Typically when the term real estate investment comes to your mind you most likely think of the house buying process to be able to find a home to move into. However, real estate investments can involve many different factors in order to be effective in buying and holding and even fixing and flipping houses.
There are actually some indirect investments that will allow you to add real estate to your portfolio and you with some strategies you can even start with a minimal investment amount. However, with there being so many options available it can be difficult to figure out where you should begin.
The Importance of Real Estate Investing
Real estate should always play an important factor in your investment strategy. Historically, in fact, it’s one of the most readily available and most reliable investment options you can ever make and it’s also a perfect way to diversify your portfolio.
One way to invest in real estate directly is by utilizing leverage to purchase a house or a rental property or through indirectly purchasing shares of a real estate investment trust (REIT) or by buying online real estate crowdfunding platforms.
Not only does this give you ownership of a tangible asset which its value typically appreciates, real estate can certainly hedge against overall inflation and other types of market sectors. As a whole, investing in real estate is one of the easiest ways to be able to generate cash flow, increase wealth, and make your net worth grow.
Best Ways to Invest In Real Estate
The approaches that are written below can vary substantially in cost, overall return on investment (ROI), the expertise that’s required, and time demands that are needed. To figure out which real estate investment you should consider choosing it usually depends on several factors, which include:
- Risk tolerance
- Desired returns
- How much money and time you have to invest in real estate properties
One of the easiest and most common ways to invest in real estate is by purchasing rental properties. Whether you invest in a duplex, single-family home, or a multi-family apartment building, investing in rental properties can be a reliable and long-term investment that can allow you to have a steady flow of passive income, while benefiting from the increasing property values. If you need some guidance, a buyers agent can assist with the entire process of acquiring property for rental.
If you’re not sure if you’re ready to be a landlord full-time, you may want to consider trying house-hacking. You can achieve this by renting out a part of your primary residence一such as a single room or fully finished basement一to a tenant. You can then generate some rental income to offset the overall cost of the payments you make toward your mortgage.
If you would rather not have to deal with the hassle of having long-term tenants, then utilizing websites such as Airbnb can allow you to find short-term tenants to rent that will just pass through for a short period of time.
If you’ve ever heard of or seen an episode of HGTV, then you more than likely know exactly what house flipping is. On a basic level, flipping a house simply refers to purchasing undervalued properties and then selling it immediately at a much higher price for a quick profit.
Most of the time many “flippers” will also add more value to the property they are flipping by fixing it up or by improving it as much as possible before reselling it. In order to make profit from flipping houses, you should have substantial experience in the real estate market and the overall know-how to renovate and repair the properties you’re flipping.
Real Estate Owned (REO) Or Foreclosures
Whenever a homeowner fails to properly pay their mortgage in a timely manner or just doesn’t make any payments at all, it will usually lead to a foreclosure. This means the mortgage company or financial institute that’s involved in the property then repossesses the property and resells it at an auction.
If they are unable to obtain a buyer for the property, then it will become “REO.” Foreclosures and REO properties are typically priced way below the market value and they become the perfect investment opportunity.
Real Estate Investment Trusts (REITs)
REITs are considered to be indirect real estate investments that provide both experienced and beginner traders to obtain exposure to the real estate market without needing to buy their own property. Just like ETFs and also mutual funds, REITs involve a number of different assets, pay regular dividends, and can be traded on the stock market.
If you don’t necessarily have a lot of money to invest then this could be a really good option for you to think about considering if you’re wanting to invest in real estate. By buying shares of REITs, you end up earning a proportionate share of the overall income they tend to produce.
There are different types of REITs that invest in different types of assets一for instance, equity REITs own buildings, while mortgage REITs own mortgage-backed securities (MBS) and they also own mortgages.
Real Estate Limited Partnerships (RELPs)
RELPs will allow investors to have a diversified portfolio of certain real estate assets. However, RELPs, unlike REITs, are actually private equity investments, this means that they aren’t traded on any public exchanges.
RELPs don’t typically pay out regular dividends either. Rather, they’re mostly intended to be short-term investment vehicles that will eventually allow you to earn a lump sum as soon as they reach their term. Once the project is finished, the partnership ends up dissolving.
Real Estate Investment Groups (REIGs)
An REIG is typically made up of a group of multiple partners that invest in and manage a single apartment or condo complex or more. In order to join one of these groups, you have to purchase a condo or apartment through that company.
By purchasing the property a property manager is then usually hired on to take care of typical maintenance, fill vacancies if there are any, and take care of interviewing tenants. However, this type of investment option costs exponentially more upfront than RELPs and REITs do.
It can actually be a great opportunity for investors who want to be able to own and rent out their own property without all of the hands-on experience that’s needed to maintain it.
Online Investment Platforms
Online investment platforms which are also referred to as real estate crowdfunding, are known for connecting individual investors with real estate developers that need to be able to increase capital for several various development projects.
Rather than funding their projects through the use of a bank, the developers will sell equity stakes and then offer monthly or even quarterly distributions to online investors. In order to invest, you can pay a minimum deposit of just $500 to open an account.
Home Construction Companies
This is another indirect type of investment in real estate which is done by purchasing stocks in home construction companies. While the housing market consistently keeps growing, companies such as D.R Horton are continuously able to build new developments to keep up with overall rise in demand.
Commercial Real Estate
Some types of commercial properties include retail, office, industrial buildings, and storage facilities which feature real estate investors who have all the expertise required to invest in these properties at a higher return than investing in residential real estate properties.
Revenue that is made from commercial real estate is typically higher than residential properties and is mostly gained through rent. However, sometimes tenants can be known to buy options for something that is called “right of first refusal” (ROFR) directly on the neighboring properties.
However, unless you have knowledge of zoning, building codes, and specialized rental contracts you probably shouldn’t use this type of investment.
Figuring Out the Best Real Estate Investment Strategy For You
It’s important to remember that real estate isn’t a one-size-fits-all kind of investment. Depending on what your financial objectives are, that will determine where you end up choosing to invest your money. And you should never forget that you don’t have to just pick one of these real estate investment options.
Actually, by adding diversification to your portfolio when it comes to real estate it becomes a perfect way to figure out what will work the best for you as an individual investor. And it will ultimately hedge against the potential for losses if you only use one sector.