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If you’re looking to add diversification to your investment portfolio, real estate is an excellent option. This asset class offers a double benefit: generating passive income through rental payments and capital appreciation as the property’s value increases over time.
According to Statista, the real estate market in the United States is expected to grow significantly. By 2028, it is projected to reach a market volume of US$142.90 trillion, indicating a growth rate of 4.70% from 2023 to 2028. This poses a unique opportunity for investors looking to add real estate to their portfolio.
If this sounds like something you would like to explore further, this beginner’s on how to start investing in real estate is a must-read.
- Real estate is a good investment option that allows for leverage and offers both regular income through rental payments and potential appreciation in property value.
- There are multiple ways to invest in real estate, including becoming a landlord, flipping houses, investing in real estate investment groups (REIGs), and investing in real estate investment trusts (REITs).
- Each investment option has its pros and cons, such as regular income and property appreciation for rental properties, a more hands-off approach with REIGs, and the potential for significant profits with house flipping.
- Factors to consider when investing in real estate include managing tenants, potential property damage, reduced income from vacancies, property location, valuation, investment purpose and horizon, expected cash flows and profit opportunities, and being cautious with leverage.
What Is Real Estate Investing?
In a nutshell, real estate investing refers to the process of buying and/or owning property with the view of making financial gain.
As we cover in more detail later in this guide, real estate investing doesn’t have to involve going through the traditional route of buying a property outright or obtaining a long-term mortgage.
On the contrary, there are many different ways that you can gain access to this investment arena. Nevertheless, the primary objective when investing in real estate is to grow your capital in two streams:
- Appreciation: This is when the value of your investment property increases. For example, if you bought the property when it was worth $200,000 and five years later its value has grown to $250,000, this amounts to capital gains of $50,000.
- Rental Income: Unless you are yourself living in the property, you will also be able to make money through rental income. This is usually a fixed amount that is paid each month, albeit commercial properties might settle on a quarterly or annual basis.
In many ways, the two revenue streams explained above are not too dissimilar to dividend stocks. This is because you can earn money when the shares increase in value as well as when the company releases a dividend payment.
Investors who are just starting out in real estate should consider many different property types. This includes not only traditional residential properties but also commercial buildings, warehouses, shopping malls, healthcare facilities, and more.
This is because the provider will purchase and rent out properties on behalf of its investors. Plus, minimum investment requirements are often super-low, as most REITs are listed on public stock exchanges.
There are many advantages when it comes to investing in real estate. Real estate investments can provide investors with passive income (cash flow), outstanding returns, tax advantages, and portfolio diversification.
Ways to Invest in Real Estate
So now that we have covered the basics of what real estate investing is, we can dive into the specifics. That is to say, in the sections below, we explore the many ways to invest in real estate, with options covering all financial budgets and tolerance for risk.
1. Real Estate Investment Trusts (REITs)
As we briefly covered just a moment ago, one of the best ways to invest in real estate is via a Real Estate Investment Trust (REIT). Put simply, REITs are very similar to ETFs.
This is because:
- REITs are listed on public stock exchanges, meaning that you can buy and sell any time that the respective market is open.
- Your investment in the REIT is determined by the number of shares you buy.
- The value of the REIT is largely dictated by the NAV of the fund.
In terms of how REITs work, the fund in question will typically buy a large number of properties from a specific sector of the real estate arena.
For example, this might include a collection of multi-family complexes or a group of shopping malls. Some REITs might specialize in healthcare facilities, while others might concentrate on commercial buildings.
Either way, the REIT will decide which properties to invest in based on its due diligence. This means that by investing in a REIT, you can gain exposure to the real estate industry in a fully passive nature.
As it would in an ETF, the value of your REIT investment will move up and down depending on the NAV (net asset value) of the assets held by the fund.
