Thanks to a robust real estate market, adding real estate to investment portfolios is growing in popularity. Owning real estate allows you to capitalize on incredible growth, while also offering diversification and often a hedge against inflation. It’s no wonder why more and more people are adding real estate to their holdings. There are various ways to do that. Let’s look at some of the easiest. Here are three simple ways to invest in real estate:
1. Buying a Rental Property
The most straightforward way to invest in real estate is to buy and rent individual properties. While this can be office space, retail buildings, or any other type of property, it is most commonly residential property in the form of single-family homes.
One significant advantage of this approach is that you control everything having to do with your property. No one else gets a vote on how much rent to charge or whether you should repave the driveway now or wait a year. You also aren’t splitting the profits with partners or other investors. Of course, that also means you aren’t splitting the risks and expenses. Still, being able to call the shots is appealing to many investors.
One downside to owning individual rentals is that you have to locate your own properties and evaluate their merits as rentals. Some of this can be offset by working with a property investment company. These services familiarize themselves with the local rental market, helping you find rentals that give you the best chance of significant profits.
Another thing to consider with this approach to real estate investing is the work involved. Hiring a property manager can make this a more passive investment. However, there are still decisions to make, so it isn’t entirely hands-off. Still, you may well find that the cost of hiring a property management professional is worth the time you save.
Owning rental property can be an excellent investment and part of a balanced asset allocation.
2. Real Estate Investment Trusts (REITs)
REITs allow investors to add real estate to their holdings without purchasing specific, individual properties. Traded on major exchanges just like stocks or mutual funds, REITs are corporations that own and rent real estate. When you buy into an REIT, you own a bit of that corporation.
These corporations must pay out 90% of their profits. That money goes to their investors, acting much like a dividend-paying stock.
Because REITs are traded like stocks, they are also highly liquid. Since they can be quickly bought and sold, your money is readily available.
REITs also offer the opportunity for smaller investors to own real estate in sectors other than residential properties. With a variety of offerings, you can find options that include office buildings, malls, warehouses, or different property types that would likely be out of reach for most private investors.
With an REIT, the corporation makes decisions associated with the property. This means fewer choices for you to make, but it also means less control over your investment.
3. House Flipping
If you’ve spent much time watching real estate TV shows, you are probably familiar with house flipping. Investors purchase properties then resell them for a profit. There are two basic types of flippers: those who buy undervalued properties and sell for more than they paid, and those who purchase, rehab or renovate, then sell for a profit based on the improvements.
Some flippers make a tremendous profit, especially if they have contacts that allow them to finish renovations quickly and inexpensively. It is critical that they have the knowledge of the local market needed to carefully evaluate each property. Knowing what sells quickly and for how much is vital to being able to successfully flip.
One upside to flipping is that the intention is to hold the property for a short time, so capital isn’t tied up long term. If the market softens before you sell, however, you may still be stuck holding the property unless you sell it for less than you paid.
House flipping is inherently risky. An overestimation of what the property might sell for can not only eat away any profit, it can force you to sell for a loss. These losses may be significant if the real estate market crashes before you can sell. That’s especially true for renovation flips, which investors own for more time while they make the necessary repairs. It could mean more time for a market adjustment to cause the value to drop. If you can’t quickly unload a property, you must pay carrying costs while you search for a buyer.
Flipping can certainly make a great deal of money. But it is one of the riskiest ways to invest in real estate. If you don’t have a deep understanding of the local markets and the ability to cover expenses if the house doesn’t sell, it probably isn’t for you.
Diversifying your investments by adding real estate can be a great decision. Carefully evaluate your goals and risk tolerance and determine which method is best for you. Whatever method you choose, you can feel good about having a more diversified portfolio and getting in on the real estate market.