Want to diversify your portfolio by investing in real estate? Read on to find out how.
Below are some different ways to invest in real estate, and some tips for becoming a savvy investor.
No matter which investment you choose you’ll need to:
Understand the investment.
Understand your risk tolerance.
Understand what you can (and can’t) control.
Stay informed and calm.
In this Guide
To be a long-term profitable real estate investor, you want to implement a diversification strategy.
It is important that you avoid putting all your eggs in one basket, because you never know what might happen in the real estate business.
What if very few houses or properties come on to the market? Or what if prices drop drastically?
You want to avoid having to sell all your properties at the same time or something like that.
Real estate investment strategy is definitely a tricky subject to learn, and it is advised that you take courses in order to learn the proper investment techniques.
However, there are some basics that you can learn that will help guide you in your investments. These basic real estate investment strategies will help you get your mind around what you must do and how to invest in real estate.
Real Estate Strategies Overview
Incorporating real estate investment strategies into your investment strategy will give you diversification, stable cash flow, and protection from inflation. Each of these things is very important in your overall financial plan.
Rental Property Investing
In addition to buying a primary residence, an investor can benefit from buying a second home or an investment property. This is a great way to diversify your real estate holdings, manage risk, and maximize returns.
Where a primary residence is driven by personal preference, rental properties are driven by potential for income. The goal is to generate income from the property so that it covers the mortgage, insurance, taxes, and any other necessary expenses.
Whether in a major urban or resort area or a small suburban or rural town, real estate is one of the easiest and most profitable ways to earn a steady stream of income.
Investors analyze different aspects of the property to determine its potential value, such as rental rates, the annual appreciation rate, and potential growth in property value. When comparing investments, they base their analysis on total property returns after considering costs and returns, as well as risk. They may also analyze how the value is affected by external factors, such as employment opportunities, trends in a particular neighborhood, cultural events, local facilities, and transportation options.
While real estate investment can be very profitable, there are times when it can also feel like a major obligation. The potential costs are too high and the chances of making a profit may be too low.
This is where diversification can help offset the risks. If you are thinking about launching a real estate investment strategy, consider all of your options, such as these:
Pros of Rental Property Investing
One of the most popular types of real estate investing is rentals. Some people even begin investing in rentals because they want to live in those houses. But oftentimes when you are starting out and you don’t have much money or haven’t become well versed in investing yet, it’s easier to start out with an investment property. This gives you the opportunity to learn about the process, learn how to handle tenants, and dig your feet in a little deeper.
Rentals are also a good option if you are working with a limited budget or are working through a limited cash-on-hand situation. When you are dealing with rentals, cash flow is often an issue, and you won’t have to take out a bank loan for a rental property. You can purchase the property outright and then pay monthly out of pocket expenses to the bank as you receive rent payments.
With rentals, you may also find that the tax benefits help quite a bit in offsetting the monthly expenses. Rentals are also much easier to sell, since they tend to be a very liquid type of transaction. And as you gain more experience, you can begin to learn about filling specific niches and increasing the amount of rental income you get.
Cons of Rental Property Investing
This can be a really great investment strategy, but like anything, it does have some downsides.
It Can Take a while to Start Making Money
Many people want to invest in rental properties because they want to start making money right away. Unfortunately, that’s not always how it works. Even the best realtors and investors tell stories of their biggest deals taking over a year to close.
Sites like Trulia showcase homes that are currently available for rent, but if you’re looking to buy a rental property, you might have to get creative with your search and spend a good amount of time searching.
This can be frustrating for investors who just want to start cashing checks quickly.
You Have to Know Where to Look, and You Have to Know What to Look For.
Investing in rental properties doesn’t necessarily mean going out and buying properties sight-unseen. There are different methodologies for investors: some like to buy rental properties that they personally live in, while others prefer to buy properties with tenants already in place.
But no matter what your deal, you need to know how to spot the best real estate properties. Properties in great locations aren’t always the best investments. You also need to know the difference between a great rental property and a poorly-maintained property just waiting to fall apart.
Real Estate Investment Trusts (REITs)
Real estate investment trusts (REITs) are companies that own or finance income-producing real estate. Stocks of REIT companies are traded on various stock exchanges. REIT stocks can be a good source of diversification for your portfolio because it is not correlated to the stock market. REITs can also be an attractive investment because of the high dividends and return on assets.
