner (LP).

3. Buying a property by yourself.

4. Buying a property with someone as equal partners.

5. Buying a property as the general partner and raising money from LPs.

Option 1: Owning Shares of a REIT

REITs are public companies that exclusively focus on real estate. They are required to distribute 90% of their taxable income to shareholders (i.e. you) as dividends. 

An example of a REIT headquartered here in San Diego, CA is Realty Income Corporation (NYSE: O). As of this writing, their stock price is trading around $61 per share and they have a 5.28% annual dividend ($3.24 per share) that is paid monthly. 

A benefit of REITs is that they are public stock, so you can sell them at any time. If you are investing in an S&P 500 index fund, then you have exposure to around 30 REITs. 

Who knew you were already a real estate investor!

Option 2: Investing as a Limited Partner (LP)

Investing as a LP is another passive way to invest in real estate. The general partner (GP) does 100% of the work and makes all decisions*. In exchange for doing all the work, the GP earns fees and often collects an oversized share of the profit if the deal does well (this is known as “promote”). 

So what is the tradeoff of being a LP? Control and liquidity.

• You don’t have any control over decisions.

• You can’t access the money until the property is sold.

• The fees and promote paid to the GP reduce your returns.

But on the positive side:

• It is totally passive. A pipe bursts at a property at 3am? The GP has the deal with it.

I have made 20+ of my investments as an LP. In my experience it is a great way to invest in real estate while keeping focused on your day job.

So how do you find these opportunities? 

In my case, I met people through working in the industry. When I heard of people or companies buying the types of properties I was interested in, I asked if I could invest. Some said no. Some said yes. Over time I built up a portfolio of LP investments.

There are also crowdfunding groups out there that connect GPs and LPs. A couple examples are Realty Mogul and Crowd Street. 

One of the challenges that you will need to work through is that most of these groups require you to be an “accredited investor” as defined by the SEC. Generally, you need to have a net worth over $1 million (excluding your primary residence) OR have earned $200,000 (or $300,000 jointly) in each of the two most recent years. Not everyone can meet these criteria.

If this is your situation, don’t be discouraged. 

Options 1, 3, and 4 don’t have these restrictions. 

Many successful real estate investors started by focusing on increasing their earnings through their day job or with a single property investment (option 3) and built their way up to becoming an accredited investor over time.

Option 3: Buying a Property by Yourself

There are no SEC requirements for buying a property by yourself. It is effectively like becoming a parent: not everyone is qualified, but anyone can do it.

This is more work than investing as an LP, but you can figure out ways to make it relatively passive so that you can focus on your day job. 

The Remote Investor Approach

In this scenario, you find a company that is both a broker and property manager. They show you lots of properties to buy. You select one and they help you with the due diligence, closing, loan, inspections, etc. Once you close on the property (i.e. you own it), they handle all the day-to-day and reporting. All you do is tell them what decisions you want to make. 

You could take this approach in the local market you live in or even out of state.

I know someone who bought a number of rental homes in another state this way and didn’t see the properties for the first two years of ownership.

This is not for everyone. 

I don’t think I could handle not seeing the properties before I bought them, but for others this is fine. If you go this route make sure you find a group you can trust. 

There are many examples of people who bought homes in the Midwest US for $100,000 ($30,000 of equity/cash) interviewed on the Bigger Pockets podcast.

Keep in mind that this is only a “passive” version based on the amount of your time it takes. For some this would be an “active” version because of the stress it could cause.

The Hands-On Local Approach

In this scenario, you buy a property in the same town you live in. You can see it, touch it, get to it within an hour if needed. 

You minimize the support you get from 3rd parties (brokers, property mangers, accountants, etc) because you don’t want to pay any fees so you can maximize your cash flow and profit. You don’t trust anyone to pay attention to the real estate like you will.

So far so good.

And then something goes wrong at the property. Eventually something will ALWAYS go wrong.

Here’s an example: You own a duplex. A pipe bursts and floods the property. The tenant calls you at 3am or when you about to deliver a presentation at work. Even if you have a group of great vendors, you still have to figure out how to deal with it.

I experienced dealing with a roof leak at a property I own while on vacation with my family over the winter break. It sucked. As soon as I returned from vacation, I hired a property manager to get me out of the “front line” of managing the property. I happily pay them each month for this peace of mind.

So which is the best option?

There is no right answer. It is all tradeoffs. You need to understand what is important to you.

There is nothing wrong with deciding that investing in REITs and as an LP (options 1 & 2) is best for you right now. You can always change options over time.

Option 4: Buying a Property with Someone as Equal Partners.

Let’s continue up the scale of becoming a more active investor.

In this case, you and a friend decide to buy a property 50/50. Ideally you have complimentary skill sets and pre-agree to how you will divide up the work. 

You only have to come up with 50% of the equity/cash and you have a partner to brainstorm with.

Partnerships can be excellent. 

They can also be very challenging.

