Real estate isn’t really my thing, but I understand that many investors like the idea of including property in their portfolios. The good news is that there are a number of ways to invest in real estate, even if you don’t relish the idea of property management. If you think you’d like some portfolio exposure to real estate, here are 5 ways to invest in real estate:
One way to invest in real estate is to rent out your property. Some investors get started down this path by renting out their own homes. Perhaps you have to move, but you aren’t happy with the current real estate market, or you don’t have time to try and sell your home. Securing a tenant can be a way to make sure that the mortgage is paid — and maybe even provide cash flow. Over time, you can continue building equity with someone else’s payment, and eventually either sell the house, or use the rental income as your own once the mortgage is discharged.
Others buy properties with the thought of renting them out, whether they purchase single-family homes or huge apartment complexes. It’s possible to purchase duplexes and fourplexes for prices that many people can afford. In fact, you can use an FHA loan to purchase a duplex or fourplex. This gives you a place to live while you rent out the other units.
If you aren’t cut out to be a landlord, you can hire a property management company to take care of the situation, while still making money.
2. Buy and Hold Property
I have relatives who basically buy and hold property. They buy undeveloped land and just sit on it. In one case, this led to eventually being able to sell at a very tidy profit down the road. If you have the resources to purchase a tract of land that you think might be valuable down the road, you can purchase it and let it sit. Later, your investment can pay off handsomely if the land really does appreciate in value. You need to be careful about this approach, though, since you might end up buying land that doesn’t appreciate in value, or that is never in demand. Choose the right property, though, and your investment could pay off in 15 or 20 years — as long as you sell at the right time.
3. Buy and Flip Homes
If you have the time, expertise, and the stomach for it, you can invest in real estate by flipping houses. If this is the way you want to make money, though, you need to understand what you are doing, and what it takes in terms of time and money. Some of the most successful house flippers are able to get good deals on foreclosures and other distressed homes, and then fix them up and quickly sell them at a higher price. To make this work, you need to know how to identify below-market deals, have the ability to spruce up the homes (or hire someone else to do the work), and then be able to sell them again. It’s very similar to an active investment strategy rather than a passive strategy. For those who like it, and know how to do it well, house flipping can be a great money-maker.
4. Real Estate Crowdfunding
Even though investment crowdfunding has been an option for a little more than a year now, 2015 might be the year that it really picks up the pace in the investing world. Real estate crowdfunding is one of the ways that investment crowdfunding is on display. With real estate crowdfunding, you can invest in real estate projects with as little as $5,000. Real estate investment clubs have been around for years, but it often takes at least $100,000 to buy in. Crowdfunding is opening up new opportunities for investors looking for access to these high-end opportunities formerly only available to the ultra-rich.
If you are interested in adding real estate to your portfolio, and don’t want to be involved in the management of it, you can use real estate crowdfunding to bridge that gap.
5. Real Estate Investment Trust (REIT)
This is the method I use to invest in real estate. I don’t do much in the way of real estate investing at all, but the small portion of my portfolio with real estate exposure is in the form of REITs.
REITs represent collections of real estate investments. You receive exposure to the real estate, without actually buying it. You can purchase domestic or foreign REITs, without needing a large amount of capital. While REITs aren’t the same as ETFs, they are strikingly similar. It’s easy to buy and sell shares, and REITs also pay dividends, so you can get a little extra income with them.
If you want exposure to real estate, without actually buying real estate, REITs are the way to go.
Be Careful When You Invest in Real Estate
Just as you would be careful with any other investment, it’s vital that you do your homework when it comes to real estate. There is always the potential for loss, no matter which strategy you employ. Never invest money that you can’t afford to lose and that you can’t afford to have tied up. Understand how your real estate investment works before you risk your money. Warren Buffett talks about knowing what you are investing in and that applies to real estate just as much as it applies to anything else.
Do you invest in real estate? What’s your preference?
Miranda is freelance journalist. She specializes in topics related to money, especially personal finance, small business, and investing. You can read more of my writing at Planting Money Seeds.