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Investing in real estate can be a lucrative way to diversify your investment portfolio, whether you’re just getting started or expanding an existing portfolio. But it’s riskier than stocks and bonds, and there’s no one-size-fits-all approach. The right real estate investment strategy for beginners — or seasoned investors — comes down to your risk tolerance, budget and overall experience.
3 reasons to invest in real estate
People invest in real estate for all sorts of reasons, but many find it appealing for these reasons:
1. Diversification
Real estate has low correlation with stocks and bonds, which can help diversify a portfolio. If you diversify within real estate itself, there are several ways to gain exposure to the market.
2. Tangible, appreciable assets
Real estate is a popular tangible asset among investors because it’s something you can see and touch, and it typically appreciates over time. Unlevered real estate has historically posted lower long-term total returns than the stock market, but rental income and the use of leverage can meaningfully improve those returns for hands-on investors.
3. Flexibility
Real estate is a flexible investment that offers not only many ways to invest your money but also flexibility in what you can do with your property. You can:
Sell it
Rent it out
Rezone it for different purposes
Subdivide it into multiple residential units
8 ways to invest in real estate
The many ways to invest in real estate vary by liquidity, investment minimum and time commitment. The best real estate investment for your portfolio hinges on your budget and stomach for risk.
You’re seeking a short-term profit and willing to take a risk
You want long-term, continuous income
High
Buy a rental property
Those seeking consistent income and full control over the real estate investment experience may want to consider purchasing rental property. This investment option involves buying a piece of real estate and renting it to tenants. Rental properties provide rental income, many expenses are tax-deductible and most properties appreciate in value over time.
But being a landlord is no easy feat. You’re responsible for paying the mortgage and property taxes, as well as the maintenance and upkeep of the property. You also run the risk of vacancies and irresponsible tenants who can damage your property or neglect to keep up with rent.
One tax perk worth knowing: the IRS lets you depreciate residential rental property over 27.5 years, meaning you can deduct a portion of the building’s value from your taxable rental income every year you own it.(1)
Pros:
Full control over the property and tenant selection
Ongoing rental income plus long-term appreciation
Multiple tax-deductible expenses, including depreciation
Cons:
High upfront capital and ongoing maintenance costs
Vacancy and problem-tenant risk
Illiquid — can take months to sell if you need your money out
One platform for all your property banking and finances. Get started by connecting your existing bank account or by opening a Baselane banking account.
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Banking, bookkeeping & rent collection
REITs
Real estate investment trusts are a way to invest in real estate without purchasing physical property. Instead, you invest in a company that purchases and operates income properties. And you can do it through a brokerage account with an online trading platform.
REITs are a practical option for stock market investors seeking portfolio diversification, and they’re one of the most beginner-friendly ways to get real estate exposure since there’s no property to manage. These trusts are bought and sold on major exchanges — similar to stocks. And like stocks, REITs pay dividends.
By law, REITs must distribute at least 90% of their taxable income to shareholders as dividends.(2) That requirement is part of why REITs typically offer higher yields than the average dividend stock.
The perk of investing in REITs is that they’re highly liquid, which means you can buy and sell them quickly — typically in a day. They also offer access to commercial real estate an investor might otherwise have difficulty accessing, including office buildings, apartment complexes, malls and hotels.
The major downside to investing in REITs? While the REITs themselves often carry real corporate debt, you as an individual investor don’t get the personal mortgage leverage you’d have buying a property directly. With so many types of REITs, some are riskier than others. Beginners will want to stick with publicly traded REITs.
Pros:
Highly liquid — buy and sell in a single trading day
Low minimum investment, no property management required
Required to pay out at least 90% of taxable income as dividends
Cons:
No personal mortgage leverage, unlike a directly financed property purchase
Dividends are typically taxed as ordinary income
Non-traded REITs can be complex and illiquid — stick to publicly traded ones as a beginner
Mutual funds
Another option for investors who don’t want to purchase property of their own is to buy into real estate mutual funds. These mutual funds pool the assets of multiple investors between REITs and real estate operating companies. And you can invest through an account with an online broker or stock trading app.
Like REITs, real estate mutual funds are also fairly liquid. But unlike REITs, mutual fund profits remain in the fund unless you sell. Mutual funds also provide access to a broad sweep of assets with fewer transaction costs. That said, when you buy into a real estate mutual fund, you have little say in the companies your money is invested in.
