Investing in real estate is not a new concept. In fact, it is said to have created some of the wealthiest individuals in the world. Many people look to real estate investing as a way to diversify their portfolio and receive a higher return on their money, secured by a tangible asset. When it comes to building a well-diversified portfolio that maximizes your returns and capitalizes on opportunities to grow your wealth or retirement, real estate should be in the mix.
Why you should invest in real estate
Regardless of the market highs and lows, people will always need a place to live and land is one thing you can't build more of. By investing in real estate you have the potential to take advantage of appreciation, tax advantages that may be available from owning real estate, and the opportunity to receive residual income.
There will always be fluctuations, recessions, and pullbacks in the market -- ahem, The Great Recession -- but historical data from National Home Price Index which adjusted for inflation has shown that property values in most markets increase each decade.
When most people think of investing in real estate, they think of being an active investor, but it’s not the only option. There are also passive forms of real estate investing such as crowdfunding or REITs. A Real Estate Investment Trust (REIT) allows individuals to invest in a real estate asset class through the purchase of individual company stocks, mutual funds, or exchange-traded funds (ETF).
The REIT pays a dividend to the investors and invests across a number of properties within that asset class. The primary goal of a REIT is acquiring and managing assets to generate operational cash flow, so the dividends are often more consistent than other real estate ventures or stock investments. Since REITs and REIT ETFs are publicly traded you can purchase as many shares as you feel comfortable with given your investment allocation and risk level and is one of the easiest ways to get started in real estate investing.
Crowdfunding is a more recent opportunity that was only made possible in 2012 after the Jumpstart Our Business Startups (JOBS) Act was put into effect. This allowed companies to pool or combine money from different investors to purchase an asset that may require value ad or improvements to increase value. Most crowdfunding platforms have a minimum income threshold or require the investor to be accredited, so while this has the potential for access to large deals this investments strategy is best for those who have the knowledge and financial means for large real estate investments but lack the time or desire to acquire and manage a larger real estate venture on their own.
It ultimately comes down to what you want out of your investments. Do you want to put in the time and effort it takes to be an active investor, or do you prefer to take the passive real estate route?
What’s your risk tolerance?
Everyone’s risk tolerance is different. Investing is very personal and the way that you invest should be personalized for your portfolio, risk tolerance, and desired returns. There is a risk in all investments.
Both passive and active real estate investments have risks, but generally, there is more risk in owning and managing the asset yourself. While you often receive a much higher return with active real estate investments, you are the one liable if there is an issue with the property and would be the one on the line for the mortgage. You and only you can determine if the higher returns are worth the risk. There are always ways to mitigate risk and find an investment avenue that best meets your tolerance.
Finding investment opportunities -- getting started is easier than you think
Hopefully, by now, you realize there is never a bad time to invest in real estate and there are a number of options available to get started. Below I’ve outlined some steps you can take moving forward to start investing in real estate.
- Determine if you want to be an active or passive investor.
- Identify how much money you have, or are willing to invest in real estate. If you want to actively invest but don’t have the funds available at this time, start saving. Most advisors and financial experts suggest saving a minimum of 10% of your income for investing, although many say it should be closer to 20–30%. And while you are saving as much as you can, you can start investing in a REIT or real estate ETF.
- Choose an asset class to invest in. There is a multitude of niches in real estate that all provide varying rates of return. It’s a matter of finding the one that interests you the most. Take a look at some of the most common types of real estate investments to determine the best one for you.
- Research potential investment opportunities and do due diligence on the investment or company you are interested in. Whether you take the active or the passive route, education is absolutely essential.
- If you want to actively invest in real estate, you need to learn as much as you can about your desired niche. There are a number of books and blogs out there that provide real-world investing examples and the knowledge you need to get started. Another great resource is your local real estate investors association (REIA). Having decided that active real estate investment was the route I wanted to take, I now attend my local REIA, which offers networking and educational opportunities. The knowledge I’ve learned and the connections I’ve made from my REIA have been invaluable.
- If passive real estate is the route for you, do your homework on the company you are investing in, whether it be a REIT or crowdfunding investment. Look at their track record, and understand how they identify investment opportunities. Even in the most passive opportunities, there is still work required upfront.
The best way to start investing in real estate is to simply get started. As you can see there are a number of avenues, opportunities, and investment options available no matter what your experience level is or how much you have available to invest. Figure out what makes sense for you, learn as much as you can about that avenue of investing, and just get started!