There are several types of real estate investments, but most fall into two categories: Physical real estate investments like land, residential, and commercial properties, and other modes of investing that don’t require owning physical property, such as REITs and crowdfunding platforms.
Investing in traditional, physical real estate can offer a high return, but it also requires more money upfront and it can have high ongoing costs. REITs and crowdfunding platforms have a lower financial barrier to entry, meaning you can invest in multiple types of real estate for far less than it would cost to invest in even one traditional property. These alternative real estate investments also offer the distinct advantage of not having to leave your house or put on pants to start investing.
In this article, we’ve compiled the best ways to invest in real estate. From commercial real estate to rental properties, we cover all the essential investment options in the real estate market.
1. REITs
Publicly traded REITs, or real estate investment trusts, are companies that own commercial real estate (think hotels, offices and malls). You can invest in shares of these companies on a stock exchange. By investing in REITs, you are investing in the real estate these companies own, without as many of the risks associated with owning real estate directly.
REITs are required to return at least 90% of their taxable income to shareholders every year. This means investors can receive attractive dividends in addition to diversifying their portfolios with real estate. Publicly traded REITs also offer more liquidity than other real estate investments: If you find yourself suddenly needing some cash, you can sell your shares on the stock exchange. If you want to invest in publicly traded REITs, you can do so through a brokerage account.
2. Crowdfunding platforms
Real estate crowdfunding platforms offer investors access to real estate investments that may bring high returns but also carry significant risk. Some crowdfunding platforms are open only to accredited investors, defined as individuals with a net worth, or joint net worth with a spouse, of more than $1 million — excluding the value of their home — or an annual income in each of the last two years that exceeds $200,000 ($300,000 with a spouse).
But others, like Fundrise and RealtyMogul, offer investors who don’t meet those minimums — known as nonaccredited investors — access to investments they wouldn’t otherwise be able to invest in. These investments often come in the form of nontraded REITs, or REITs that don’t trade on the stock exchange. Since they aren’t publicly traded, nontraded REITs can be highly illiquid, meaning your funds will be invested for at least several years, and you may not have the ability to pull your money out of the investment if you need it. Keep in mind, that many crowdfunding platforms have a short track record, and have yet to weather an economic downturn.
3. Residential real estate
Residential real estate is virtually anywhere that people live or stay, such as single-family homes, condos and vacation homes. Residential real estate investors make money by collecting rent (or regular payments for short-term rentals) from property tenants, through the appreciated value their property accrues between when they buy it and when they sell it, or both.
Investing in residential real estate can take many forms. It can be as simple as renting out a spare room or as complicated as buying and flipping a house for a profit.
4. Commercial real estate
Commercial real estate is a space that is rented or leased by a business. An office building rented by a single business, a gas station, a strip mall with several unique businesses and leased restaurants are all examples of commercial real estate. Unless the business owns the property itself, each business would pay rent to the property owner.
Industrial and retail real estate can fall under the commercial umbrella. Industrial real estate generally refers to properties where products are made or housed rather than sold, like warehouses and factories. Retail space is where a customer can buy a product or service, like a clothing store. Commercial properties tend to have longer leases and can command more rent than residential properties, which may mean greater and steadier long-term income for a property owner. But they may also require higher down payments and property management expenses.
5. Raw land
If you build it, will they come? Investors typically buy land for either commercial or residential development.
But buying land to develop involves a fair amount of market research, especially if you plan to develop the property yourself. This type of investment is best suited to someone with a large amount of capital to invest and a deep knowledge of all things real estate —building codes, zoning regulations, flood plains — in addition to an understanding of the local residential and commercial rental markets.
Read Also: How Do You Target Real Estate Investors
If you’re considering investing in traditional real estate — like residential or commercial properties — doing your due diligence doesn’t just mean coming up with a down payment. Knowing your local market is important. If there isn’t much demand for homes or commercial space in your area, or property values start dipping, that investment could quickly turn into a burden.
If you’d prefer to be more hands-off with your investments, REITs and crowdfunding platforms are easier ways to add real estate to your portfolio without owning physical property.
Some brokerages offer publicly traded REITs and REIT mutual funds.
Strategies To Invest In Real Estate
Real estate is often a rewarding investment, with the potential for passive income and long-term appreciation. It can also be a smart way to diversify your portfolio beyond the traditional lineup of stocks, bonds, and mutual funds.
While a home might be your first foray into real estate investing, there are numerous other avenues for tapping the market, from rental properties and house flipping to real estate investment trusts (REITs) and online real estate platforms. Here are six investments to consider to diversify your portfolio with real estate.