Pros:
Instant diversification across REITs and real estate operating companies
Fairly liquid and low-cost compared to buying individual shares
Professionally managed — no need to research individual holdings
Cons:
No control over which specific companies you’re invested in
Profits stay in the fund unless you sell your shares
If you need some extra cash and have an extra room, you can rent it out through services like Airbnb, Vrbo or FlipKey. Most allow you to set your own prices and offer tools to help you determine prices competitive in your area. You can also decide when and for how long guests can stay. Think of it as turning your home into a mini hotel you run.
But it’s not as easy as it sounds. Make yourself aware of the laws and regulations regarding these types of rentals in your town, city or state. Also, ask the service provider about any available insurance or liability policy available in case your guests damage the property. Make sure you understand the terms. And be aware of the tax implications. Rental income on these types of properties is generally taxable unless you meet these two guidelines.(3)
Rent the property for no more than 14 days during the year
Use the vacation house yourself 14 days or more during the year or at least 10% of the total days you rent it to others
If you meet those guidelines, the IRS excludes that rental income from your gross income entirely, so you don’t need to report it on your return. Rental platforms may still issue a 1099 for payments processed through their system, so it’s worth keeping your own records of the rental dates in case you need to show you stayed under the 14-day limit.
Pros:
Fast, flexible passive income from space you already own
Full control over pricing, availability and guest terms
Potentially tax-free income under the 14-day rule
Cons:
Inconsistent, seasonal income rather than steady cash flow
Local short-term rental laws can restrict or ban this entirely
Risk of property damage from guests
Real estate crowdfunding platforms
Real estate crowdfunding lets you pool your money with other investors to finance a real estate project, taking a page out of the crowdfunding playbook to connect investors directly with developers. To invest, you’ll need to select a platform and open an account with the required minimum deposit. Through these online investment platforms, you can help finance a real estate project through debt or equity. In return for your investment, you receive monthly or quarterly distributions.
Popular platforms include Fundrise, Cardone Capital and Ark7. Minimum investments range from $10 to $25,000 and platform fees are typically around 1%. Different platforms offer access to different types of real estate, and some are open only to accredited investors — under SEC rules, that generally means earning at least $200,000 a year ($300,000 with a spouse) or having a net worth over $1 million.(4) Always check eligibility requirements before signing up.
Pros:
Low barrier to entry — some platforms start at $10
Access to commercial real estate deals individual investors couldn’t otherwise reach
Passive — the platform and developer handle management
Cons:
Many platforms lock up your money for months or years
Some higher-value deals are restricted to accredited investors
Returns depend heavily on the platform and project’s success
RELPs
When entering into a real estate limited partnership (RELP), investors help finance a real estate project managed by a real estate development firm or property manager — the general partner of the RELP. RELPs aren’t publicly traded and are less liquid than REITs and mutual funds. To invest, you’ll need to partner with a real estate development firm accepting investors.
When accepted, investors become limited partners with part property ownership. As a limited partner, you have little management control over the project, but you take on less risk than the general partner overseeing the development of the property.
These short-term real estate investments typically involve the purchase of undeveloped land with the intention of developing the land and selling it for a profit. RELPs don’t often offer cash distributions — the investment payoff comes when the property is sold at a profit. Once the property is sold, the RELP is dissolved.
Pros:
Access to large-scale development deals without acting as general partner
Limited liability — you generally can’t lose more than you invested
Potential for a sizable lump-sum payout when the property sells
Cons:
Highly illiquid, with no public market to sell your stake
Little to no control over how the project is managed
No income until the property sells — no interim distributions
REIGs
Real estate investment groups (REIGs) allow investors to purchase one or more units of real estate across a set of buildings — typically apartment complexes. To invest, you’ll need to research REIGs in the area you’re interested in and find out what’s available for purchase.
This option is well suited to investors that want to own and rent their own property but don’t want the hassle of maintaining it. Instead, the investment group manages the units, including property maintenance, interviewing tenants and filling vacancies.
When you invest in property through an REIG, your name is on the lease, but a portion of your owed rent is deducted to cover maintenance costs. You’ll also need to be wary of vacancy risks — although your REIG may ask investors to contribute a portion of the rent to safeguard against empty units.
Pros:
You own real property without handling day-to-day management
Professional group handles tenants, maintenance and vacancies
More direct ownership than a REIT or fund
Cons:
Ongoing management fees reduce your rental income
May be asked to contribute extra during vacancies
Less regulatory oversight and transparency than public REITs
Flip properties
Also known as real estate trading, house flipping involves purchasing a property for a short period of time — typically less than six months — and reselling it for a profit. Many investors get started by searching the real estate market for undervalued properties within a price range.
Some property flippers do not invest time or funds into improving the property before reselling it. Others renovate the property before putting it back on the market.