An overly simplistic example of this is as follows:
- Let’s say that you invest in a REIT that owns $1 billion worth of commercial properties;
- Five years later, the total value of all properties held by the REIT has increased to $1.8 billion;
- This amounts to an increase of 80% in the NAV; and
- In theory, this means that the value of your investment has also risen by 80%.
However, there are many other factors that can influence the value of your REIT investment, such as wider industry conditions, rental occupancy rates, and the specific housing market in which the properties are based.
Not all REITs are created equal. Some REITs invest directly in properties, earning rental income and management fees. Other REITs invest in real estate debt (i.e., mortgages and mortgage-backed securities).
You also need to consider the costs involved, not least because the REIT will be managing the properties on behalf of its investors.
All in all, there are a significant number of REITs based in the US and even more located overseas. But, to give you an idea of some of the most traded, check out the list below:
- Simon Property Group (NYSE: SPG): This REIT specializes in high-end shopping malls and outlet centers located in the US. Simon Property Group trades on the NYSE and is now an S&P 500 company. The REIT has since expanded its overseas properties and has locations in Europe and Asia.
- Welltower (NYSE: WELL): Launched way back in 1970, this REIT also trades on the NYSE, albeit, it specializes in healthcare facilities. This covers hospitals, medical centers, and senior housing.
- Equity Residential (NYSE: EQR): If you’re more interested in investing in residential properties, Equity Residential might be the right REIT for you. In total, the REIT is behind over 300 properties, which amounts to almost 78,000 individual units. This makes Equity Residential one of the largest REITs in the residential property sector.
We should also note that in the US, REITs are legally required to distribute at least 90% of taxable income annually to those holding shares. This will be especially attractive to those seeking consistent income from their investments.
And of course, you also stand to make financial gains if and when the value of the properties held by the REIT increases. This should be reflected in the NAV of the fund.
2. Real Estate Crowdfunding
Real Estate Crowdfunding is a relatively new way of gaining access to the real estate industry without needing to have a large amount of capital. In its most basic form, crowdfunding allows you to invest in a fraction of a property.
The balance will usually be made up by investors who are using the same real estate crowdfunding platform.
- For example, let’s say that the platform has a multi-family complex that it plans to buy at a value of $10 million;
- Of this figure, the platform has secured funding of $8.5 million from private investors;
- This means that $1.5 million will be crowdfunded;
- You decide to inject $20,000, while the rest is made up by other crowdfunding investors; and
- In theory, this means that you own $20,000 of the total multi-family complex, which, again, is worth $10 million.
Although you also need to factor in fees, your potential returns are directly correlated with the amount you invested. For example, if you owned 1% of the property and the NAV grew by $200,000, you would, in theory, be entitled to $2,000. You would also be entitled to your share of any rental payments that the property attracts.
In terms of management of the properties in question, this is usually taken care of by the crowdfunding platform itself. In turn, this will attract additional fees. The main attraction of choosing this real estate investment method is that you can typically get started with really small amounts.
This makes it ideal for those who wish to gain exposure to real estate but are on a budget. Additionally, low-minimum crowdfunding platforms are also great for diversification purposes, as the provider will often have multiple properties that can be invested in.
Some of the most prominent real estate crowdfunding platforms active in this space include Fundrise, CrowdStreet, DiversyFund, and RealtyMogul. Each platform will specialize in a specific niche of the real estate arena — so do your research before proceeding.
In many ways, real estate crowdfunding is somewhat similar to equity investing since an investor can buy into a property and become a shareholder.
3. Farmland Investing
When learning how to invest in real estate for the very first time, you will likely fixate on traditional properties. This might include residential homes or even shopping malls, commercial offices, and healthcare facilities.
With that said, another option to consider is farmland investing. This simply means that you will be investing capital into US-based farmland. Much like any other real estate investment, this allows you to grow your capital in several ways.
- First, the invested land can be leased to farmers who use the plot for commercial purposes (e.g., for growing crops).
- Additionally, the land itself has intrinsic value that ultimately can grow over time. If the land is sold at a higher market rate, this will allow you to enjoy capital gains.
