Last week I posted about homeownership and I am continuing the real estate theme, but this time with a different twist. My husband and I went to go look at a condo this weekend. Not for us (as many of you may already know we own a home), but for a close family member who is looking to move closer to the rest of the family. We looked at 2 places: one that was fully renovated and move in ready and another that was just purchased from auction, which needed a decent amount of work before someone could move in. The whole process got me and my husband thinking, should we invest in real estate to diversify some of our portfolio? My husband currently owns a REIT in his IRA account and has purchased and sold a few other REITS over the years. If you don’t know what REIT stands for, don’t worry I’ll will cover that. During our conversation over the weekend, my husband and I came up with the list below as the 3 ways to possibly invest in real estate. Keep in mind that this list is for investment purposes and not for homeownership.
- Rental Property: The first thing we discussed is probably the most common, buying a rental property. The basic process is simple. A person will buy a property and rent it out to tenants, collecting a fee, or rent, in the process. The owner of the property pays the mortgage, taxes and the overall costs to maintain the property. While the tenant pays the monthly utility bills and their rent. Ideally, the owner of the property will charge enough rent to cover the costs of the mortgage, taxes and annual maintenance with any leftover being a profit to the homeowner. In most cases the homeowner is happy to cover all of the expense because he/she is building equity in the home basically for free (through the rent charged to tenants), but no one will say no to a little extra profit if the pricing works out 😊! The goal is to have the tenants pay off the mortgage associated with the house in order for you to own the house outright and have 100% equity. There are pros and cons to this approach. One con is that you need to have a good amount of capital to invest initially to put the down payment on the house so that you can take ownership of the home and then rent it out. The other con that we discussed was that you need to be very hands on and tenants can be a lot of work. Many of my fellow bloggers own rental property and they have stories of the trips to fix appliances or deal with noise complaints, just to name a few. Some pros are that it would be nice to have tenants build equity in a home on your behalf. We are currently paying our own mortgage now and know that it would be extremely hard to pay 2 mortgages on our own. The second is that if you purchase a home where you would like to vacation, you could potentially use the home as a vacation spot down the road with no mortgage!
- Real Estate Investment Trust (REIT): As I mentioned in the opening paragraph my husband has purchased a few REITs, so he talked me through the investment thesis. I will spare you the FULL details of our conversation and focus on the key facts. As stated on Investopedia.com, a REIT is created when a corporation (or trust) uses investors’ money to purchase and operate income properties. REITs can be bought and sold on the major exchanges just like any other stock. The main difference with a REIT compared to a common stock is that a REIT must pay out 90% of its taxable profits in the form of dividends to keep its status as a REIT. So in short, investors can purchase shares of a REIT and earn a share of the income produced through real estate investment, without actually having to go out and buy or finance a property as discussed in the paragraph above. There many different kinds of REITs. For example, there are Mortgage REITS, Healthcare REITS, Commercial REITS, the list goes on and on. In addition, there are also a number of different companies operating in each space. One of the cons is that there still needs to be a significant amount of time and research committed to find the right REIT for your investment profile. Another con is that with REITS, the market can turn against the REIT’s primary business and, as a result, profits decline which leads to a cut in the high dividend rate. A cut in the dividend will likely drive the share price of the REIT down, which could result in losses for investors. One pro is the counter argument to the previous statement. REITs can have above average yields and can be safer than a typical common stock paying a dividend of the equivalent rate. My husband owns a senior housing REIT that currently pays a dividend of approximately 7.6% a year, which is a great return. Finding the industry and then the company you want to invest is in key with this type of real estate investment and while we currently have shares in one, we may consider diversifying into other types of REITS.
- Real Estate Crowdfunding: Real estate crowdfunding is something we have been researching the past few years. I have read a number of different articles and blog posts regarding the pros and cons to real estate crowdfunding. In summary, real estate crowdfunding allows smaller investors to pool their money with other investors to invest directly in large real estate deals. For instance, it would be impossible for me and a few friends to pool our money together and purchase an apartment building in NYC because we simply don’t have enough money to make that happen. However, real estate crowdfunding makes that possible by taking my money along with other small investors all over the country to purchase the apartment building or a large share of the interest in that apartment building. All the investors then split the return that that apartment building generates, net of fees the crowdfunding company charges to bring all the funds together and purchase the initial investment(s). One downside is that if you are not an accredited investor, your real estate crowdfunding options are limited. Most real estate crowdfunding companies require you to be an accredited investor, which is defined as a person with an annual income of $200,000, or $300,000 for joint income, for the last two years with expectation of earning the same or higher income. One upside is the low initial upfront investment. Many sites will allow investors to start with just $1,000, which is significantly less than the down payment amount required for a rental property. This is the closest way to invest directly in real estate with the least of amount of maintenance or continuous work needed. One site that is well known and open to non-accredited investors in Fundrise. My husband and I have been looking into Fundrise and are considering opening an account with a small position, so I will keep you posted!