How to Invest In Real Estate
Many investors have a real estate position in their portfolio. But adding other real estate investments can help you diversify your portfolio and protect you from stock market volatility. Here is the complete guide on how to invest in real estate
Most Popular Real Estate Investment Method
Here are the most popular real estate investment methods:
- Rental Properties
- Real estate investment groups
- Flipping houses
- Real estate limited partnerships
- Real estate mutual funds
Let’s dive deeper into how these work.
Rental properties are the most hands-on option in this list. You buy a piece of residential real estate and rent it to tenants. Many rental properties are rented for 12-month periods.
As the property owner, you are the landlord. You’re responsible for the upkeep, cleaning between tenants, extensive repairs, and paying property taxes. Depending on the lease terms, you may be on the hook for replacing appliances and paying for utilities.
You make money off rental properties from the rental income you receive from tenants and price appreciation if you sell the property for more than you paid
If you don’t want to put up with the headache of managing a rental property or can’t come up with the 25% down payment, real estate investment trusts (REITs) are an easy way to start investing in real estate. REITs are publicly traded trusts that own and manage rental properties. They can own anything: medical office space, malls, industrial real estate, and office or apartment buildings, to name a few.
REITs tend to have high dividend payments because they are required to pay out at least 90% of their net income to investors. If the REIT meets this requirement, it will not have to pay corporate taxes.
Additionally, while selling a rental property could take months and mountains of paperwork, a REIT has the advantage of liquidity since they trade on stock exchanges.
Real Estate Investment Groups
Investing in a real estate investment group (REIG) is one way to keep the profit potential of private rental properties while possibly getting more upside than REIT trading at a premium.
REIGs purchase and manage properties and then sell off parts of the property to investors. An REIG will buy something like an apartment building, and investors can purchase units within it.
The operating company retains a portion of the rent and manages the property. This means the company finds new tenants and takes care of all maintenance. Often, the investors will also pool some of the rent to keep paying down debt and meet other obligations if some units are vacant.
Flipping houses is the most difficult and risky of these options, but it can be the most profitable. The two most common ways to flip houses are to buy, repair, and sell, or buy, wait, and sell. In either case, the key is to limit your initial investment with a low down payment and keep renovation costs low.
Real Estate Limited Partnerships
Real estate limited partnerships (RELPs) are a form of REIG. RELPs are structured similarly to hedge funds, where there are limited partners (investors) and a general partner (the manager). The general partner is typically a real estate business that takes on all liability.
RELPs are a more passive investment in real estate. Typically, the general partner sets up the partnership and recruits investors to be limited partners. RELPs can be very profitable if you find a good general partner. But you’re relying totally on that general partner who must, without much oversight, manage the property and reliably report financials back to you.
Real Estate Mutual Funds
Real estate funds invest in REITs and real estate operating companies (REOCs). REOCs are like REITs, but they don’t have to pay dividends, so they grow much faster.
Real estate mutual funds or exchange-traded funds (ETFs) are the simplest ways to invest in real estate. You allow a manager or even an index to choose the best real estate investment while you collect dividends.
Even if you’re a stocks-only investor, consider using real estate funds to get diversification while keeping the liquidity profile you’re used to.