Much like the previously discussed real estate crowdfunding option, farmland investing can be done via a third-party platform. Some examples include AcreTrader and FarmTogether. Once again, be sure to research the platform in great depth before proceeding.
Generally speaking, Farmland provides uncorrelated returns compared to traditional asset classes like stocks and bonds, which in turn offers portfolio diversification, especially in periods when the stock market is down.
4. Rental Properties
A specific niche of the real estate investment scene is to buy a property specifically to earn rental income. This is a bit more systemic insofar that you will need to focus on properties that offer an attractive yield.
The yield itself can be determined by several factors but is largely down to the specific housing market. Many investors will purchase a property by first obtaining a mortgage and then renting the home to a tenant.
If done correctly, this allows you to repay your mortgage with the rental payments you receive. You do, however, need to think about the management of your rental properties, as this can be somewhat hands-on.
This includes tasks like vetting tenants, drawing up contracts, collecting rental payments, and arranging for maintenance when needed. With this in mind, many rental property investors will utilize the services of an agent who, for a fee, will take care of the aforementioned tasks.
It’s also worth checking an online service called Roofstock. This platform is home to a sizable number of pre-vetted single-family rental properties.
You can view key metrics surrounding the size and location of the property, the current rental amount per month, and what this translates into in terms of the gross yield.
5. Flipping Real Estate
When learning how to invest in real estate, you are likely to come across the term ‘flipping.’ The term refers to a specific investment strategy that entails buying a property with the view of selling it quickly for a profit.
The main concept here is that you will look to buy a property that is being sold below its intrinsic value. Of course, in many cases, this can be subjective. However, oftentimes, experienced real estate flippers will know a good deal when they see it.
Generally, there are two key ways in which you can approach real estate flipping:
- The first is to buy a property and sell it straight on as it is.
- Alternatively, some flippers will look to pay for renovations with the view of increasing the sale value of the property.
Either way, real estate flipping can be a good short-term strategy, but you do need to know what you are doing. After all, you will be in full control of the end-to-end process, which can be daunting if you are a beginner.
Flippers purchase undervalued properties with the intention of holding them for a short period of time—often no more than six months—and quickly sell them for a profit.
6. Real Estate Mutual Funds
Real estate mutual funds are very similar to the previously discussed REITs. This is because both investment vehicles offer a low barrier to entry into the real estate arena, meaning that investors do not need to inject large amounts of capital to participate.
Both real estate mutual funds and REITs are professionally managed by the respective fund, which paves the way for a diversified and passive real estate investment journey.
However, perhaps the main difference is that real estate mutual funds are slightly more flexible in the assets they invest in. For example, the fund might elect to invest in a collection of individual REITs, as well as stocks of companies that are actively involved in real estate.
The value of your investment is again largely dictated by the NAV of the real estate mutual fund, and you will still be entitled to your share of rental payments. The latter comes in the form of dividends, which are either paid on a monthly or quarterly basis.
Some of the most popular real estate mutual funds listed in the US include:
- PGIM Select Real Estate A (MUTF: SREAX): This mutual fund seeks to invest in between 30 and 45 real estate securities, many of which are REITs. This includes the likes of Welltower, New Senior Investment Group, and Simon Property.
- Dunham Real Estate Stock Fund C (MUTF: DCREX): This mutual fund invests in a highly diversified basket of publicly listed real estate securities. This is inclusive of REITs, land development services, real estate management, and gaming operators. Some of the fund’s largest holdings include Caesars Entertainment, American Tower REIT, and Fortress Transportation & Infrastructure.
7. Real Estate Investment Groups
Real Estate Investment Groups, or REIGs, are companies that focus the vast majority of their business operations on generating gains from real estate.
More specifically, if you wish to own a property or group of properties, but you don’t have the time to manage the real estate yourself, you might consider joining a REIG. This allows you to invest in your chosen property while allowing the REIG to take control of tasks surrounding tenants, maintenance, and rental payments.
