How To Invest In Real Estate – Forbes Advisor
There are endless ways to invest in real estate, from taking out a mortgage to building a nationwide real estate empire.
While the latter is likely out of reach for most of us, there is no shortage of viable options. Additionally, not all of the rental property finance and maintenance headaches need to be causing them. Here are five strategies for adding real estate exposure to your investments.
1. Real Estate Investment Trusts (REITs)
If you want to start investing in real estate right away and with as little money as possible, consider real estate investment trusts (REITs).
These public corporations raise funds by selling stocks and issuing bonds, and use the proceeds to buy and rent real estate such as shopping malls, office buildings, apartment buildings, and warehouses. REITs have to distribute almost all of their after-tax profits to their investors as dividends.
Real estate investment trusts make owning real estate a breeze. Management takes care of all of the property and rental logistics – you just sit back and collect dividends, which are often higher than many stock-based investments.
Like any other publicly traded company, you can use a brokerage account to buy and sell shares in REIT stocks in the market. This makes REITs the most liquid real estate investment available. You can also buy shares in Exchange Traded Funds (ETFs) that own shares in many REITs. New investors without a lot of money can invest in parts of REIT ETFs using micro-investment apps such as Stash, M1 Finance and Robinhood.
There are also private REITs, but they are only available to accredited investors and may be riskier assets that are difficult to sell on quickly. You should also be aware that most REIT dividends are taxed as normal income rather than the slightly lower preferential rate you might get from qualifying dividends.
2. Crowdfunding real estate platforms
Investors who prefer a more hands-on approach should take a look at real estate investing crowdfunding platforms. Many of these online platforms allow you to invest in specific real estate development projects rather than large, generic real estate portfolios.
Real estate crowdfunding platforms pool money from multiple investors to fund development projects. Typically, investors must commit to real estate investments for longer periods of time, in many cases five years or more. You may be able to access some of your funds by then, but this is at the discretion of the platform and there may be early withdrawal penalties.
The platforms may charge fees. Watch out for fees or additional administrative costs that can decrease your ROI.
Note that you may not be able to participate in all online real estate platforms. Most require minimum investments of between $ 500 and $ 25,000 or more. Some require you to be an accredited investor – meaning that you have $ 1 million in assets that is not your primary residence, or that you make more than $ 200,000 a year.
Fundrise, Crowdstreet and DiversyFund, three popular platforms, offer different investment options depending on how much money you need to invest, from real estate funds to individual real estate projects.
3. Invest in your own home
Primary residences are the most common way most people invest in real estate. You take out a mortgage, make your monthly payments, and gradually build up ownership of your home. With luck and strong demand in your local market, you can take advantage of the equity in selling your home.
While investing in your own home can help you build wealth over the long term, the average annual returns are lower than expected. According to a report by industry analyst Black Knight, home value only increased about 3.9% per year from 1994 to 2019.
While there are areas in the country where home appreciation is much higher, the home you live in is unlikely to see any dramatic increase in value on average, especially when you consider expenses like maintenance and repairs, insurance, property taxes, and more the interest you pay on takes into account your mortgage.
Other real estate investments like REITs achieved an average annual return of up to 11.28%, according to Nareit – even a Vanilla S&P 500 ETF has achieved an average annual return of around 10% over the long term.
This does not mean that you should never buy a home or consider it an investment. Government support for the mortgage market in general, in addition to programs that assist first-time home buyers, will help you buy a home at a much lower price than other home purchases would.
4. Invest in rental properties
If you want to get heavily involved in real estate investing, consider buying rental properties. Rentals can offer steady cash flow as well as the ability to increase in value over time, but it is one of the most labor-intensive methods of real estate investment.
There are two ways to make money from rental properties:
- Long term rentals. These properties are usually designed for a rental period of at least one year and theoretically offer a constant monthly cash flow. However, this depends on whether your tenants are reliable. You can buy an apartment building or a single family home that you rent to others.
- Short term rentals. These accommodations are aimed at rotating renters like Airbnb who may only stay for one night. You can list your entire house or apartment when you are away, or you can invest in a separate property that is only for short-term rentals.
Investing in real estate with rental properties, while offering higher profit potential, also requires great effort on your part. You need to find and review tenants, pay for ongoing maintenance, perform repairs, and resolve any other issues that arise.
You can reduce some of these headaches by hiring a property management company. However, this will affect your return on investment. When it comes to financing rental properties, the resources and low interest rates available for primary residences may not be available. This can make the purchase of rental properties more expensive.
5. Invest in real estate by flipping real estate
You don’t have to buy a rental property to maximize your real estate investment income. Buying and flipping properties is a common strategy, although like with rental properties, flipping the pages is a lot of work. It means renovating homes and learning to identify emerging neighborhoods where you can sell your purchases at a premium.
If your flipping strategy for your home includes renovation and construction, it means you are taking additional risk and paying high costs out of pocket. In short, it’s not as simple as it might look on HGTV. Renovation work requires planning permission, and the cost of remodeling can be higher than expected, especially if you hire contractors or outsource other work.
Look for homes that don’t need major renovations in emerging areas to minimize the hassle of real estate flipping. This can be even more lucrative if you rent the property while waiting for home values to rise. Keep in mind that the neighborhood you think will be trendy may never catch on and you have a property that is difficult to recoup your investment.
Should you invest in real estate?
Real estate investments can offer robust long-term returns that do not fully correlate with the stock market. However, costs and risks can be high when investing in physical property. This makes REITs possibly the best choice for those with limited money or not looking for a primary residence.
If you decide to buy rental properties or flip houses, make sure you are fully aware of the risks you are taking and have a plan for how you will get your investment back. Remember: real estate can be very illiquid in the short term, which means it can pose a huge financial obligation. If you have any questions about getting started with real estate investing, consult a financial advisor.