It’s no secret that investing in real estate can be a lucrative financial opportunity. In fact, many of the most successful investors of our time have a significant presence in the real estate market – billionaires like Donald Bren, Stephen Ross, and Sam Zell are just a few that are reaping the rewards of their savvy real estate investments. And even for investors without billions of dollars to work with, real estate can offer a sustainable and passive form of income.
However, real estate investments tend to be more complex than the typical portfolio of stocks and bonds. So, before you start searching for your first investment property, it’s important to begin by learning a few key basics, such as:
- How do you invest in real estate?
- Why should I invest in real estate?
- What are some ways to invest in real estate?
- What are the pros and cons of the different ways to invest in real estate?
We’ve created a practical real estate investing guide that outlines the various options for prospective real estate investors, including the risk levels, capital requirements, and investment dynamics of each. With this resource in hand, you’ll be better equipped to choose the path that best aligns with your specific goals, needs, and preferences.
Real Estate Investment Opportunities
Although real estate has long been a popular investment option, it’s evolved considerably over the past 50 years or so. There are now more ways than ever to profit off of real estate, with a wide spectrum of involvement levels, niches, and more. Many investors opt to invest in multiple niches, while others prefer to zero in on a specific area – ultimately, it’s completely up to you.
One of the biggest advantages to real estate investment is the option to use leverage to purchase an investment property. Unlike stock or bond investors, real estate investors can pay for a portion of a property upfront, then pay the rest off (plus interest) over time.
Another key advantage is the versatility of this form of investment. In the past, the main way to earn money in real estate was via rental income as a landlord. Alternatively, you could “flip” real estate, making savvy improvements to undervalued properties and then selling them for a profit. Today, the world of real estate investment has become much more complex, featuring methods such as real estate investment groups and investment trusts (REITs). As a result, the opportunities are far more diverse.
- A new investor can purchase a property using leverage, which makes real estate a more accessible investment opportunity for a wide variety of individuals.
- Being a landlord or “flipper” are two ways to invest in real estate, but there are now many other options to consider.
- Depending on your specific goals, you may choose a single niche, or you might want to diversify your investments.
- Real estate is virtually unmatched in its flexibility, providing potential investors with an impressive array of options.
For generations, real estate has been considered a sound investment. There are only a few exceptions throughout history (such as the Great Recession) in which the average sale price of U.S. homes paused their ever-steady rate of increase.
But even though real estate remains a solid choice for most investors, the ways in which people are choosing to enter the market is changing. Whereas becoming a rental property owner used to be the primary path into investing, more and more investors are looking to options such as REITs, REIGs, and others.
Different Ways to Invest in Real Estate
1. Rental Properties
Owning a profitable rental property is one of the most common forms of real estate investment, largely because it can be done on as small (or as large) a scale as an investor would like.
In many cases, buying a house to rent puts you in the position of the landlord. This means that you will be responsible for the property’s maintenance and repairs, as well as expenses such as insurance and property taxes. You’ll also need to prepare to search for and secure tenants, as well as navigate the various administrative tasks involved. Alternatively, you can hire a property manager to handle all of these details, but that comes with a cost.
Being a landlord is, by far, one of the most “hands-on” ways to invest in real estate. It can be a highly challenging and time-consuming task, and the return on investment can vary. Rental properties typically offer two forms of income: the rent collected each month and any appreciation in the value of the property itself (which you can collect if/when you sell it at a profit).
A real estate investment trust (REIT) is a relationship between a corporation or trust and investors. The investors’ money funds the purchase, operation, and sale of various income-producing properties, but the investors themselves can maintain a fairly hands-off position. REITs invest in a mix of property types, including shopping malls, office buildings, and residential communities.
Just like stocks and exchange-traded funds, REITs are bought and sold via major exchanges. They’re also similarly appropriate for investors who are searching for a regular source of income. Compared to other real estate investments, REITs are far more liquid.
An REIT differs from a regular company because it is not required to pay corporate income tax. REITs must pay a minimum of 90% of its taxable profits in the forms of dividends provided to shareholders, otherwise, they will no longer qualify as a REIT.
3. Real Estate Investment Groups (REIGs)
If owning a rental property sounds like an attractive option, but you aren’t sure that you want to commit to being a landlord, a real estate investment group (REIG) can be an ideal match.
An REIG is almost like a small mutual fund for rental properties. A company or developer will purchase or construct a series of buildings such as single-family rental communities or apartments, then allow investors to join the “group” by purchasing one or more rental units. Although the investor is the owner of the unit(s), the company manages the entire property. The company handles all of the maintenance, as well as the processes of advertising and securing tenants. In return, the investors pay the company a percentage of the monthly rent.
