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Many investors hold real estate in their portfolios. But, diversifying your portfolio with other real estate investments might help you protect yourself from stock market volatility.
What are my investment options?
Here are the most popular real estate investment methods:
Rental properties
The most hands-on option on this list is renting out your property. You purchase residential real estate and rent it out to renters. Usually rental apartments are rented for a year, but shorter-term rentals through companies like Airbnb are growing more common.
You are the landlord since you own the property. You’re in charge of maintenance, cleaning between tenants, major repairs, and paying property taxes. You may be responsible for replacing appliances and paying for utilities, depending on the lease terms.
You profit from rental properties through rental revenue and price appreciation if you sell the property for more than you bought for it.
A down payment of up to 25% may be required when purchasing rental property. Yet, if you charge enough rent to meet your mortgage payment, your tenant will cover the rest, plus any price appreciation.
REITs
If you don’t want to deal with the hassle of managing a rental property or don’t have the 25% down payment, real estate investment trusts (REITs) are a simple method to get started in real estate investing. REITs (real estate investment trusts) are publicly traded trusts that own and operate rental properties. They can own anything, including medical office space, malls, industrial real estate, and office or apartment complexes.
REITs have significant dividend payments because they are obligated to distribute at least 90% of their net income to shareholders. If the REIT fits this criterion, it will not be required to pay corporate taxes.
Real estate investment groups
Investing in a real estate investment group (REIG) is one approach to maintain the profit potential of private rental properties while potentially gaining more upside than a premium-traded REIT.
REIGs buy and manage properties before selling off parts of them to investors. A REIG will purchase an apartment complex, and investors will be able to purchase flats within it.
The property is managed by the operating firm, which keeps a share of the rent. This implies that the corporation finds new renters and handles all maintenance. If some apartments are vacant, the investors may frequently pool some of the rent to pay down debt and satisfy other commitments.
Flipping houses
House flipping is the most difficult and risky option, but it may also be the most profitable. The two most typical methods for flipping houses are to buy, repair, and sell or to buy, wait, and sell. In any scenario, the objective is to reduce your initial investment to a minimum with a low down payment and to keep renovation costs to a minimum.
Housing markets aren’t known for being volatile, but when they’re leveraged to the max – as they must be – it kills you in the house flipping game. Keeping renovation expenses low may appear simple, but it may be practically hard if you lack firsthand building knowledge.
As of 2021, material prices are skyrocketing, there are labour shortages everywhere, and there are almost no cheap dwellings for sale. For house flippers, this is the worst stage of the cycle: Everything is pricey, and the market might change at any time.
Real estate limited partnerships
REIGs are real estate limited partnerships (RELPs). RELPs are formed in the same way as hedge funds, with limited partners (investors) and a general partner (the manager). The general partner is often a real estate company that assumes full obligation.
RELPs are a type of real estate investment that is more passive. Normally, the general partner establishes the partnership and recruits limited partners. Investors are then given a K-1 to record income on their taxes, but they have little influence over operations.
If you locate a solid general partner, RELPs can be quite rewarding. But you’re completely reliant on that general partner, who must operate the property and report financials to you without much control.
Real estate mutual funds
Real estate funds invest in real estate investment trusts (REITs) and real estate operating companies (REOCs) (REOCs). REOCs are similar to REITs, but because they do not have to pay dividends, they develop significantly quicker.
The most straightforward way to invest in real estate is through mutual funds or exchange-traded funds (ETFs). Although you get dividends, you enable a management or perhaps an index to select the best real estate investment.
Even if you solely invest in equities, real estate funds can provide diversification while maintaining the liquidity profile you’re used to.
Why should you invest in real estate?
Here are a few pros and cons of investing in real estate:
- If you invest in physical property, you can control your investment. You could also have a totally passive investment that you don’t need to manage.
- Can be a source of steady monthly income payments.
- Can reduce your overall volatility through diversification and lower price movements in general.
- Can lead to long-term wealth through the use of leverage.
CONS
- In a Great Recession type of event, prices can collapse and take down your entire portfolio.
- With the amount of leverage required, even small price drops can wipe out your whole investment.
- If you choose to flip houses or personally own rental properties, it can turn into a career in itself and use up significant free time.
- Up-front costs can make initial investments difficult. You need to save enough for the down payment and to cover cash flow shortages when there are vacancies.
How to get started in real estate
If you choose to invest in real estate, follow these five steps to get started:
- Save money: Real estate has some of the most expensive entry barriers of any asset sector. Before you begin, you should pay off your high-interest debt and have a substantial savings account.
- Choose a strategy: Each of the tactics listed above has the potential to be successful. If you decide to invest in REITs or funds, you may learn more about your alternatives online. If you wish to buy tangible property, you must first choose a market.
- Assemble a team: When you first start out, you might wish to work with an agent. Excellent agents will send you off-book chances that have not yet been listed. You may eventually require someone to manage your properties and an accountant to handle your finances. If you are successful, you may need investors as well.
- Do deal analysis: Whether you’re investing in residential or commercial real estate, you should do your homework. For example, when it comes to rental properties, you’ll need to consider what future rent payments would be, what expenses you might incur, and what you might be able to sell the property for.
- Close the deal: The last step is to pull the trigger. Closing on your home or make the purchase in your brokerage account.
