Investing in real estate has serious appeal. Who doesn’t want extra income? Whether you want to be a landlord yourself or invest in real estate by way of a Real Estate Investment Trust (REIT), we’ve got you covered with our guide to real estate investing and what it can do for you. Read on and discover if real estate investing is the right financial move. If it is, you’ve got options.
Find out now: How much mortgage can I afford?
Investing in Real Estate, the Old-Fashioned Way
The old-school way of investing in real estate is to buy an investment property. Then, you can either find tenants and collect rent, or you can re-sell the property for a profit. You can do this once, or as many times as you can afford. You can work your way up to real estate magnate status, be a serial house flipper or simply rent out your vacation home when you’re not using it. Just remember to factor in maintenance expenses, vacancy between tenants and property taxes when you’re deciding what’s affordable.
For most people, saving up to buy one primary residence is hard enough. Not to mention the fact that if you own an investment property you’re responsible for either managing it yourself or hiring a management company. Are you ready to get calls in the middle of the night when your tenant’s pipes burst? No? Then you’ll need to spring for a management company.
Folks who have their hearts set on early retirement and financial independence may find that owning real estate is a key component of their financial plan. That’s because investing in real estate can create large sums of (mostly passive) income, the Holy Grail of financial independence. On the flip side, if you find yourself owing more than your investment properties are worth and you have trouble finding tenants, real estate investing can backfire. It’s important not to get in over your head.
Real Estate Investing and REITs
Another option for those who don’t want the hassle of becoming full-on landlords is to invest in real estate via a Real Estate Investment Trust (REIT). When you buy shares in a REIT or REIT fund, you profit from the dividends that real estate companies pay out to investors. You can buy shares in a REIT, or buy a REIT mutual fund. These can be actively managed mutual funds, or passively managed REIT index funds. There are also REIT exchange traded funds (ETFs). REITs can be domestic or international.
There are equity REITs, mortgage REITs and hybrid REITs. Equity REITS are what most people think of when they think REIT. They own and manage income-producing properties, commercial or residential. The REIT has equity in its many properties and can afford to pass part of its income on to investors.
A mortgage REIT doesn’t have the same kind of equity. It lends money to real estate companies, either with direct loans or by buying mortgage-backed securities. Instead of getting their income from rents, they get their income primarily from interest on mortgage loans. As you’ve probably figured out, mortgage REITs are more leveraged, meaning that they’re riskier investments than equity REITS. There are also far fewer mortgage REITs than there are equity REITs. Hybrid REITs, as you might expect, combine the traits of equity and mortgage REITs.
Related Article: How to Invest in Real Estate Using REITS
Real Estate Crowdfunding
Recently, the crowdfunding movement has found its way into real estate investing. Several start-ups now let individual investors make small, medium or large investments in real estate, reaping rewards proportional to their initial investment. Real estate crowdfunding lets you have a little more control over your investments than you’d get with a REIT. You can review potential investment properties one by one and choose where you invest. Just make sure you’re investing with a reputable company, and that you’re clear on how you declare the income you earn come tax time. And remember that because you’re choosing individual properties, you’re not getting the same level of diversification.
Related Article: What Is Real Estate Crowdfunding?
Experts agree that investing in real estate is not an adequate substitute for investing in the a variety of stocks. That’s because the real estate sector is only one sector of our big, complicated economy. If you’re only invested in real estate, you could be in trouble when there’s a downturn in that sector.
If you’re already diversified across stocks and bonds, you’re on track to meet your retirement savings goals and you have a fully stocked emergency fund, you may be looking to branch out. Real estate investing is a great way to chase returns, and because real estate often performs differently from stocks and bonds, it can add diversification. Just be prepared for some ups and downs if you’re investing for the long term.
Photo credit: ©iStock/Spondylolithesis, ©iStock/bluejayphoto, ©iStock/Courtney Keating