Real estate investments can diversify a portfolio, but managing properties can be time-consuming. You might prefer to invest in real estate online as an alternative to owning property directly. Some of the options for online real estate investing include crowdfunding, real estate investment trusts (REIT) and real estate exchange-traded funds (ETFs). Each one can offer advantages to investors who are ready to venture into real estate. Talking to a financial advisor can help you develop an investment strategy that’s tailored to your goals.
Why Invest in Real Estate Online?
Real estate is a unique asset class, as it tends to fare well during periods of high inflation and, in some instances, recessions. When consumer prices rise, rental rates tend to follow suit. Meanwhile, certain types of property, including multi-family homes, student housing and farmland, can remain profitable during economic downturns.
Owning real estate also lends some tax advantages in the form of deductions for eligible expenses and deferral of capital gains tax. There’s a trade-off, however, since owning rental properties or investing in fix-and-flip properties typically requires investors to be hands-on to some degree.
Investing in real estate online might appeal to investors who want to forego direct property ownership. Here are some of the benefits of online real estate investing:
- Potential for above-average returns
- Lower points of entry
- No need to borrow
- Diversification and protection against inflation
- Ability to spread funds over multiple property investments
- Access to a broad range of property types
Online real estate investing still involves risk and it may not be suitable for every investor. However, there are some good reasons to consider investing in real estate online as an alternative to purchasing a rental property or becoming a house flipper. If you’re interested in online real estate investing, the next step is deciding how you’d like to do it.
Online Investing With Real Estate Crowdfunding
Real estate crowdfunding platforms allow multiple investors to pool their money together to fund property investments. There are numerous crowdfunding platforms that offer access to real estate. Some of the most recognizable names include CrowdStreet, RealtyMogul and Fundrise.
Each platform has its own rules and requirements for who can invest and what types of property investments you can make. Some crowdfunding platforms limit access to accredited investors only, while others allow anyone to invest. To qualify as an accredited investor, you must:
- Have a net worth exceeding $1 million, excluding your primary residence OR
- Have more than $200,000 in earned income for the past two calendar years ($300,000 for married couples) with the expectation of the same earnings in future years
Financial professionals can also be categorized as accredited investors if they hold a Series 7, 65 or 82 license.
In terms of the kinds of real estate investments offered, it depends on the platform you’re using. Some crowdfunding platforms specialize in a particular niche, such as self-storage properties or apartment buildings. Others might offer access to a varied mix of investments that can include office buildings, multi-family homes and retail space.
There’s typically a minimum investment requirement which may range anywhere from $1,000 to $100,000 or more. Lower minimums can make crowdfunding attractive to investors who don’t have thousands of tens of thousands of dollars to sink into a single deal.
When comparing crowdfunding platforms, it’s helpful to consider the range of investments offered, the minimum investment for each one and the projected return. It’s also important to weigh up the fees that you’ll pay and the holding period of each investment, as real estate crowdfunding can be fairly illiquid.
Use REITs to Invest in Real Estate Online
Real estate investment trusts (REITs) are another option for investing in real estate online. REITs are legal entities that own income-producing properties, such as warehouses, retail space or multi-family housing. Publicly traded REITs are available to any investor, while private REITs are accessible to accredited investors.
What’s the benefit of investing in REITs? Passive income is the answer. REITs are required to pay out 90% of taxable profits to their shareholders as dividends. Investors get the income benefits of real estate without the headaches that go along with owning property.
The criteria for choosing REITs to invest in are similar to choosing a real estate crowdfunding platform. It’s helpful to look at what the REIT invests in, how much of a dividend it typically pays out to shareholders and any fees you might pay to invest. You may also want to consider how easily you’ll be able to sell your shares should you decide to move on from a REIT investment, as some are more liquid than others.
Consider Real Estate ETFs
Exchange-traded funds are mutual funds that trade on an exchange like a stock. ETFs can offer access to a basket of investments, including real estate, allowing for easier diversification. You can “own” multiple property types through a single ETF versus having to tie money up into individual properties.
Investing in real estate with ETFs has some advantages, as they tend to be more tax-efficient than other types of mutual funds. You may pay lower expense ratios as well, depending on which fund you’re investing in.
When comparing real estate ETFs, it’s a good idea to start with the investments themselves. Specifically, consider the type of properties you’ll have access to, what kind of returns those properties are likely to generate and the associated risks of each one. You’ll also want to look at the minimum investment required and the fund’s fees.
What’s the Best Way to Invest in Real Estate Online?
The best approach for online real estate investing can depend on several factors, including the types of properties you’re interested in, the amount you have available to invest, your risk tolerance and your preferred timeline for making an exit from property investments.
Real estate crowdfunding is notable for making deals that would ordinarily be the domain of higher-net-worth investors available to a broader audience. As mentioned, it’s possible to find investments with relatively low entry points. The trade-off, however, is that crowdfunding tends to require a longer holding period, which may last anywhere from three to 10 years.
REITs, on the other hand, might be suited to investors who are looking to collect steady income from dividends. Again, liquidity is a key concern as some REITs may be easier to sell than others. Real estate ETFs, meanwhile, may offer the highest level of liquidity with the lowest overall cost, though it’s important to consider the kind of returns you might be able to generate.
Investing in real estate can help you to balance risk in your portfolio while creating an inflationary hedge. Should you decide to invest in real estate online, there are several possibilities for doing so. Considering your goals and risk tolerance can help you to decide which one might be right for you.
- Consider talking to your financial advisor about the benefits of real estate investments and how you might use them to diversify your portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’re considering adding real estate to your portfolio, your financial advisor can help you decide on the right asset allocation. While real estate investments, either online or offline, can provide some protection against inflation and recessions, they’re not entirely risk-free. Your advisor can look at your portfolio as a whole, as well as your age and risk tolerance, to help you decide how much of your holdings to allocate to real estate.
Photo credit: ©iStock.com/golero, ©iStock.com/uchar, ©iStock.com/wichayada suwanachun