Have you ever thought about owning a piece of real estate to earn money? Most people think of owning residential property, which they could rent out to tenants or become a host on Airbnb.
But what are some other ways to invest in real estate with a lower barrier to entry and less involvement? Many non-traditional property investments could be viable options for you. Let’s explore the different ways to get started with micro-real estate investing.
Looking Beyond Traditional Real Estate Investing
Traditional real estate investing is often associated with residential housing. I am a traditional real estate investor, owning several rental properties and renting to long-term tenants.
Some people might consider it “passive” income. However, based on my experience, it requires me to roll up my sleeves and be more hands-on than my stock market portfolio. Plus, it requires a high upfront investment, including a down payment on the property, closing costs, mortgage payments, and maintenance fees, to name a few.
Aside from that, no one can really prepare you to deal with a flood, broken appliances, or tenants who break the rules (yes, I’ve dealt with all those scenarios). You need to be a problem solver and more active with traditional real estate investing. Although you can certainly make a lot of money as a landlord, it’s not for everyone. Let’s take a look at other potential ways to earn income through micro-real estate investing.
Real Estate Investment Trusts (REITs)
A REIT is a company that owns or manages real estate to generate income. REITs may invest in different sectors, including commercial property, office buildings, warehouses, data centers, shopping malls, hotels, self-storage facilities, apartment buildings, and mortgages.
You can easily purchase U.S. REITs through the stock exchange. Plus, it doesn’t require a large amount of money to get started. Another way to gain exposure to real estate is through exchange-traded funds (ETFs) or mutual funds. According to research by Nareit, approximately 168 million Americans, or 50% of households, are invested in REITs.
You can look through Nareit’s REIT directory to see what’s available. One advantage of owning a REIT is that you can earn dividends. It could be a good way to earn income from commercial real estate without having to buy property.
Before you make a purchase, be sure to understand the potential tax implications and fees when buying a REIT through your investment accounts. You may consider speaking with a tax advisor to understand the financial impacts. Also, be cautious of non-exchange-traded REITs, as they are less liquid and their share prices may be less transparent to individual investors.
Storage Units
With the high demand for extra space to store personal belongings, storage units have become an appealing choice for some individual investors looking to diversify their portfolios. According to LaSalle, 10% of American households rent space in a self-storage facility.
If you’re looking for ways to invest, you can do it by purchasing and managing your own storage facility. Mixed-use, drive-up, vehicle, and climate-controlled storage are the most common types of storage facilities. You can also gain exposure simply by investing in self-storage REITs. Another option is to pool money with other investors through private equity or syndicated investments, which self-storage investment firms manage.
There are several factors to consider when investing in storage units. First of all, location is key. You want to be situated in an area where there’s high demand and low competition. Some areas already face tough competition as there’s a lot of supply. That has resulted in lower occupancy rates and competitive pricing.
With low overhead costs, profit margins can be quite lucrative. The average profit margin is 41%, according to Storeganise. It can provide steady, ongoing income with relatively low maintenance.
In contrast, self-storage facilities may deter some investors, as they pose a high barrier to entry. You need substantial capital, and it may take years to become profitable. You’ll also need to ensure you have enhanced security features to reassure customers that their belongings are safe. As such, you need a long-term mindset for this type of investment.
Parking Spaces
One area worth exploring is investing in parking spots or lots, as they’re generally considered lower-risk and less complicated than residential properties. There are two main options you can choose from:
Option 1: You can opt for individual deeded parking spots (such as a condo or residential parking spot in a downtown area) where parking is hard to come by. For novice real estate investors, this could be an easy way to get started. It typically doesn’t require a large amount of money, and the parking spot could appreciate over time.
The downside is that you have to follow the condo by-laws. They may impose restrictions, such as renting only to residents of the condo building. I own a few parking spots with my rental units. In my experience, I’ve also been limited to renting my parking spot only to building residents, which narrows the pool of potential renters.
Option 2: You can choose a commercial parking facility (such as a multi-level garage or a surface lot). Investors who take this route usually enter into a double-net (NN) lease agreement. The process involves hiring a parking management company to operate the lot on your behalf. Typically, they pay you the base rent, property taxes, and insurance premiums.
The drawback is that it generally requires a large sum of capital. You may have to deal with external factors, such as a municipal government changing parking rules or zoning laws.
It’s relatively low maintenance compared to traditional real estate. However, you’re still responsible for maintenance and repairs, such as repainting the lines, fixing lights, and troubleshooting payment machines. If you’re in a high-traffic area, it could be a viable way to earn consistent cash flow. You can adjust the pricing based on demand. For example, if there’s a concert with a famous singer, you could increase the price, whereas if it’s a slow day, you could drop the price.
Raw Land Flips
Most people know about renovating and flipping a home. The simplest form of investing in real estate is buying and flipping vacant land. The process involves finding a parcel of land you can buy at a steep discount and resell to new buyers at a higher price.
The concept is quite straightforward, but you need to understand the basics first. It’s important to do your due diligence and identify areas with growth potential, such as a town expanding its borders or where a new shopping center is being developed. Consider working with a surveyor to confirm the boundaries and that the land is usable. For instance, it shouldn’t be in a flood-prone area, and it should have access to utilities.
Compared to buying a house, land is generally more affordable. Unlike owning a property, you don’t have to worry about building insurance, maintenance fees, utility costs, and repairs. Another benefit is that you don’t have to find tenants or take on the responsibilities of being a landlord.
Beware that there have been fraudulent land-flipping cases in the past. Be sure to follow your state laws. If you flip land on a short-term basis (where you hold the land for one year or less), it’s usually taxed as business income. Whereas an investor who holds land for the longer term may be eligible for lower capital gains tax rates.
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Sources:
- https://www.investor.gov/introduction-investing/investing-basics/investment-products/real-estate-investment-trusts-reits
- https://www.reit.com/investing/reit-directory
- https://medium.com/@colinrhys/always-buy-the-parking-spot-deeded-parking-spots-are-a-surprisingly-good-investment-becb1b0f248b
- https://www.airgarage.com/blog/investing-parking-lots-garages?srsltid=AfmBOoqutcvWT8S52ANypTxuCyxnmJy1ABn4hqmN9rzoeeZ1meQSP54I
- https://www.lasalle.com/properties/self-storage-portfolio/
- https://storeganise.com/blog/how-to-invest-in-self-storage
- https://www.holdstorage.co.uk/blog/how-to-invest-in-self-storage
- https://www.forbes.com/councils/forbesbusinesscouncil/2023/03/03/a-real-estate-investors-guide-to-investing-in-vacant-land/
- https://www.investopedia.com/terms/l/land-flip.asp