The stock price of a REIT is not just a reflection of the company’s real estate holdings. A lot of factors including cost of capital, industry outlook, and asset management activities can also affect this. This is why REITs are very volatile.
Some of the benefits of investing in a REIT are:
Since they are traded on the exchange floor, they have high liquidity, low cost of trading, and high transparency.
Because they can invest in different asset classes, they are considered income generators.
Average annual returns of 12% with lower risk if compared with other investments.
Even after subtracting average inflation, you can still expect 6% average return.
They provide an investment alternative for small investors.
Pros of REITs
If you’re a long-term, stable investor, REITs could be the perfect match for you. REITs have many advantages that make them a great choice for an investor who doesn’t want to worry about the day-to-day running of the property and just wants to see the asset grow in value:
Many REITs are diversified so that you aren’t putting all your eggs in one basket. For example, you may have a REIT that owns apartments in the North West and also owns parking garages in the South East.
Benefits of Property Ownership without Owning It
REITs provide their investors with a certain degree of property ownership without actually owning real estate. It’s a unique asset class that blends aspects of financial investments and property investments.
Low Capital Requirements
REITs require low capital because they’re typically listed on a stock exchange. Therefore, you can invest with little money in them.
REITs are easy to get in and out of. Lastly, they have high liquidity.
Cons of REITs
First, companies that invest in REITs often face high turnover. REIT stocks tend to be volatile because they rely on fluctuating interest rates, gas prices, and earnings predictions. They also yield lower returns because REIT companies, in general, are taxed less than their rivals. That’s because they get to deduct real estate depreciation. The profits from selling stocks held less than one year are also subject to a higher tax rate.
Real Estate Exchange-traded Funds (ETFs)
One way to invest in real estate is through real estate exchange-traded funds (ETFs). Like a real estate investment trust (REIT), a stand-alone REIT ETF tracks the performance of a portfolio of real estate-related assets. But unlike a REIT, a stand-alone REIT ETF trades like a stock, making it easier to buy and sell.
There are two primary types of REIT ETFs: target date and sector funds (like energy or healthcare). Target date REIT ETFs invest in a range of real estate-related securities as well as real estate debt and mortgages. A sector fund invests in one specific sector; a healthcare REIT ETF, for example, invests exclusively in healthcare companies. Sector funds can also request that an exchange include additional or alternative holdings outside of the sector.
A sector fund does not track an underlying index. Because it is actively managed, a sector fund’s returns can differ significantly from the REIT sector index. Sector funds can also charge higher expense ratios than stand-alone REIT ETFs.
When considering REIT ETFs, you may want to consider three factors: the index the ETF tracks, the sector into which the ETF is classified, and the management fees associated with the ETF. Using ETFs also reduces your exposure to actively managed funds, which carry greater risk.
Pros of Real Estate ETFs
Real estate ETPs or Exchange Traded Funds are slowly gaining popularity amongst investors in the past years. The real estate market has done pretty good in the past years and we could be in for more of the same in the future. These types of funds allow for smaller investors to play a part in the real estate market without having to actually deal with the nitty-gritty parts of real estate.
However, this might have its consequences. Real estate is very different from traditional stocks.
Rather than investing in companies whose business is defined, they invest in projects with uncertain returns. If a purchaser is planning on renting out the property, it would be unwise to purchase a property and wait for a five year period for the proper market to be in place before selling.
· A property can be held as an investment.
This is the main difference between a security and an asset. A security is something that can be sold quickly and with little effort, while an asset can have ongoing value. An example of a security would be stocks, bonds, and ETFs. They would have a very low monthly usage, and though they may have value in the short term, their market value can drop rapidly.
· There Are Alternatives to Direct Property Ownership
In recent years, there has been a slight downturn in the industry, but the recovery rate was fairly impressive. Investors who are worried could always invest in property development.
Cons of Real Estate ETFs
The ETF will follow various properties, such as stocks, bonds, precious metals, and real estate. Some of these securities that are classified as real estate usually include real estate investment trusts (REITs), preferred stocks, and common stocks.
