One of the keys to building wealth through investing is diversification. If you ask uber-wealthy investors like Warren Buffett or Ted Turner, they’ll probably tell you that no portfolio is complete without a healthy dose of real estate holdings. Buying into private real estate can cost you $100,000 or more, but that’s not the only way to get into the game. If you’re ready to invest in real estate on a much smaller scale, here are three ways to get started.
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1. Buy an Investment Property
With the median rent price hovering at $1,500 and demand for rentals higher than ever, there’s a lot of potential to turn a decent profit if you’re in the landlord business. Investing in a rental property often involves putting out a lot of money upfront. But it can be worth it if you can recoup the cash relatively quickly.
As far as the downsides of investing in a rental go, there’s the hassle that goes along with being a landlord. Unless you hire a management company to oversee the property, you’re going to be the one your tenants turn to when something breaks or another issue crops up.
Owning a rental property also involves a certain amount of risk, since there’s no guarantee that you’re going to be able to make money off the deal. If you get stuck with tenants who skip out on the rent or the rent prices in your area take a nosedive, you may see any potential profit go up in smoke.
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2. Put Some Money Into REITs
Real estate investment trusts (REITs) are worth considering if you’re not keen on the idea of being tied down to a specific property. A REIT allows you to invest money in lots of different real estate holdings without actually having to assume ownership of them. The kinds of investments you might find in a REIT include commercial buildings like hotels, office buildings and shopping malls.
This kind of real estate investment typically pays out a steady stream of income in the form of dividends and it can be exchanged on the stock market. Some REITs are classified as non-traded investments, though, and carry more risk since they’re not as liquid as the ones that are publicly traded.
The most important thing to keep in mind if you’re considering a REIT is the kinds of fees you’ll be charged to invest. The expense ratio is the percentage of assets that go toward covering the management fees each year. Some REITs can have expense ratios as high as 0.56%, which can detract significantly from any returns you’re seeing.
3. Crowdfund Your Way to a Real Estate Investment
Crowdfunding has caught on big-time in the lending arena but the trend is working its way into the real estate investment market, too. A number of crowdfunding platforms are making it possible to invest in commercial and residential real estate holdings with as little as $100.
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Like any other kind of real estate investment, crowdfunding has its risks. But there are some advantages too, particularly compared to a REIT. For one thing, investors have a little more control over where their money’s going since they can see the individual properties they’re investing in. With a REIT, you don’t have that same kind of transparency.
Which Kind of Investment Is Best?
There are a few things to consider when you’re comparing your real estate investment options. For instance, it’s a good idea to ask yourself whether you prefer a hands-on or hands-off approach and how much risk you’re comfortable with. Once you know the answers to those questions, you can factor in the potential costs to see which investment option will provide the best returns.
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