Table of Contents
- How to Invest in Real Estate without Buying Property?
- How to Invest in Real Estate by Buying Property?
However, the real estate market is still in a much better state than a decade ago, during the recession of 2008. Mortgage rates are likely to continue increasing in 2019, but at the same time millennials are expected to continue buying new homes. From the perspective of landlords, i.e., homeowners who are looking to rent out their properties, rents across the country are also expected to rise in 2019, which is both good and bad news.
Traditionally, investing in real estate meant that you bought a new property and rented it out. The rent covered a part or whole of the monthly mortgage payment and once the mortgage was fully paid up you started making a healthy profit per month. Plus, the value of the property appreciates over the years. This is still a popular option, but as the forecast for 2019 indicates that the real estate market is likely to experience another year of slowdown, it makes sense to explore some of the other options of investing in real estate. So, let’s look at the various ways of investing in real estate, including options in which you actually own a physical property and options in which you don’t have to buy a property.
Diversification is the key to a good investment strategy. “Hedge your bets,” as they say. An exchange-traded fund (ETF) is a type of investment fund that’s traded on stock exchanges, similar to how stocks are traded. ETFs are in many ways similar to mutual funds. Just like mutual funds, ETFs offer diversification and low costs. So, by investing in an ETF that focuses on real estate you can diversify your investments and at the same time protect your investments from major fluctuations in the market. Ideally, you should look for an ETF that invests in real estate investment trusts (REITs) stocks. REITs are entities that primarily buy commercial properties. More about REITs later in the article. If you’ve engaged the services of an investment manager to help you identify the right avenues, ask them to offer you a variety of real estate-focused ETFs and then make a decision.
It might seem that by purchasing a property and being the landlord you have greater control over your investment. However, a lot of work is involved in being a landlord. It’s not as simple as buying a property, renting it out and accepting monthly rent. You will have to spend time and effort to manage the property as well. A number of people do not have that extra time to spare. This is why investing in real estate investment trusts (REITs) makes more sense. You get to invest in real estate minus the added responsibilities that come with holding a physical property. On top of that REITs provide the opportunity to diversify your investments. The other advantage with REITs is non-correlation. What that means is that price movements in any other type of asset doesn’t affect your investment. The real estate market is bound to go through its ups and downs every year, but your investment in REITs won’t be affected drastically by the fluctuations. It’s worth noting that REITs are required to pay out 90% of its profits as dividends to the investors. This also allows REITs to skip corporate income tax payments.
A few years back, the US Securities and Exchange Commission had warned that there are certain undue risks related to non-traded REITs, which isn’t the case with publicly traded REITs. The primary difference between the two is that while publicly traded REITs are listed on NASDAQ, NYSE or any other stock exchange, non-traded REITs aren’t listed and aren’t traded publicly. The risks associated with such REITs include lack of liquidity, high fees, lack of transparency in the share value, etc. Thus, it’s advisable that you invest only in publicly traded REITs.
A number of mutual funds focus of real estate as well. Since there’s a lot more awareness about mutual funds as compared to ETFs, you might feel more comfortable in a real estate-focused mutual fund. What makes mutual funds particularly attractive investment options is that if you select the right mutual fund to invest in, you’re basically guaranteed a steady return for years to come and the cost of entry is quite low. While selecting a mutual fund to invest in, read up as much literature about it as possible and look at the historical returns data. This will give you a fair idea of the level of return you can expect over the next five years.
Crowdfunding as a concept isn’t new. It has been around for quite a few years now and has been used to fund movie productions, develop innovative products, fund travel, etc. and entrepreneurs have utilized these platforms to raise funds when venture capital firms haven’t been interested. Some of the most popular crowdfunding platforms are Kickstarter, Indiegogo, GoFundMe, etc. In recent years, similar crowdfunding platforms have mushroomed in the real estate investment segment as well. These platforms allow you to invest as little as $5,000 to $10,000 in a variety of properties, including residential buildings, condos, office buildings, hospitality properties and other types commercial properties. Typically, investors start receiving returns in the form of interest within a few weeks and up to a month since the first investment. Some of the most popular online real estate investment platforms are Fundrise, Prodigy Network, Realty Mogul, iFunding, RealtyShares, etc.
Do not restrict yourself to just REITs. There are other companies in the real estate space that have good investment options as well. Property construction companies are an obvious choice. Even though 2019 is expected to experience an overall slowdown, in the long-run, that’s a positive development. It will correct the price rises and even out over the next two to three years. This means that property construction companies will be busy over the next few years to meet the increase in demand in a couple of years’ time. A number of construction companies are listed on both the NYSE and NASDAQ. Investing in these companies are not only good option in terms of potential return, it will also allow you to diversify your real estate investments. Similar to construction companies are real estate service companies that either sell new properties through real estate agents or provide other connected services. Investing in these companies is also a prudent option, because they will always be in business.
The third option in this category are companies that own a chain of hotels or resorts and timeshare companies. These companies also own and manage real estate and are good investment options. However, it’s important that you study the company and its future projects before investing in the stock of these companies. Hiring an investment manager or adviser can help. Also, remember that these companies are likely to pay lower dividends than REITs.
