Three main paths to real estate investing, and what each one costs to start
You can invest in real estate three ways: buy property directly, buy shares in a REIT (Real Estate Investment Trust), or lend money to real estate projects through crowdfunding platforms. Direct ownership requires the most cash upfront and the most work. REITs let you own real estate through a brokerage account with as little as the price of one share. Crowdfunding sits in the middle — lower entry costs than direct ownership, but you are lending to a specific project rather than owning an ongoing business.
Which path makes sense depends on how much money you have to start, how much time you want to spend managing the investment, and whether you want steady income or growth. There is no single right answer — many investors use more than one approach.
Key Takeaways
- Direct property ownership requires a down payment (typically 15 to 25 percent of the purchase price), a mortgage, and ongoing work managing tenants and repairs.
- REITs trade like stocks and require no down payment, no mortgage, and no tenant management — you can buy one share through any brokerage account.
- Real estate crowdfunding platforms let you lend money to development projects with minimums ranging from $500 to $5,000 per project, though your money is locked in for years.
- Direct ownership builds equity through mortgage payments and property appreciation, while REITs and crowdfunding generate income through dividends or interest payments.
- Each path has different tax treatment, liquidity (how fast you can turn it into cash), and risk — understanding these differences matters more than picking the "best" one.
Buying property directly: what you actually need to do
Direct ownership means you find a property, get a mortgage, and become the landlord. The process starts with a down payment — typically 15 to 25 percent of the purchase price for a rental property, though some loans allow as little as 10 percent. If you are buying a $300,000 house, expect to have $45,000 to $75,000 in cash ready before you make an offer.
You will also need cash for closing costs (title insurance, appraisal, inspections, attorney fees), which typically run 2 to 5 percent of the purchase price. A mortgage lender will check your credit score, income, and debt-to-income ratio — they want to see that you can afford the monthly payment. Most lenders require a score of at least 620, though 740 or higher gets you better interest rates.
Once you own the property, you become responsible for everything: finding tenants, collecting rent, fixing the roof when it leaks, paying property taxes, maintaining insurance, and handling evictions if a tenant stops paying. Some landlords hire a property manager to handle this work, which typically costs 8 to 12 percent of monthly rent. You can deduct mortgage interest, property taxes, repairs, insurance, and property management fees from your rental income when you file taxes.
The payoff is that you build equity — each mortgage payment reduces what you owe, and if the property appreciates, you own that gain. If you buy a $300,000 property and it is worth $400,000 in ten years, you own the $100,000 difference (minus what you still owe on the mortgage). You also control the property — you decide when to sell, how much to charge for rent, and what improvements to make.
REITs: real estate ownership without the landlord work
A REIT is a company that owns and operates real estate — apartment buildings, office towers, shopping centers, data centers, storage facilities. When you buy shares of a REIT, you own a piece of that company. The REIT collects rent from tenants, pays its expenses, and distributes most of its remaining income to shareholders as dividends. You get the income without managing tenants or fixing anything.
REITs trade on stock exchanges just like regular company stock. You can buy one share through any brokerage account (Fidelity, Vanguard, Charles Schwab, or others) for the current share price — often between $50 and $200 per share. There is no down payment, no mortgage, no closing costs. You can sell your shares any trading day if you need the cash back.
Most REITs must distribute at least 90 percent of their taxable income to shareholders, which is why REIT dividends tend to be higher than stock dividends. If a REIT yields 4 percent and you own $10,000 worth of shares, you receive roughly $400 per year in dividends. The trade-off is that you do not build equity the way you do with direct ownership — you own shares that go up or down in value, but you are not paying down a mortgage.
REITs are taxed differently than stocks. Dividends from REITs are taxed as ordinary income (at your regular tax rate), not at the lower capital gains rate. If you hold the shares in a retirement account like an IRA or 401(k), you avoid this tax until you withdraw the money. Many investors hold REITs in tax-advantaged accounts for this reason.
Real estate crowdfunding: lending to specific projects
Crowdfunding platforms like Fundrise, RealtyMogul, and CrowdStreet let you lend money to real estate developers. You pick a specific project — a new apartment complex, an office renovation, a shopping center expansion — and commit your money. The developer uses your money (combined with money from other investors and their own capital) to build or improve the property. When the project is complete and sold or refinanced, you get your money back plus interest.
Minimums vary by platform and project, but typically range from $500 to $5,000 per project. You can spread $10,000 across ten different projects to reduce risk. The interest rate you earn depends on the project's risk — a stable apartment building renovation might pay 6 to 8 percent, while a riskier development in an uncertain market might pay 10 to 14 percent.
The catch is that your money is locked in. A typical project runs for three to seven years. You cannot sell your stake in the middle — you have to wait until the project finishes. If you need the cash before then, you are stuck. Some platforms have secondary markets where you can sell to another investor, but you may have to accept a discount.
Crowdfunding is riskier than REITs because you are betting on a single project, not a diversified company. If the developer runs out of money or the market turns, you could lose part or all of your investment. The platforms do not insure your money the way banks insure deposits. Read the offering documents carefully — they explain the risks and what happens if the project fails.
