Investing in real estate is a great way to diversify your portfolio with investments that are, in large part, uncorrelated to stock movements. Most financial planners recommend every investor hold some form of real estate to maintain a balanced investment. And with the stock market more volatile than ever, thinking about alternative investments is more important than ever. In this article, we've gathered the eight most popular
1. Rental Property Investing
Rental property investing involves finding, acquiring, and managing residential dwellings — single-family homes, duplexes, townhouses, and condominiums — for a profit. The majority of investors own rental units that have “cash-flow,” meaning that the monthly rental income exceeds the monthly rental expenses. This isn't always possible in an expensive and rapidly growing market. And investors may choose to break even or even fund part of the monthly cost in anticipation of holding and selling the property for more money down the road.
Rental property investing is best suited for those with the skills and interest in taking a very active role — including researching, selecting and acquiring homes, property management, maintenance, and handling tenants. If you need help finding a good rental property, you can use a free service like HomeLight to find a real estate agent in your area who can help you find the best deal for you.
2. Real Estate Investment Trusts (REITs)
REITs (real estate investment trusts) are a way to own commercial real estate without owning physical office buildings, retail spaces, apartments, or hotels. REITs are companies that own and operate properties to generate income. You purchase shares that represent ownership of an individual real estate company that holds the properties, and you share in the rental income and profits from property sales.
Investing in REITs is a very passive way to add real estate to an investment portfolio. REITs by law must distribute 90% of their annual profits, which can make them an excellent strategy for investors looking for both regular rental income and the potential for appreciation. Just be aware that some investing fees can be quite high and eat into your gains.
3. Real Estate Exchange-traded Funds (ETFs)
Real estate exchange-traded funds (ETFs) invest the majority of their assets in equity REIT securities and related derivatives. These securities are passively managed around an index of publicly traded real estate assets and often have low expense ratios.
Similar to REITs, this strategy is ideal for the passive investor who wants a convenient way to add the diversity of real estate holdings to a portfolio without owning real properties directly.
4. Real Estate Mutual Funds
A straightforward and very common way to add real estate investments to your portfolio is to buy shares of a mutual fund that invests in commercial properties, giving you real estate exposure without the need to own, operate or finance properties yourself.
This is perhaps the most passive and easiest strategy to invest in real estate. You can buy shares on major stock market exchanges. And there are typically a very low minimum number of shares that you need to buy.
5. Online Real Estate Investment Platforms
Crowdfunding companies provide online platforms where real estate developers who need funding to finance projects can connect with individual investors looking for a return from real estate investing without getting their hands dirty. As part of the “crowd,” you can choose to participate in either debt or equity investments.
Real estate crowdfunding platforms are plentiful; there are many to choose from. And each has its own niche. Many require you to be an accredited investor to participate. But even if they don't require it, this is a strategy best suited for investors with enough real estate knowledge to do proper due diligence on platforms, sponsors, properties, markets, and opportunities.
6. Real Estate Investment Partnership
A real estate limited partnership (RELP) is an entity consisting of individual investors who pool their money to invest in real estate assets.
RELPs are run by a general partner, which is usually a corporation, an experienced property manager, or a real estate development firm. The general partner is responsible for property purchasing, leasing, and development. And it shoulders the liability. Most investors contribute funds as limited partners and are liable only up to the amount they contribute. In essence, the limited partners simply provide financing in exchange for an investment return.
This strategy is for passive investors looking to add income-producing buy-and-hold real estate to their investment portfolio without direct ownership of properties.
7. Real Estate Investment Groups
As an investor, or member, of a real estate investment group, you acquire ownership of one or more units of an apartment building that's owned by a large company that buys and manages large apartment complexes. Real estate investment groups commonly buy out a property and sell units to investors while taking on the responsibility of administration and maintenance.
This strategy is best for investors who want the benefits of owning rental units — including monthly income, tax benefits, and potential appreciation — without the responsibility of managing the property. The company takes care of all maintenance, advertising, tenant placement, rent collection, and management in exchange for a percentage of the rent.
8. House Flipping (a.k.a. Real Estate Trading)
Flipping has recently been made popular by reality TV shows. But it has been a real estate investment strategy for decades. This is when an experienced real estate investor purchases a distressed or outdated property at a discount price and improves the property to sell it at a higher price a few months later.
This is not a strategy for real estate investing beginners, as it's very easy to lose money flipping houses. But it's a great way to make short-term profits if you're an experienced real estate investor with access to deals and a well-chosen team of tradespeople like contractors, plumbers, and electricians. And you need an investor-friendly agent.
It's Easier Than Ever to Invest in Real Estate
Adding real estate to your investment portfolio is a sound financial decision. According to a study by Morgan Stanley, real estate has turned more people into millionaires than any other investment class. The barriers that once excluded small investors from participating in large real estate deals have largely been removed thanks to advances in technology and relaxed government regulation.
It's never been easier to invest in real estate. I've been investing in real estate since 2015 using several of these strategies and have more than doubled my portfolio value in less than five years. By all means, jump in once you choose a real estate investment strategy that fits your experience and comfort level.