Buy a rental property
Buying and leasing out a rental property to short- or long-term tenants is a classic way to invest in real estate. A huge perk of being a landlord is that you can deduct many of the costs associated with the property, including maintenance, repairs, insurance premiums, utilities, administrative fees, mortgage interest, and depreciation.
Of course, the downside is that rental property can be a time-consuming investment with high start-up costs, You might have to deal with late payments, property damage, and unruly tenants. Still, you can enjoy positive cash flow and long-term appreciation with the right property. What’s more, if you sell the home and swap it for a “like-kind” property, you can use a 1031 exchange to defer capital gains taxes.
Rent out a room
House hacking can be an excellent way to dabble in real estate investing. The strategy involves renting out part of the home you live in, such as a single room, the basement, an attic, or an accessory dwelling unit (ADU). The start-up costs can be minimal, depending on the condition of the space. And the extra income can help offset your monthly housing expenses while you pay down the mortgage and build equity.
A more advanced house hack is to invest in a multifamily property: living in one unit and renting out the rest. Whether renting out a room or half of a duplex, you can find long-term tenants or—where permitted—open the space to short-term rentals using an online platform such as Airbnb.
Use an online real estate investing platform
Online real estate investing platforms (aka “crowdfunding websites”) are the new kids on the block in the real estate investment world. These platforms match developers with interested investors who pool their capital to fund real estate projects with as little as $500. In exchange, investors get debt or equity in a project, as well as monthly or quarterly distributions if all goes well. While these investments offer higher potential returns than publicly traded REITs, they carry more risk and are generally illiquid, so you may not be able to sell your shares quickly.
Some platforms are open only to accredited investors, while others, including RealtyMogul, offer opportunities for accredited and nonaccredited investors alike. Investors typically pay an annual management fee ranging from about 0.25% to 2.50% (depending on the platform), and other fees may apply.
Flip a house
House flipping involves buying a discounted property, fixing it up, and selling it for a profit. With the right property, you can turn a quicker profit than from managing a property, but it’s not as easy as it looks on TV. To be a successful flipper, you need to see a property’s potential and have a vision for bringing it to life. You also need sufficient cash, a reliable team of contractors, and accurate cost-estimating skills to ensure that you earn a profit.
Strong project organization skills are also a plus. The sooner you can sell the property, the less you’ll spend on holding costs, including mortgage payments, utilities, property taxes, homeowners’ association (HOA) fees, and insurance.
Buy a REIT
A REIT can be an excellent option if you want exposure to real estate without the responsibility and headaches of managing rentals. A REIT is a company that owns and operates income-generating properties, such as apartment buildings, offices, warehouses, medical facilities, hotels, and retail centers. Like mutual funds, a REIT pools the capital of multiple investors and owns a portfolio of assets. Investors buy shares of the REIT and earn a proportionate share of the income.
A key selling point is that most REITs are publicly traded on stock exchanges, making them an easy and highly liquid way to gain exposure to real estate. A REIT makes money leasing space and collecting rent on its real estate holdings. In turn, investors earn money through dividends. By law, REITs must pay out at least 90% of their taxable income as shareholder dividends each year.
Invest in a real estate investment group (REIG)
A real estate investment group (REIG) is a club of private investors who pool their money and expertise to buy income-generating properties. They can be a good option if you want to own rental properties but don’t want sole responsibility for managing them. REIGs leverage the buying power (and experience) of the entire group to invest in various types of properties, including apartment blocks, condominiums, and commercial buildings.
On the plus side, REIGs allow you to learn from other, more experienced real estate investors while participating in deals that can expand your wheelhouse. However, the downside is that membership fees could erode your profits, and the investment could flop if you partner with an inexperienced or unskilled group. Still, if you do your research and find a group that aligns with your goals and risk tolerance, a REIG could be a worthwhile venture.
Investing in real estate has plenty of potential
Real estate investments can offer numerous benefits, including stable cash flow, long-term appreciation, portfolio diversification, tax breaks, and the ability to leverage your funds. Of course, there are also drawbacks—among them lack of liquidity, high start-up costs, and the reality that real estate investing can be a long grind.
Still, it’s helpful to remember that there are multiple ways to invest in real estate, and some options might be a better fit than others. For example, rental property might be a good option if you’re looking for an investment that offers hands-on control and money-saving tax breaks. You might opt for a REIT if you prefer a hands-off approach and a more liquid asset. If you want the best of both worlds, you might invest in rental properties and REITs. After all, you don’t have to pick just one type of investment.
Ultimately, investing in real estate depends on your goals, risk tolerance, and time horizon. Working with a financial advisor and researching your options can help you find an investment that works for you.