In turn, the REIG will take a share of any income you generate from the respective properties. The specific fee will vary depending on the provider.
Real Estate Investment Groups don’t qualify as REITs and are not subject to any specific limitations or disclosures.
8. Real Estate Limited Partnerships (RELPs)
A Real Estate Limited Partnership (RELP) is another option to consider.
Put simply, a RELP will see multiple investors pool money together to purchase or develop real estate. In particular, this method is often used when the real estate project in question is considered large.
Investment returns from a RELP are proportionate to the amount of capital injected, and most agreements will have a general partner.
This is the person or company responsible for managing the RELP. They will deal with tasks surrounding property due diligence, financing, negotiations, and rental agreements. The general partner will, of course, charge a fee for this, which will come from any profits made from the RELP.
9. Short-Term and Vacation Rentals
This particular real estate investment option doesn’t need much explaining, not least because the specifics are like-for-like with the previously discussed rental property strategy. The main difference is that instead of renting your property out to long-term tenants, you will target the short-term/vacation niche.
This means that you might rent your property out for several days or weeks but rarely months. This strategy comes with its pros and cons. Regarding the positives, you can generally charge a much higher rate when renting your property out via a short let.
In turn, this can generate a more attractive yield on your investment. However, you do need to consider that there is no guarantee that you will fill the property. Each day that the property remains empty translates into losses.
Additionally, you never quite know what you are getting with short-term/vacation rentals. Unlike renting to a long-term tenant, you will unlikely have the opportunity to vet the tenant in question.
Nevertheless, if short-term rentals are something that interests you, there isn’t a better platform than Airbnb for this purpose.
Although the platform takes a commission on any rentals it puts your way, your property will have exposure to a global audience that now consists of millions of registered users.
When managed properly, short-term rental properties, typically less than 30 days at a time, can provide greater returns than conventional long-term rental properties.
Benefits of Investing in Real Estate
Like with all potential investments that you are thinking about making, it’s important to consider both the pros and cons before proceeding.
Let’s start with the benefits of investing in real estate.
Although there are never any guarantees in the real estate arena, it is important to note that the US property market has continued to grow over time. This is known as appreciation, and it simply refers to the process of the property increasing its market value.
If you can sell your property at a higher price than you originally paid, you will rake in capital gains. Specific yields will vary considerably depending on the type of property and, more pertinently, the housing market.
In addition to appreciation, real estate investing allows you to earn regular income. This comes in the form of rental payments that the respective tenant pays to use the property.
From a long-term investment perspective, this allows you to reinvest your rental payments into other assets. It also enables you to benefit from the effects of compound interest.
In the US, it’s possible to purchase a property with a small down payment. Depending on your personal circumstances, you might be able to complete the investment with a down payment of just 3%.
In essence, this allows you to control an asset that is worth considerably more than the capital you originally put up. If done correctly, you can then rent the property out, with the monthly payments covering the cost of your mortgage obligations.
Diversification From Other Markets
Allocating some of your investment funds to the real estate industry allows you to diversify away from other asset classes, such as bonds and stocks. This ensures that you are not overexposed to a single market.
Low Barrier to Entry
In a time not so long ago, the only way to invest in real estate was to purchase a property outright. This either required a large amount of capital or a long-term mortgage agreement.
However, fast forward to today, and it is now possible to gain exposure to the real estate industry with a small amount of money. This is possible through several investment vehicles, such as REITs, real estate mutual funds, and even crowdfunding.
Downsides of Investing in Real Estate
Now let’s look at some of the main downsides of investing in real estate.
Real estate is arguably one of the most illiquid asset classes on the investment scene. For those unaware, this means that the asset is not easily converted into cash. After all, if you own a property and wish to sell it, the process can take many, many months.
