The options compared
| Approach | How it makes money | Money and work needed | Main risks |
|---|---|---|---|
| Rental property | Rent, plus any rise in value | High: down payment, repairs, managing tenants | Vacancies, repairs, leverage, illiquidity |
| House hacking | Renting part of a home you live in | Moderate | Living with tenants; landlord duties |
| Flipping | Buying, renovating and reselling for a profit | High: purchase, renovation, carrying costs | Cost overruns, delays, falling prices |
| Publicly traded REIT | Dividends and share price changes | Low: buy shares through a broker | Market swings |
| Non-traded REIT | Distributions | Varies | Illiquid, high upfront fees, hard to value |
| Crowdfunding | Returns from a private deal | Low to moderate, within legal limits | Speculative, illiquid, may lose everything |
This guide explains how each works. It isn't investment advice.
Rental property
Two common measures:
Cap rate = NOI ÷ purchase price
Cash-on-cash return = yearly cash flow after the mortgage ÷ cash you invested
Example: a $300,000 rental brings in $2,600 a month ($31,200 a year) with $10,800 of yearly expenses for taxes, insurance, repairs, vacancy and management. NOI = $20,400; cap rate = 6.8%. With 20% down ($60,000) plus $9,000 of closing costs and a $240,000 loan at 7% (example rate) costing $19,161 a year, cash flow is about $1,239 and cash-on-cash return about 1.8%. A higher rate or one bad repair year can turn that negative. All figures are example inputs. Run your own with the rental property calculator, the cap rate calculator and the cash-on-cash return calculator.
Risks: vacancies and nonpaying tenants, big repairs, rising taxes and insurance, landlord laws, and leverage: a loan magnifies both gains and losses. Property is also slow and costly to sell.
House hacking
You buy a home with more than one unit or extra rooms, live in part of it and rent out the rest. Because it's your principal residence, you may qualify for owner-occupant financing; for example, since November 2023 Fannie Mae's automated underwriting allows up to 95% loan-to-value on purchases of two- to four-unit principal residences. Risks: you're a landlord where you live, rent may not cover what you expect.
Flipping
You buy a property below market value, renovate it and sell. Profit is what's left after the purchase, renovation, financing, holding costs (taxes, insurance, utilities while you own it), and buying and selling costs, including commissions. See the costs of selling and the house flipping calculator. Risks: renovations often cost more and take longer than planned, every month of delay adds holding costs, and prices can fall before you sell.
REITs
A real estate investment trust is a company that owns and typically operates income-producing real estate or related assets. Publicly traded REITs are registered with the SEC and listed on an exchange, so you can buy and sell shares through a broker. Public non-traded REITs are registered but not listed. The SEC warns non-traded REITs are illiquid, often carry upfront sales commissions and offering fees of about 9% to 10% of the investment, may not provide a per-share value until 18 months after the offering closes, and may pay distributions from borrowed money or new investors' money rather than income.
Real estate crowdfunding
Online platforms let many people invest small amounts in private real estate deals. Under the SEC's Regulation Crowdfunding, non-accredited investors are limited over 12 months: if your annual income or net worth is under $124,000, to the greater of $2,500 or 5% of the greater of the two; if both are at least $124,000, to 10% of the greater, up to $124,000. You generally can't resell for the first year. The SEC warns these investments are speculative and illiquid, hard to value, and that you should be prepared to lose your entire investment. Read the offering documents before you invest.
Before you start
- Have emergency savings and manageable debt first.
- Know how much you could lose and how long your money will be tied up.
- Check that brokers and advisers are registered, and compare fees.
- Run the numbers with conservative rent, vacancy and repair estimates.
Sources: SEC Investor.gov: REITs; SEC Investor.gov: Regulation Crowdfunding investor bulletin; Fannie Mae: 2-4 unit LTV expansion (October 2023).
Every worked example on this page was checked with Calcist's own engine and an independent reference.