They are like a marriage. You are together for the life of the investment. Remember: real estate cannot be converted to cash instantly. It takes time to market and sell a property. See lessons 14 & 15 from my previous newsletter.

My advice: only partner with someone you really trust. This should be someone you would trust with your bank account. And always, ALWAYS have a written partnership agreement that clearly documents decision making, including the right to sell the property.

When you have an equal partner, you both need to agree on what to do. Decisions that will come up:

1. The roof is leaking. Do you patch it or replace it? 

2. A tenant pays late each month, but always pays by the end of the month. Do you renew them at the end of their lease or vacate the property and try to find a better tenant?

3. The property has increased in value by 50% since you bought it. Do you sell it? Refinance? Do nothing and enjoy the higher cash flow?

There are many, many issues that will come up. When you have a partner it is not just your decision. You and your partner need to agree. 

Things may start out well, but you and your partner may have very different circumstances a few years into owning the investment. Examples:

1. Your partner gets married and wants to sell the property so she has cash to buy a house. You are still single and like the flexibility that the cash flow from the property provides.

2. You want to invest the cash flow into the property to make it the best in the neighborhood. Your partner wants to squeeze every penny from the property, making you feel like a slumlord.

Bottom line: decision making will be more complicated by having a partner than if you own the property by yourself. 

BUT the right partnership can give you an ally and sounding board as you begin your real estate investing journey.

Option 5: Buying a Property as the General Partner and Raising Money from LPs.

This is the opposite of option 2: investing as a limited partner (LP) where someone else does all the work. In this case you are the general partner (GP). You do all the work. 

You find the deal and operate it. You find LPs to invest in the deal. You collect fees and earn an oversized share of the profit if the deal does well (the promote).

Fees and promote? Sounds pretty good.

So what’s the catch?

It is a TON of work. 

Here’s some examples of what you will need to take on if you are the GP:

1. You do all the work. 

2. You typically enter into a purchase agreement to buy a property before you have raised all the equity/cash required. Although you still have the right to back out before your due diligence period expires (typically 30 day), you are still putting your reputation on the line. You don’t want to earn a reputation of someone who always backs out of deals.

3. You will need to “dial for dollars” to find the LPs. This will occur simultaneously with performing the due diligence AND finding a loan. You will feel stretched in many directions.

4. You will need to keep the investors up to date on the deal. Even when you do this in a structured way, it can consume your time in unintended ways. Example: you are out for a walk and coffee with your spouse on a Saturday morning. You run into an investor who wants an update on why the deal is not performing as planned. So much for your peaceful morning...

There are many more things you will do as a GP. It can take up a ton of time and is tough to do if you have a traditional W2 job. 

Putting together deals as a GP is not for the faint of heart. You need to be all in and stick with it for the long haul. 

So Which is the Right Option for You?

It all depends on your goals and needs. Here are some examples I created to help you think about it.

The Passive Approach (Options 1 & 2)

• “Perfectly Passive Penny” - Penny invests in real estate exclusively by buying shares in REITs. She holds these shares for the long term. 

• “Hands Off Harry” - he invests exclusively as a LP with people he trusts. He stays focused on earning money in his day job, while regularly investing in both real estate and the stock market. His tax returns are made more complicated by his LP investments, but he feels this is an acceptable trade-off. See lesson 16 from my previous newsletter.

The Side Hustle (Options 2, 3, & 4)

• “Freakout Frank” - just like Harry, he invests as a LP. Unlike Harry, he constantly calls the GP for updates and ask confrontational questions. He invests as a LP, but acts like a GP. Note: if you go the GP route, avoid taking money from a Frank.

• “Active Alice” - she buys a duplex and lives in one half. She does all the home improvements at nights and on the weekend. Eventually she will sell her duplex and buy a four-plex.

• “Patient Peter” - he uses money he has saved from the last two years of bonuses in his day job to buy a rental property out of state. It doesn’t take up much of his time because he hires a team to manage it. As the property increases in value, he refinances it and uses the refinance proceeds to buy another property. Over time, he assembles a portfolio of properties that provide him passive income equal to his salary.

All In

• “Rockstar Reggie” - Reggie works for a real estate company. He is humble, driven, and constantly looks for ways to add value to the company and the properties. His work has been recognized, and he is now able to invest alongside the owners as a GP and participate in a small portion of the promote.

• “All in Alex” - Alex creates her own real estate company and raises money from LP investors. She has saved up money to live frugally for two years while she gets her real estate company off the ground. 

So Who are You?

You don’t need to pick just one.

I started as a Harry, soon became a Reggie, and then took money I made as a Reggie to become more of a Harry. Passive to active to passive.

Be a student of yourself. Don’t try to get rich quick. Successful real estate investing is best done as a long game. See lesson 3 from my previous newsletter.

Remember, patience is a superpower. 

Combine that with self reflection, clarity of thinking, focus, and hard work…then you have a magical combination.

Good luck on your journey to becoming a real estate investor!

Professor Bateman