Not only do you need to find a suitable buyer who is willing to pay the price you wish to sell at, but you also need to factor in the cumbersome processes involved in completing the handover.
With that said, investing in real estate through a REIT alleviates this downside. This is because REITs are usually traded on public exchanges like stocks, meaning that you can cash out at any time during standard market hours.
Real Estate Diversification Is Not Simple
Another drawback to consider is that diversification in the real estate arena is not easily achieved. For example, in the traditional equities space, you can now diversify across hundreds of stocks through a small investment of just a couple of dollars.
This can be achieved by purchasing fractional shares or simply investing in an index fund like the S&P 500. However, when you consider the high value of real estate, diversification is a lot less straightforward.
Once again, the main solution to this issue is to consider an alternative investment option, like a REIT or crowdfunding platform.
If you decide to invest in real estate by purchasing a property outright or taking out a buy-to-let mortgage, you need to think about the time requirements of managing the asset.
After all, you will be renting the property out to a third-party tenant, which in itself can be problematic. For instance, you will need to run checks on the tenants before they move in, collect payments every month, and deal with any issues surrounding maintenance.
This is why many real estate investors will turn to property management companies that take care of everything on behalf of the owner.
In turn, you will need to pay the property manager a fee, but this will remove the need for you to take a hands-on approach to your real estate investments.
FAQs How to Invest in Real Estate
We found some of the most frequently asked questions with regard to investing in real estate. Here are our answers.
Why Invest in Real Estate?
Real estate is often viewed as a slow but steady investment stream. This is because people will always need a place to live. In many ways, real estate offers a low-risk way to grow your money over time.
In terms of making money, this can be achieved by renting the property out to tenants, resulting in monthly payments that you can then reinvest into other ventures. You can also benefit from appreciation, which is when the value of the property increases over time.
How Can I Invest in Real Estate Without Being a Landlord?
You can now invest small amounts into real estate by going through a Real Estate Investment Trust (REIT). REITs are traded on public stock exchanges, which allows you to enter and exit your chosen market with ease.
How Much Money Do You Need to Start Investing in Real Estate?
The minimum amount of money required to invest in the real estate industry depends on your chosen avenue. For example, some REITs trade for less than $100 per share. This means that you can gain exposure to a specific niche of the real estate scene — such as commercial property or healthcare facilities — with a very small amount of capital.
How Do People Make Money in Real Estate?
You can make money from real estate in two ways. The first is by charging monthly rental payments to tenants to pay to use the property. The second is through appreciation, which is when the property increases in value. The latter can only be realized when you sell the property.
When Is a Good Time to Invest in Real Estate?
Some investors will look to time their real estate investments based on historical trends or seasonal events. With that said, there is never a better time to enter the real estate industry, especially if you are using a method like REITs, which has a low barrier of entry.
Is Real Estate A Good Hedge Against Inflation?
The general consensus is that during times of rising inflation, investors will flock to safe havens. While this often includes commodities like gold, real estate is also a great hedging vehicle. This is because history suggests that as inflation rises, so does the market value of real estate. In turn, this then allows you to periodically charge tenants more in the way of rent.
In summary, while most investors in the US will focus on traditional stocks and bonds, real estate is also worth considering. The US real estate arena has never been more accessible for the average investor.
Sure, you have the option of buying a property and renting it out to tenants. But, perhaps the smarter way — at least in terms of diversification and liquidity — is to consider a REIT or real estate mutual fund.
Both avenues allow you to invest in real estate passively, and minimum investment requirements are typically very low. You also have real estate crowdfunding platforms, which are attractive to those looking to invest with a small amount of capital.
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Kane is a highly-skilled researcher and writer with expertise in finance, trading, and cryptocurrencies. Academically, Kane holds a Bachelor’s Degree in Finance, a Master’s Degree in Financial Crime, and he is currently engaged in a Doctorate. He is passionate about researching the money laundering threats of the virtual economy — notably, cryptocurrencies and blockchain technology.