REIGs can take various forms. Most commonly, the investor’s name is on the lease for the unit(s) they own. All investors pool a portion of the monthly rent, as a financial safeguard against any occasional vacancies. So, even if your unit is unrented for a short period of time, this fund will ensure you are able to pay the mortgage without significant financial loss.
Keep in mind that not all REIGs are created equally – there are some that charge exorbitant fees or rely on the fine print to tip the scales more in their favor. If you’re considering an REIG, it is vital to do your research in order to minimize risk.
4. Real Estate Limited Partnership (RELP)
Much like an REIG, a real estate limited partnership (RELP) is a group of investors that are joined by their ownership of one or more properties. Some RELPs are formed for the purpose of purchasing a single property, while others hold a broad portfolio of properties.
The key characteristic of a RELP is that it is designed to be an investment with a finite lifespan. A developer or property manager takes the role of the general partner of the RELP, with investors contributing funding for the project and claiming a share of ownership (becoming limited partners). In some cases, the investors may receive a portion of the income generated by the property. However, the primary goal is to eventually sell the property (or properties) and earn a large profit, at which point the RELP dissolves.
5. Real Estate Mutual Funds
A real estate mutual fund invests in real estate operating companies and REITs, expanding access to diversified investments without requiring a significant amount of capital. Each real estate mutual fund operates according to a specific strategy and set of goals, but they can be an excellent option for investors searching for a broad selection of assets.
These mutual funds are fairly liquid, much like REITs. They also offer investors the advantage of extensive expertise and research analysis. An investor can weigh their options between a high-risk/potentially high-return path with a real estate mutual fund, or choose a safer route if preferred.
Why Invest in Real Estate?
Ultimately, one of the top reasons to invest in real estate is that it can significantly strengthen your risk-and-return profile. In terms of risk-adjusted returns, few investments can compete with rental homes and real estate. And compared to stocks, bonds, and equities, the real estate market is far less volatile.
An investor can build a robust portfolio by incorporating real estate, and the upfront costs are often comparatively minimal. Even as the market experiences ups and downs, there’s always the potential for profit in real estate.
Diversification and Protection
Of course, the above is not an exhaustive list of all of the ways you can invest in real estate. In fact, this is an investment field that exemplifies diversity – with so many options, real estate investments can suit an incredibly wide range of investment goals and preferences. The spectrums of risk profiles and required involvement are extremely broad, leading many investors to take on multiple investments of different types and niches.
Interestingly, real estate tends to have a low (sometimes negative) correlation with other key asset classes. For example, when the stock market is down, real estate is often up. So, including real estate in your investment portfolio can be a smart protective measure. Your overall portfolio will have a lower volatility, and you can achieve a higher rate of return per unit of risk.
Another benefit of investing in real estate is its inflation-hedging capability. Generally, real estate maintains the purchasing power of capital as economies expand. Because demand for real estate tends to rise in relation to the growth of gross domestic product (GDP), much of the pressure of inflation is transferred onto tenants rather than investors.
Increased demand results in higher rent prices, which then raises capital values. Therefore, capital appreciation helps investors bypass much of the impact of inflation.
The Power of Leverage
Real estate investors have a powerful tool that cannot be utilized by stock market investors, with the exception of those operating within an REIT: leverage.
For example, purchasing a stock means paying for the full value of that stock up-front (unless you are planning to buy on margin). But with real estate investments, having access to mortgages as a financing method opens up a whole new world of possibility. Because you’ll only need to pay for a small portion of the overall property value upfront, you gain considerable flexibility for investment.
The Bottom Line
Real estate can be an exceptionally sound investment option that offers a steady and sustainable income, as well as a route to building long-term wealth. Of course, your investment experience largely depends on how you choose to enter the market. Like any investment opportunity, there are tradeoffs: higher liquidity often comes at the cost of higher volatility, better market pricing might require you to sacrifice some diversification benefits, and so on and so forth.
Above all, it is critical that you have realistic expectations, conduct proper research, and choose investment partners you are confident you can trust.
Learn About Wan Bridge Real Estate Investment Opportunities & Partnerships
Our Texas rental communities are reshaping the market, providing residents with the modernized luxury and lifestyle they want in communities we professionally manage ourselves. And because we are diligent in our market research, our development team is able to pinpoint prospective sites in the state’s most in-demand cities and regions.
The result? Our build-to-rent communities are better able to attract long-term tenants and secure sustainable profits for our investors and partners. That’s why our current partnerships feature many of the industry’s best-known names, as well as a multitude of landowners, REITs, and others. Going forward, our plans are only getting bigger and better – and we would be happy to have you join us.
For more information about how to invest with Wan Bridge, as well as the partnership opportunities we have available, please contact our team today.
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