These ETFs may include real estate securities that are not directly related to real estate. Examples of such securities that are not directly related to real estate include timber, gold mining, and oil and gas. In many cases, the ETFs that are related to real estate may contain securities from different countries.
Real Estate Mutual Funds
When it comes time to consolidate your real estate interests into one profitable venture, looks to real estate investment funds. To understand how these funds work, you must first understand what they are, and how they differ from other real estate investment strategies.
What is a Real Estate Investment Fund?
A real estate investment fund is a business entity that allows investors to pool their money together to purchase properties or loans secured by real estate. Since the Great Recession, there has been an influx of property owners who are likely to have difficulty maintaining their mortgage payments. In order to take advantage of the increase in foreclosures, many investors are looking to real estate funds to help them find these deals.
So what makes these funds different from other investment strategies? These entities have a great deal of flexibility in how you invest… the funds can be set up for tax purposes, and you have a choice in how the returns are distributed. In order to understand how real estate investment funds can help you make your real estate investment strategies more profitable, you must understand these two terms, especially as they relate to your personal real estate goals.
Pros of Real Estate Mutual Funds
Real estate investing is complex and can be expensive. But if you have the time, money, and inclination, it offers some great opportunities. For example, some people decide to buy rental properties to generate income and build wealth. If you want to invest in this way, it’s a good idea to diversify. That way, if one investment isn’t performing in a certain way you’re looking for, the other ones can help offset it.
Now if you haven’t got the money or the time to get involved in this way, you can consider investing in a real estate mutual fund. It’s essentially a packaged set of individual investments that gives you a way to pool your money and divide up the deals you want to take part in.
If you’re not interested in getting involved with a real estate mutual fund, then you still can benefit from real estate investment strategies.
Cons of Real Estate Mutual Funds
It is important to also understand the cons of such investment strategies. One of the biggest cons of investing in a mutual fund is that most of the time, there is NO guarantee that you will receive steady returns. The value of the property may actually decrease over time. You may even end up earning very little or even LOSING money.
Online Real Estate Investment Platforms
The real estate industry has reached a huge importance in today’s world. This is a sector that has many opportunities available for investments. Real estate investment strategies are being enhanced and developed every day by different companies. Online real estate investment platforms are platforms that enable the users to invest through the internet on real estate opportunities.
How to invest online?
There are many projects established every day and, due to this, there are a lot of investors who would benefit from a platform that offers them the chance to track real estate deals. With online real estate investment platforms, it is possible to gain access to opportunities you would not have access to otherwise. You can find opportunities all over the world to invest on them.
It is possible to find new investment alternatives in countries such as Australia, Canada or Japan. With platforms such as Proptiger, Realtyshare, WeSaveProperties and Fundrise, you are able to make investments on wide variety of assets. These platforms enable everybody, including beginners, to become prosperous through investing on real estate.
Pros of Online Real Estate Investment Platforms
- Beginners who deal with the real estate investment news, they can easily get the details about the investment. Nowadays, most of the beginners are making mistakes, but with the help of the real estate investment news, they can make a better decision. These news not only assist them to determine the total cost of the property investment and the benefits it can bring them to, but also with the current market trends. As it is quite easy for the news to reach out to all the corners of the world, it has become quite easy for the beginners to get the perfect information regarding the real estate investment. The beginners also can get to know the competition and its pros and cons when they try to reach the top.
- If you are planning to invest in the real estate, and want quick returns, then the real estate investment can provide it to you. The investors focuses on getting the best rent and selling the property for a higher price. There are quite many real estate investments available in the market, and it is quite important for you to select the one which can provide you with better returns.
- With the help of online real estate investment platforms, you can easily get the ideal one for you. There are many investors who have lost their investments when they fail to get the required information about the real estate investment. There are quite many companies who arrange the online real estate investment conference in the particular place, and you can attend that conference in order to get the finest one.
Cons of Online Real Estate Investment Platforms
If you’ve ever considered investing in domain names or other online real estate, you’ve probably tried out some of the online platforms offering investment tips or domain name portfolio tracking software. However, investing in domain names online is not an easy thing. There are many unscrupulous players out there who will try to get your money. They do this by offering ill-conceived strategies, over-hyping domain names they don’t own, and encouraging investor’s to make risky short-term investments.
