From getting a home loan to creating a nationwide real estate empire, there are countless methods to invest in real estate. There are plenty of other options, even though the latter is probably out of reach for the most of us. These are five methods for increasing your assets’ exposure to real estate.
1. Trusts that invest in real estate (REITs)
Look into real estate investment trusts if you want to buy property right away and with the least amount of money possible (REITs). These publicly traded firms raise money by selling stock and issuing bonds, and they then use the money to buy and rent out real estate assets including warehouses, offices, shopping centers, and office buildings. Nearly all of a REIT’s after-tax earnings must be distributed to investors in the form of dividends.
Real estate investment trusts simplify the hassle of property ownership. You merely have to sit back and collect dividends, which are frequently larger than many stock-based investments because management takes care of all the ownership and rental logistics.
Like any other publicly traded firm, REIT stock can be purchased and sold on the market using a brokerage account. Because of this, REITs are among the most liquid real estate investments. Moreover, shares of exchange-traded funds (ETFs) that possess shares in numerous REITs are available for purchase. With investing applications like Stash, M1 Finance, and Robinhood, new investors without a lot of capital can purchase fractional shares of REIT ETFs.
2. Real estate crowdfunding platforms
Platforms for real estate crowdfunding are a good option for investors who want to get more involved. Instead of investing in huge, generalized portfolios of properties, several of these online platforms allow you to do so in particular real estate development projects.
Platforms for real estate crowdfunding combine funds from numerous investors to finance construction projects. Companies typically demand that investors make real estate investments over longer periods of time, often five years or longer. Some of your funds might be accessible earlier, although that will depend on the platform, and there might be fees associated with early withdrawals.
The platforms could demand a fee. Watch out for any fees or additional administration expenses that could reduce your returns. Remember that not all online real estate sites may allow you to participate. The majority demand minimal investments of $500 to $25,000 or more. Some ask that you be an accredited investor, which is someone who has $1 million in assets other than their primary residence and makes more than $200,000 annually.
Two well-known platforms, Fundrise and Crowdstreet, provide a variety of alternatives, from real estate funds to specific real estate projects.
3. Spend Money on Your Own House
The most popular real estate investment for most people is their primary residence. You obtain a mortgage, pay your regular installments, and steadily increase your home’s equity. You might be able to profit from the equity in your property when you sell it with some luck and a healthy local market.
Even though typical annual returns are smaller than you might expect, investing in your own home can help you create wealth over the long term. Home values barely grew by 3.9% yearly on average from 1994 to 2019, according to a survey by market analyst Black Knight. Although there are some regions of the country where home appreciation is much higher, on average your home’s value is not expected to increase significantly, especially when you account for expenses like upkeep and repairs, insurance, property taxes, and mortgage interest.
According to Nareit, average annual returns on other real estate assets, such as REITs, have reached 11.28%; even a plain vanilla S&P 500 ETF has long-term average annual returns of roughly 10%. This is not to argue that you shouldn’t ever own a property or consider it an investment. You can buy a home for a lot less money than you could with other real estate transactions thanks to government assistance for the mortgage industry generally and initiatives that aid first-time homebuyers.
4. Purchase rental property
Consider buying rental homes if you want to devote significantly to real estate investing. Although rentals have the potential to provide a consistent income flow as well as the chance of appreciation over time, they are one of the most labor-intensive real estate investment strategies.
The following are the two primary strategies to profit from rental properties:
- Rentals for a long time In principle, these buildings, which are often built to be rented for at least a year, should generate a consistent monthly cash flow, but this depends on your renters’ dependability. You might purchase a single-family home or a building with multiple units to rent out to other people.
- Brief-term leases Similar to Airbnb, these apartments cater to recurring tenants whose stays may be as brief as one night. While you’re away, you might offer your entire house or apartment, or you may buy a separate property designed solely for short-term rentals.
Real estate investments with rental properties have a higher potential for profit, but they also demand a lot of work from the investor. You must discover and carefully screen potential tenants, make any necessary repairs and maintenance payments, and deal with any additional issues that may emerge.
Hiring a property management company will minimize some of these hassles, but the cost will reduce your profits. The resources and low interest rates available for primary residences may not be available for financing rental properties. This may increase the cost of purchasing rental property.
5. Flipping properties is a way to invest in real estate
To increase your real estate investing earnings, you don’t necessarily need to purchase rental properties. The practice of purchasing and selling real estate is widespread, but, as with rental properties, flipping requires a lot of labor. It entails remodeling houses and learning to spot emerging communities where you can resell your acquisitions for a profit.
If your home flipping approach includes construction and renovation, you are taking on additional risk and incurring significant out-of-pocket expenses. In conclusion, it’s not as simple as it might appear on HGTV. For improvements, you’ll need building permits, and expenses can be more than you anticipate, particularly if you hire contractors or outsource additional work.
In order to reduce the amount of work involved in flipping properties, seek for houses in developing neighborhoods that don’t require extensive improvements. If you decide to rent the home out while you wait for the value to increase, this might become much more profitable. Just keep in mind that the area you anticipate being trendy may never take off, leaving you with a home that makes it difficult to recover your investment.
Are Real Estate Investments a Good Idea?
Strong long-term gains from real estate investing are possible and they are not always connected with stock market performance. But, investing in real estate can be expensive and risky, so for people with little capital to work with or who aren’t searching for a permanent house, REITs can be the best option.
Be sure you’re fully informed of the dangers you’re taking on and have a plan on how you will earn back your investment before you decide to buy rental properties or begin flipping homes. Keep in mind that buying real estate can be a significant financial commitment because it can be relatively illiquid in the short term. Speak with a financial advisor if you have any questions about how to begin real estate investing.
