You can create regular investment income through the purchase of an income-producing property. It might be a single-family detached home, apartment building, industrial warehouse, or even a storefront.
Whether you buy this property with a mortgage or cash, do your due diligence and conduct a financial evaluation. Rents need to be high enough to cover vacancies and expenses and still provide you with income.
To be successful, you’ll need to know what you’re getting into. That means buying the rental property at the right price, with the right financing, and understanding your rental market so you don’t lose money.
Along the way, keep account of all your costs and expenses and add them to your cost basis when you sell. This keeps your tax liability on capital gains as low as possible.
Buy into a crowdfunded real estate deal
Title III of the JOBS Act lets companies raise capital through online crowdfunding. That includes real estate developers. And, importantly, non-accredited investors can buy into some of those deals.
Crowdfunded real estate has a few stipulations, including limitations on how much you can invest in a 12-month span. If your income or net worth is below $107,000, the limit is:
- the greater of $2,200 or
- 5% of the lesser of the annual income or net worth.
If both your income and net worth are at least $107,000, the limit is 10% of your annual income or net worth, whichever is less, up to $107,000.
Before you sign on, do some research to understand how you’ll make money. Is it an annualized return, a single cash-out, or through dividends? Fees charged by crowdfunding platforms can reduce your income and profits, so make sure to examine the offering documents carefully and understand the fees you'll pay.
There are many real estate crowdfunding sites to choose from with varying barriers to entry and niches. Some offer direct investment into individual deals, while others offer public non-traded REITs -- also known as eREITs -- that allow you to invest in a portfolio of properties.
Real estate crowdfunding sites backed by venture capital are under pressure to quickly show viability, progress, and income. Given that they're still new, you need to be cautious and choosy with your investments.
Just because your crowdfunded deal is publicly available doesn’t mean it's been properly or thoroughly vetted by the platform. It’s still on the individual investor to conduct his or her own due diligence. Make sure you understand the deal’s opportunities and potential downsides.
If the project requires an extensive fix-and-flip, it could go south if repairs go over budget or the developer over-leverages it with debt.
Just like with any other investment, it’s a good idea to diversify your crowdfunded holdings and expect to keep them a while.