Okay, so what’s a smart investor to do then?
★ Some strategic real estate investors like to buy, lease, or sell land or real estate. They tend to make long-term investments and tend to make sure that they have a strategic advantage in every transaction. It doesn’t mean that they do not make short-term profits, but they definitely try to minimize their risk.
★ It is also true that web-savvy people choose to invest in web domains and websites, but they have a justifiable reason for doing so. Remember, the web is growing, and there is a significant demand for a variety of web-related domains. So any site that you own has a potential of yielding great returns.
Real Estate Investment Partnership
One of the safest and soundest ways to invest in real estate is in partnership with someone who has experience, unless of course, you can afford to take a huge risk.
Real Estate Partnerships Should Be Formed Carefully
First and foremost, if you are thinking of investing in a real estate partnership, you would have to discuss potential partners with the firm and have them give you references and necessary disclosures.
Real estate partners can be divided into two types: partners who actively take part in investment decision making and those who are passive.
The goal, however, is the same: to make more profits and to protect the investment. As such, you will need to enter into a formal partnership agreement that details the rights and obligations of both partners.
There are many established rules for entering into a real estate partnership. The agreement itself will usually detail the following:
- An introduction of the partners involved
- Details of the property acquired
- Company purpose
- Manner in which profits will be allotted and who will be responsible for what
- Terms ending the partnership
The document should also spell out the power of attorney of both partners. This is essential because one day you can be in agreement with your partner on what to do next and the next day, you won’t be able to discuss these aspects with him anymore.
Pros of Real Estate Partnerships
These investment partnerships can be formed with another real estate investor, a spouse or an unrelated person. When both partners share the same real estate goals, work together and have complementary skill sets, partnerships can be mutually beneficial. In fact, we are hoping to make a new investment partner soon for each one of us.
If you have been researching real estate investing strategies, you probably already know that there are many different ways to approach investing. We prefer to invest in fix and flip properties and to buy our own investment properties.
Imagine that you have a partner. You could cover different sides of the transaction – one of you could purchase the house while the other handles the actual renovation. You could also invest in different properties together with someone you know.
Another advantage of real estate partnerships is diversification. Since real estate prices tend to move in cycles, one partner’s investment may be helping the other to smooth out some of the bumps. In some situations, one partner may be able to provide financial support to the other.
Cons of Real Estate Partnerships
Like every type of investment strategy, real estate partnerships have their drawbacks. No investment is risk-free, and these are three ways in which real estate partnerships can fall apart.
Distrust between Partners
People are going to have different opinions, and disagreement is unavoidable. But if the area of contention between you and your real estate partner is the partnership itself, it might spell trouble. In every business relationship, there’s always a possibility that the relationship will fail. There’s also a chance of your not working well together.
If you have doubts about your real estate partnership, don’t be afraid to open up a conversation with your partner(s).
Hoarding Risk by Owners
An owner can become a silent partner… too silent. If he or she isn’t contributing in the way that you’d expect (e.g. money, time, expertise), you may conclude that they’re hoarding risk.
When this happens, it’s often due to the owner’s concern that if the property loses value, their partners will ask for their money back. If that happens, the owner leaves with nothing.
Real Estate Investment Groups
The quickest way to start earning real estate profits is to join an established real estate investment group or multi-family home.
Real estate investment groups are typically 7-10 investors that pool their money to purchase a property. You'll have one main point person in charge of the property, but you will be given a part of the buy out and an agreed-upon amount of money from the rental income each month. You remain an investor in the house (like a partial owner), and you can work out a time when you can enter the house to do your own updates and repairs.
Multi-family homes, in contrast, are usually 3 or more units in a building. You buy it with other investors and are guaranteed a certain monthly income (based on the number of tenants and rent per tenant) that you can receive each month. These homes afford you a wider variety of opportunities, such as sliding equity and getting a return on the money you put in at the beginning.
Some investment groups or Multi-family homes are done through chosen partners and friends, and other investment groups are done with random people from all over the country. When you start on a local level, you can form an indispensable network of investors that can help each other not only with real estate, but in just about any venture that you may have.