This investment strategy offers the opportunity for sizable short-term returns. But it also carries significant risk. If the market turns and you’re unable to offload a property, you run the risk of continued losses in the form of ongoing mortgage payments.
House flipping is considerably more complex than home renovation shows would have you believe. Turning a profit flipping properties requires a solid understanding of the real estate market and renovation experience.
Pros:
Potential for a large profit in a short window — months, not years
Hands-on investors can add value directly through renovation
Cons:
Renovation, holding and financing costs can erase a large share of the profit
High risk if the market cools before you sell
Requires renovation know-how, contractor relationships and significant capital
Compare platforms to invest in real estate
5 of 5 results
What is the Finder Score?
The Finder Score crunches 147 key metrics we collected directly from 18+ brokers and assessed each provider’s performance based on eight different categories, weighing each metric based on the expertise and insights of Finder’s investment experts. We then scored and ranked each provider to determine the best brokerage accounts.
We update our best picks as products change, disappear or emerge in the market. We also regularly review and revise our selections to ensure our best provider lists reflect the most competitive available.
As with any investment strategy, investing in real estate offers unique benefits and drawbacks.
Pros
Leverage. Unlike stocks, real estate lets you finance most of the purchase price with borrowed money. If you occupy a unit in a 2-4 unit property yourself, some conventional loan programs allow as little as 5% down. A standalone rental or investment property you won’t live in typically requires 15% down for a single unit and 25% for a 2-4 unit — still leverage, just less of it, and higher leverage always means higher risk.
Low volatility. Traditionally, the real estate market is less volatile than the stock market. This means you’re more likely to receive a consistent return on investment.
Diversification. Adding real estate to your investment portfolio helps lower portfolio volatility while protecting against inflation.
Tax benefits. Investors have access to a number of deductible expenses, including mortgage interest, property taxes, property improvements and operational expenses.
Passive income. Whether it’s dividends from a REIT or monthly rent from a tenant, real estate investments can earn you passive income.
Cons
Illiquidity. Unlike stocks and bonds that you can swap in seconds, real estate is fairly illiquid, meaning it can take months to offload.
Expensive. Real estate investing requires a higher cost of entry than stocks. A down payment on a property can run in the thousands, while mortgage payments, property taxes and maintenance costs can eat into your bottom line.
Time-consuming. You can monitor your stocks from a computer or device with ease. But property investments often require in-person visits — especially for those managing rentals or flipping houses.
Bottom line
Real estate investing offers a variety of paths in, with options that vary by liquidity and skill level. Property investments are historically less volatile than stocks and bonds, but the cost of entry is higher, and some approaches take real hands-on work depending on which option you choose. Passive routes like public REITs, mutual funds or real estate crowdfunding tend to suit beginners best, while direct ownership — rental property, REIGs or flipping — rewards those ready to take on more control, and more responsibility.
Frequently asked questions
It depends on the method. Real estate crowdfunding platforms and REITs can have minimums as low as $10, while buying a rental property typically requires a down payment plus closing costs — often tens of thousands of dollars. If you're working with a smaller budget, REITs, mutual funds or crowdfunding are the most accessible entry points.
Publicly traded REITs are generally considered the most beginner-friendly option, since they trade like stocks through a regular brokerage account, require no property management and are highly liquid. Real estate mutual funds and crowdfunding platforms are close runners-up.
Real estate can be a strong way to diversify a portfolio and generate passive income, but it comes with real risks — illiquidity, upfront cost and market cycles. Whether it's "good" for you depends on your time horizon, risk tolerance and how hands-on you want to be.
REITs remove landlord-specific risks like vacancies, tenant disputes and maintenance costs, and they're far more liquid than physical property. But they still carry market risk and can lose value, just like stocks. Direct ownership trades that liquidity for more control and the ability to use leverage.
It carries real risk — your money is often locked up for months or years, and returns depend on the platform and project performing as expected. Stick to established platforms, read the fine print on fees and lock-up periods, and check whether a deal requires accredited-investor status before committing funds.
Sources
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Matt Miczulski is an investments editor and market analyst at Finder. With over 450 bylines, Matt dissects and reviews brokers and investing platforms to expose perks and pain points, explores investment products and concepts and covers market news, making investing more accessible and helping readers to make informed financial decisions.
Before joining Finder in 2021, Matt covered everything from finance news and banking to debt and travel for FinanceBuzz. His expertise and analysis on investing and other financial topics has been featured on Yahoo Finance, CBS, MSN, Best Company and Consolidated Credit, among others. Matt holds a BA in history from William Paterson University.
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