🏙 Investing In Real Estate: 4 Options for Building Your Portfolio
Personal finance is for everybody. Regardless of how much money you earn, your educational background, experience, or how much you currently have saved. There’s a space for you in this sphere.
Investing plays a huge role in personal finance because, unfortunately, we can’t just save our way into wealth. We need to be putting our money to work for us.
Investing in real estate is exciting, full of variety and lucrative! There are many different ways to jump into real estate investing, so you can choose which way fits your preferences and financial lifestyle best.
Part of my mission is to help you understand that investing is not just for large corporations with millions in capital, but rather it's for everyone. Getting educated on your options will empower you to jump into the wonderful world of real estate investing and strengthen your financial future.
6 Benefits of Real Estate Investing
There are many reasons why you might want to add real estate to your portfolio, but here are six that stand out to me the most.
Hedge against inflation: This reason may be the most attractive today as we continue to see inflated prices everywhere we go. As inflation rises, rents and property values also typically rise, making your real estate investment an anchor in an inflation financial storm.
Diversification: Not only will including real estate diversify your portfolio, but you can also have diversification within real estate investing. You can choose to flip a property, buy and rent, or participate in real estate crowdfunding. All aspects we’ll discuss below!
Passive income: You work hard every day at your full-time job. Wouldn’t it be nice to also have additional income coming in while you slept? Rent, dividends, capital gains, and other profits are all great ways to earn passive income.
Appreciation and long-term wealth: Generally, the price of homes and rental rates increase over time. As your tenants pay down your mortgage and the value of the property rises, you create long-term wealth.
Leverage: Thankfully you don’t have to save up 100% of the purchase price before buying a piece of property. Through financing, you can put down 5-20% of the price of the property and start your investing.
Tax deductions: You can reduce the amount of tax you owe on your real estate investing profits by claiming tax deductions. Some tax deductions include insurance payments, interest, home repairs, and depreciation.
4 Real Estate Investment Options
There are many different options to invest in real estate. By learning more about how each one works, you can choose which is best for your preferences and portfolio.
Option 1: Real Estate Investment Trusts (REITs)
If you don’t feel ready to jump head-first into owning a real estate investment property, REITs are an excellent way to get your feet wet.
REITs are companies that own income-producing real estate. Similar to mutual funds, investors’ money is pooled together to get the capital/cash to purchase properties. These properties can be apartments, hotels, warehouses, office buildings, and more.
Instead of purchasing the property yourself, you are purchasing a share of the company that has bought and currently manages the property. There usually is a minimum dollar amount requirement to get started.
Some REITs are publicly traded and registered with the Securities and Exchange Commission (SEC), while others are not publicly traded. Non-traded REITs carry special considerations such as a lack of liquidity and difficulty in seeing the value of your shares. Publicly traded REITs offer more liquidy and transparency.
You’ll need a broker to buy REITs, which will carry associated fees. You’ll also need to pay taxes on your capital gains and dividends. The value of REIT shares can also fluctuate throughout the day, similar to traditional stocks.
Overall, REITs can provide you with a good return on your investment, passive income in the form of dividends, liquidity, access to commercial real estate, and diversification.
Option 2: Rentals
Owning a rental property is probably the most obvious example when it comes to investing in real estate, and for good reason! Being a landlord can provide you with passive income, flexibility, security, appreciation, and diversification.
You can choose to buy and rent out single-family homes, apartments, condos, townhomes, or multi-family homes such as duplexes, triplexes, and fourplexes.
Some considerations when choosing the right rental property for you include the location of the property, your state’s landlord laws, supply and demand, and current market conditions.
You can choose to hire a property management company to help you manage your rental for a fee, or you can respond to maintenance requests and other tenant matters yourself.
There are many guidelines when it comes to finding the right rental property. Most importantly, you’ll want to ensure you will be creating a positive cash flow. An easy, common rule of thumb is the 1% rule. This rule states you should multiply the purchase price by 1% to determine the base rental amount.
Option 3: Auctions
Flipping properties is also a great way to invest in real estate and acquiring properties at a deep discount through an auction is an even better method.
You do need to be prepared when purchasing a property through an auction. You must do all of your due diligence, including things you wouldn’t typically need to do when purchasing a property, such as checking for liens, claims, and occupants in the home. These steps need to be taken before you make a bid.
If you enjoy the physical labor and challenge of fixing up a home, finding a discounted property at auction could be a great way for you to invest in real estate. Be sure to have a solid team behind you including a general contractor, appraiser, real estate attorney, and experienced real estate agent.
Option 4: Real Estate Financial Technology Companies
Crowdfunding through real estate financial technology companies has become increasingly popular. The JOBS Act in 2012 loosened restrictions on how people and companies could raise capital to buy commercial real estate.
Today, there are many crowdfunding platforms (CrowdStreet, Fundrise, etc.) where the everyday investor can get access to investing in properties they’d never be able to afford on their own.
Though similar to REITs, crowdfunding is different in that you know exactly what property you’re investing in, rather than just holding a share in a company. Not only will you know the exact property, but you’ll also have access to the building’s financials and projected returns. In addition, your investment does not fluctuate daily since you are investing in individual properties rather than shares.
You can get started with some platforms for only $100, but most real estate crowdfunding companies require a more substantial investment — $5,000 or more. It just depends on the platform and property. Real estate crowdfunding is less liquid than buying shares of a REIT - investors are typically locked into their investments for three or more years.
Crowdfunding can carry more risk because you’re investing in individual properties and at the mercy of whichever company you choose to invest with. Some are very experienced while others may just be getting started. You’ll want to do your own due diligence on the platform you choose.
Each platform will have its own statistics, but overall, crowdfunding can produce returns anywhere from 2-20%, making it an extremely attractive potential investment.
Get Real Estate Investing Tips and More With Wealthly
At Wealthly, we have a passion for helping our clients live a life of freedom. Managing money, investing, retirement planning, and building wealth can seem overwhelming, but it doesn’t have to be! Having a finance coach come alongside you can help you understand your options and potential.
If you’d like to jump into the world of real estate investing, I’d love to connect with you! There are so many opportunities just waiting for you to discover. I coach both individuals and couples and have online courses (launching in 2023) for you to tap into your money mindset and all the financial possibilities out there.
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.