When you think of real estate, the first thing that often comes to mind is buying a house to live in.
But real estate investments can take many different forms, from buying and holding to fixing and flipping. Some indirect investments even let you add real estate to your portfolio for as little as a few hundred dollars. With so many options, it can be hard to know where to start.
But fear not — we've got you covered. Read on for some of the best ways to invest in real estate for every type of investor.
What is real estate investing and why is it important?
Real estate investment means buying property to earn income. That income can be passive (like collecting rents or dividends) or active (like fixing up a house and selling it for a profit).
Real estate can and should play a significant part in your investment strategy. Historically, it’s one of the most reliable investments you can make and is an excellent way to diversify your portfolio.
You can invest in real estate directly by using leverage to purchase a home or rental property or indirectly by buying shares of a real estate investment trust (REIT) or online real estate crowdfunding platform.
In addition to giving you ownership of a tangible asset (whose value almost always appreciates), real estate can effectively hedge against inflation and other market sectors. Overall, investing in real estate is one of the best ways to generate cash flow, build wealth, and increase your net worth.
Best ways to invest in real estate
The approaches we list below vary considerably in cost, return on investment (ROI), time demands, and expertise required.
The type of real estate investment you choose depends on several factors, like your risk tolerance, desired returns, and how much time and money you have to invest.
One of the most common ways of investing in real estate is buying rental property. Whether you own a single-family home, a duplex, or a multi-family apartment building, rental properties are reliable long-term investments that can provide you with a steady flow of passive income while also benefiting from increasing property values.
If you’re not quite ready to be a full-time landlord, you might want to try house-hacking instead. By renting out part of your primary residence — like a room or basement — to a tenant, you can generate rental income to offset the cost of your mortgage payments. If you don't want the hassle of long-term tenants, websites like Airbnb can help you find short-term renters who are just passing through.
If you’ve spent any time watching HGTV, you probably know about house flipping. On a basic level, flipping simply means buying undervalued property and immediately selling it at a higher price for a quick profit.
Many flippers also add value to a property by fixing it up or improving it before selling it. To make money from flipping, you should have considerable experience in the real estate market and the know-how to repair and renovate your property.
Real estate owned (REO) and foreclosures
When a homeowner fails to pay their mortgage, it leads to foreclosure. That means the mortgage company or financial institution repossesses the property and tries to sell it at auction. If they don’t find a buyer, the property becomes REO. Foreclosures and REO properties are often priced well below market value and represent excellent investment opportunities.
Real estate investment trusts (REITs)
REITs are indirect real estate investments that allow both beginners and experienced traders to gain exposure to the market without having to buy their own property. Like ETFs and mutual funds, REITs contain a basket of different assets, are traded on the stock market, and pay regular dividends. They can be a good option if you don’t have a lot of money to invest and want to get started in real estate.
By purchasing shares of a REIT, you earn a proportionate share of the income they produce. Different types of REITs invest in different assets — for example, equity REITs own buildings, while mortgage REITs own mortgages and mortgage-backed securities (MBS).
Real estate limited partnerships (RELPs)
RELPs also provide investors with a diversified portfolio of real estate assets. But unlike REITs, RELPs are a private equity investment, meaning they aren’t traded on public exchanges. RELPs also don’t tend to pay out regular dividends. Instead, they’re intended to be short-term investment vehicles that earn a lump sum once they reach their term. After the project is completed, the partnership dissolves.
Real estate investment groups (REIGs)
An REIG is usually a group with multiple partners that invests in and manages one or more apartment or condo complexes. To join a group, you purchase an apartment or condo through the company, which then hires a property manager to handle maintenance, interview tenants, and fill vacancies.
While this investment option costs significantly more upfront than REITs and RELPs, it can be perfect for investors who want to own and rent their own property without the hands-on experience of maintaining it.
Online investment platforms
Also known as real estate crowdfunding, online lending platforms connect individual investors with real estate developers who need to raise capital for various development projects. Instead of funding their projects through a bank, developers sell equity stakes and offer monthly or quarterly distributions to investors online. To invest, you can often open an account with a minimum deposit of as little as $500.
Home construction companies
Another indirect way of investing in real estate is to buy stocks in home construction companies. As the housing market continues to grow, companies like Lennar (LEN) and D.R. Horton (DHI) are constantly building new developments to keep up with rising demand.
Commercial real estate
Commercial properties — like retail, office, storage, or industrial buildings — offer experienced real estate investors a higher return than residential real estate. Revenue from commercial real estate is generally higher than residential units and mostly comes from rent. However, some tenants also buy options for what's known as "right of first refusal" (ROFR) on neighboring properties.
However, making money from commercial properties requires knowledge of zoning, building codes, and specialized rental contracts.
Finding the best real estate investment strategy for you
Real estate isn’t a one-size-fits-all type of investment. Where you choose to put your money depends on your financial objectives.
And remember: nothing says you have to pick just one type of investment. In fact, adding diversification to your real estate portfolio is a great way to find out what works best for you while hedging against potential losses in one sector.
The bottom line
There are many different ways to invest in real estate. Whether you’re saving up to buy your own home, investing in a rental property, or purchasing shares in an online crowdfunding venture, always make sure to do your research to make the most out of whatever option you choose.
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