Comparing the three paths: cost, time, and returns
| Factor | Direct Ownership | REITs | Crowdfunding |
|---|---|---|---|
| Money to start | $45,000–$75,000+ (down payment) | $50–$200 (one share) | $500–$5,000 per project |
| Time commitment | High (tenant management, repairs) | None (passive) | Low (pick projects, wait) |
| Liquidity | Low (months to sell property) | High (sell any trading day) | Low (locked in 3–7 years) |
| Income type | Rent + appreciation | Dividends | Interest payments |
| Tax treatment | Deductible expenses; capital gains on sale | Ordinary income on dividends | Ordinary income on interest |
| Risk level | Medium (depends on location, tenant quality) | Medium (market-dependent) | High (project-specific) |
How to decide which path fits your situation
Start with how much cash you have available. If you have less than $10,000, REITs are your only realistic option for direct real estate exposure. If you have $50,000 or more and want to be hands-on, direct ownership makes sense. If you have $10,000 to $50,000 and want to diversify across multiple properties without managing tenants, REITs are the clearest path.
Next, think about your time. Direct ownership requires ongoing work — screening tenants, handling maintenance calls, managing evictions, keeping records for taxes. If you have a full-time job and no interest in being a landlord, REITs or crowdfunding are better fits. If you enjoy managing property or already own one rental, adding another property is a natural next step.
Consider your timeline. If you might need the money within five years, REITs are the only option because you can sell shares quickly. Crowdfunding locks your money in for years. Direct ownership is the hardest to exit quickly — selling a property takes months and costs 5 to 10 percent in realtor fees.
Finally, think about diversification. One rental property is a bet on one location and one tenant. A REIT owns dozens or hundreds of properties across multiple regions and property types. Crowdfunding lets you spread money across multiple projects. If you want to reduce risk, diversification matters — and REITs make that easiest.
Tax implications of each approach
Direct ownership offers the most tax advantages. You deduct mortgage interest, property taxes, insurance, repairs, utilities, property management fees, and depreciation from your rental income. Depreciation is particularly valuable — you can deduct a portion of the building's value each year even though the property may be appreciating. These deductions often reduce your taxable rental income to zero or even create a loss you can use against other income (subject to limits).
When you sell a rental property, you pay capital gains tax on the profit. If you owned it for more than a year, you pay long-term capital gains rates, which are lower than ordinary income rates. You can also use a 1031 exchange to defer taxes by selling one property and buying another — the IRS lets you roll the proceeds into a new investment property without triggering a tax bill when ready.
REIT dividends are taxed as ordinary income, not capital gains, even if the REIT itself earned the money through long-term appreciation. This is a significant disadvantage compared to direct ownership. However, if you hold REITs in a 401(k) or traditional IRA, you defer taxes until withdrawal. In a Roth IRA, you pay no tax on dividends or gains at all.
Crowdfunding interest is also taxed as ordinary income. The platforms send you a 1099 form reporting the interest you earned, and you report it on your tax return. There are no deductions or special treatment like there are with direct ownership.
Common mistakes to avoid
The biggest mistake with direct ownership is underestimating costs. New landlords often forget about vacancy periods (months when the unit sits empty), unexpected repairs (a water heater fails, the roof leaks), and property taxes that rise over time. Budget for 5 to 10 percent vacancy and set aside money for repairs — a common rule is 1 percent of the property's value per year.
With REITs, the mistake is chasing yield. A REIT that pays 8 percent sounds great compared to one paying 4 percent, but the higher yield often reflects higher risk — the REIT may be overleveraged, invested in a weak market, or facing headwinds. Look at the REIT's track record, debt levels, and property types before buying for yield alone.
With crowdfunding, the mistake is putting too much into one project. Even if the platform and developer look solid, real estate projects fail. Spread your money across multiple projects and platforms. Also, read the offering documents — they explain what happens if the project underperforms or the developer runs out of money. Do not assume you will get your money back.
Across all three approaches, avoid borrowing money to invest. If you take out a personal loan or use a credit card to fund an investment, you are paying interest on money that may not earn enough to cover that cost. Direct ownership involves borrowing (a mortgage), but that is different — the property itself secures the loan, and mortgage rates are typically low.
Frequently Asked Questions
Can I invest in real estate with no money down?
With REITs, yes — you can buy one share with whatever cash you have. With direct ownership, no — lenders require a down payment, typically 15 to 25 percent. Some programs offer lower down payments (5 to 10 percent) but charge higher interest rates and require mortgage insurance. Crowdfunding requires a minimum per project, usually $500 to $5,000.
What is the difference between a REIT and a real estate mutual fund?
A REIT is a company that owns and operates real estate and must distribute 90 percent of income to shareholders. A real estate mutual fund is a basket of stocks — it may own REIT shares, construction company shares, or other real estate-related companies. REITs are more focused on actual property ownership; mutual funds are more diversified but less directly tied to real estate.
How much can I make investing in real estate?
Returns vary widely. Direct ownership typically generates 6 to 12 percent annual returns through rent and appreciation, but this depends heavily on location, tenant quality, and market conditions. REITs typically yield 3 to 6 percent in dividends plus potential share price appreciation. Crowdfunding projects typically pay 6 to 14 percent interest, but you risk losing money if the project fails. Past returns do not may provide future results.
Do I need a real estate license to invest in property?
No. A real estate license is for people who sell property professionally. You can buy and own rental property as an individual investor without any license. You may want to hire a real estate agent to help you find properties, and a lawyer to review contracts, but neither is required.
What happens if a tenant stops paying rent?
You have to file for eviction through the court system, which takes weeks or months depending on your state. During that time, you are not receiving rent but still paying the mortgage, taxes, and insurance. This is why landlord insurance and an emergency fund matter. With REITs and crowdfunding, you have no tenant risk — the company or platform handles that.