This is the most common option. You buy a property and then rent it out to tenants. Once the mortgage for the property is paid you could sell it and make a large profit. However, these days a few variations are possible with rental properties. Vacation rental properties have become popular over the past few years. People prefer to stay in an independent house or apartment while on vacation instead of hotels. So, if you have the money or the right credit score to get a low mortgage rate, then you can purchase a property in an area that attracts tourists and vacationers. Ideally, the area should be one that you like as well, so that you can use the vacation home once in a while as well. Depending on the type of property and location, you can make more money by renting out the property as a vacation home for short periods than you can by renting out as a regular residential property.
The other option with rental properties is to list it on online platforms such as Airbnb. The way Airbnb works is, you register your property with the platform, select the type of lodging you’re offering (one room in the house, the entire house or any other), the number of guests the property can accommodate and indicate the availability of the property. You can set certain rules such no partying, smoking/non-smoking, etc. Once guests on Airbnb select your property, you get approve them as well. It’s a great way to make money off your property without having to rent it out for long periods.
The margins on flipping a house are probably the highest among all types of real estate investment options. If done correctly, you can make a big profit. However, before committing your funds you need to be aware that it involves a lot of work and a number of variables. If you hold a full-time job that demands a large chunk of your day, then this isn’t a viable option for you. The turnaround time with flipping a house is typically three to six months and at most could be stretched to year.
So, to flip a house, you need a house first. It works best with older properties that require renovation. This would allow you to purchase the property for an amount lower than the market value. Prior to purchasing the property you also need to have a fair idea of the amount of money you would have to spend to fix it. This will allow you to determine if the property is worth it or not. If the cost of the property and cost of fixing it comes out to be more than or on par with the amount you expect to sell it for, then you move to the next option. You need to really like the process of flipping a house to be able to get through the grind involved in it.
Purchasing a commercial, non-residential property is a great investment opportunity and one that can provide you lucrative returns. However, the barrier to entry is markedly higher in commercial properties as compared to residential properties. It’s difficult for an individual to shell out the amount of money required to purchase such a property. Hence, it makes sense to partner with other like-minded individuals. You could partner with your friends or family members who are also looking to invest in real estate. The reason commercial properties are attractive is because the rents you can charge are significantly higher. With the prices of office space increasing, most small businesses and startups can’t afford to own an office. This has led to the advent of shared or co-working spaces, where a number of small teams and individuals share the same space and work. With a commercial property of your own, you can jump on this bandwagon.
As mentioned earlier, as a landlord, you will have to take care of a number of things. You will have to take care of maintenance of the property, finding tenants, etc. A real estate investment group takes care of all of these responsibilities on your behalf. So, a real estate investment group either buys or develops a bunch of apartments, condos, etc. and sells these units to investors like yourself. A single investor can buy one unit or multiple units and rent them out. The company handles all the responsibilities related to management of the property. It takes care of maintenance and in case there’s a vacant unit, the company finds a new tenant as well. For its property management services, the company takes a cut from the monthly rent. If your profession takes up a large part of everyday, if you don’t want spend your weekends doing property management work or if you simply don’t want to deal with the hassle related to renting a property, then this is the ideal option for you. Even though a part of the monthly rent goes to the company, which could otherwise have gone towards paying off the mortgage, it’s still worth it.
Most people acknowledge that real estate is an excellent investment option. However, they often shy away because of the perception that it’s only for the rich and famous. That’s far from the truth. Yes, purchasing a property costs a lot of money, but that’s what mortgages are for. If you have managed to maintain a healthy credit score, then you will get mortgage at a good rate and the rent you will receive will take care of most of the mortgage payments. So, essentially you’re not paying very little from your own pocket. Even within the rental properties space, there’s a variety of options to choose from. For example, you could buy a vacation home by the beach that you can rent out for short periods and use it for personal vacations as well. Or, when you shift to a bigger house for your growing family, you can rent your old house via Airbnb and make good money.
Those who have the time and inclination to get more involved with the process, you could buy an old property, fix it up and sell it for a profit. It all depends on the level of engagement you’re comfortable with and the reason why you’re looking to buy a new house. If you do have the money or can partner with few other people, then investing in commercial properties is a lucrative option at present. The demand for commercial spaces that aren’t exorbitantly priced is on the rise. So, you’ll be able to make money off such a property immediately.
If you don’t want to fork out a lot of money or take a second mortgage, there are other ways of investing in real estate as well. In terms of low cost of entry, diversification and steady returns, mutual funds and exchange-traded funds focused on real estate are the perfect investment vehicle. You get to study the performance of the fund in question over the past few years and select the one that suits you. Real estate is a fluctuating market and investing in these funds insulates you from the ups and downs. REITs offer greater return on investment than mutual funds and exchange-traded funds and unless you invest in non-traded REITs, the risks are low as well. Finally, there are online investment platforms that operate on the crowdfunding model and have been offering solid returns over the past couple of years. However, these are still at a nascent stage so there’s no historical data to refer to.