Pros of Real Estate Investment Groups
If you are looking to make investment in real estate, there are a number of options that you can choose from. However, the problem with these options is that they require a lot of capital investments and there is a chance that you may lose money.
In case you are new to real estate investment and are not quite sure about what you should do, here are some of the most common mistakes that you should be aware of.
Cons of Real Estate Investment Groups
With great power comes great responsibility. That’s true not just for comic book heroes … it’s also true for those who are members of some of the more established real estate investment groups.
So the first problem is obvious from the get-go. If you invest with a group rather than doing it yourself, you’re giving up a lot of responsibility. You’ll be relying on the interaction of a group of people to produce the kind of returns you want. It may work out, it may not. There are very few guarantees with this approach.
On top of this, there is also an issue of sale. If you end up investing with a group and then decide that you’d like to sell your investment property, you will have to compete with other investors for your own property. And since there are several investors involved and houses get bought in order of cheapest first, you’re likely to find yourself at the bottom of the pile. Not a great position to be in.
So these are two good reasons to not consider investment groups.
House Flipping (a.k.a. Real Estate Trading)
Many people assume flipping houses is only for the rich and famous, but this is a misconception. Flipping houses can be a get-rich-quick scheme, but it can just as easily be a profitable way to create wealth.
So how does it work? It’s simple really: you buy a house, renovate it and sell it. Once you close on the house, you buy it and renovate it. This may be a great thing to do if you’ve got the time and money.
The downside? Finding the right prospective homes and picking out the right house to buy can be quite difficult. Also, you have to take into consideration the cost of renovations, taxes, and other factors.
Pros of House Flipping
The reality is that not all purchases of property with the intent to resell are profitable. Some turn out to be money-losers and one has to be aware of the downfalls and pitfalls. However, there are strategies that can increase your chances of a successful investment. Here are some pros of house flipping:
By purchasing a property, renovating it and reselling it, an investor can generate a good return in comparison to other types of real estate investments. In most cases, investors can expect to make money on these types of investments making it quite attractive to the average real estate investor.
For investors who do not have a lot of capital, flipping can be a good way to enter the market as it does not require a large investment to get started. In fact, most of the time, investors are only purchasing the home so that they can renovate and resell it. They will, therefore, put their money into the renovation of the home.
Due to the popularity of this type of investing, there are now special loans that cover the purchase and renovation of the property. Unlike a traditional loan, however, this type of loan would still permit the lender to be involved in the renovations for added security of the investment. There are now several lenders offering these types of loans, making them readily available to investors.
Cons of House Flipping
Although flipping houses is one of the quickest ways to make money, it is certainly not for the faint of heart. It takes guts to pull off a successful flip. Here are some reasons you may not want to take on this investment.
It’s High Risk
Flipping houses carries high risk. You could lose a large amount of money if you don’t have adequate funding. Prices could fall before you sell your house, or sometimes you may even lose money while fixing up the property.
It Takes Time
Flipping houses is a long-term investment. You will likely have to wait 6-12 months before you can sell the house. Since you have to spend long stretches of time working on the house, it also implies that you can “live” in it for a while.
It’s a Detriment to Your Health
The constant worry of losing money combined with the long hours spent working on the property can take a toll on your health. If you’re not careful, it’s easy to get burned out and lose your passion for the project.
It's Easier Than Ever to Invest in Real Estate
Real Estate is one of the best investments out there for two main reasons: it has a safe and secure history as an investment; and it is not correlated with any other asset class. When the stock market is doing poorly, real estate generally doing well.
Real Estate is also extremely accessible. While it’s not like stocks, where you can trade as much as you want, it’s a lot easier to invest in than in previous years. You can start with as little as 25% of the cost of the property and add more to it over time.
Real Estate is also a great retirement plan. It allows you to diversify your risk by adding different properties to your portfolio. And, you can always rent the property out and get extra income. If you buy the property at a discount and it appreciates over time, even better.
Real Estate Investment Strategies
In today’s world, real estate has become an easier investment to get into. Yes, you’ll still have to pay commissions, find good agents, know the local area, and deal with all of the other unfortunate difficulties, but it’s a lot easier to get started in the real estate world than before. Here are some strategies to make it a little easier on you.
Know Your Market.