Real estate investing is a popular choice for those looking to diversify their

investment portfolio. However, the biggest hurdle to becoming a landlord is having

enough capital. Fortunately, there are several options for investors to get involved in

the industry without having to pay all of their own money upfront.


  1. The 1% Rule

Real estate investing can be a profitable venture for individuals with sufficient

financial resources, including down payments. Individuals may be familiar with the

popular TV show format of flipping houses, where property owners buy, renovate

and sell residential properties for a quick profit.


Many investors who are interested in real estate investment use the 1% rule as a

prescreening tool, determining if a property will generate a positive cash flow.

However, the 1% rule has its drawbacks and limitations.

It doesn’t account for expenses like maintenance, property taxes, insurance and

operating costs, which can make an investment less lucrative. In addition, it doesn’t

take into account the location of a property, its potential to increase in value or

vacancy rates. A better metric to assess an investment property’s profitability is its

cash-on-cash return, which takes all of these factors into consideration.


  1. Cap Rate

Real estate investment is a great way to diversify your portfolio. But before you

invest, it’s important to understand the cap rate and how it applies to your potential


A property’s cap rate is determined by dividing its net operating income (NOI) by its

market value. Investors will usually choose to invest in properties with a higher cap

rate, as this suggests that they can expect a lower risk and a faster time to recoup

their initial investment. For more


Cap rates can vary widely between markets and even by neighborhood within a

market. This is due to a variety of factors, including economic fundamentals and

geographic location.

In addition to evaluating the cap rate of a property, investors should also look at

other valuation metrics and complete additional due diligence. For instance,

investors should make sure that the seller hasn’t inflated the NOI by deferring

maintenance or overestimating property values. This will impact future expenses

and could have a significant effect on the overall cap rate.


  1. Cash-flow Analysis

Rather than looking at the capitalization rate as a quick and easy way to value an

investment property, prospective investors should consider analyzing discounted

cash flow. This method takes into account both future income streams and the

expected sale proceeds.

It also accounts for vacancy costs, which is the loss in income that occurs when an

asset is empty. This amount varies by location and property type.


Investors should also take into account any potential financing terms that may

impact the cash-flow analysis. For instance, an interest-only loan may increase the

annual debt payments.

While real estate has its pros, such as tax advantages and diversification, it can be a

risky investment. Therefore, it is advisable that prospective investors become more

familiar with real estate investing before taking on the large upfront costs and

potential risks. This could mean working with a crowdfunding platform or investing in

REITs instead of purchasing an investment property. This way, investors can avoid

costly mistakes and focus on the returns they want to achieve.


  1. Taxes

Many people associate real estate investing with a big bank or private equity firm.

However, it’s much more accessible than you might think. For example, some

crowdfunding platforms like CrowdStreet offer direct investments in commercial real

estate projects with as little as $25,000. Your investment is pooled with dozens of

others to fund the deal.


This allows passive investors to diversify their portfolio and take advantage of tax

advantages that would not be available if they invested in the property directly,

such as cost segregation and bonus depreciation. These benefits offset passive

income and can be carried forward to offset active income. In addition, strategies

like 1031 exchanges can help to further defer taxes on property sales and

acquisitions. In addition, the personal residence exemption and deductions for

mortgage interest can provide significant tax rate arbitrage for homeowners. Lastly,

the low correlation of real estate to stock market returns can make it an excellent

asset to hedge against losses in other assets when markets decline.