3 Ways to Invest in Real Estate

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.

  1. 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!
  2. 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.
  3. 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!

Do any of you have rental properties or alternative real estate investments? If so, what are some of the pros and cons and what would you recommend investing in?

13 thoughts on “3 Ways to Invest in Real Estate

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  1. Real estate is a great asset class for investing. Owning land is a great investment, we can’t make any more of it!

    Right now, I’m house hacking, so I have 2 roommates paying me rent. I’d love to own rentals in the future, but for now, I’m focused on building my business and personal brand. Rental property is what I would do – though it’s a risk/reward. With a rental property, it’s 100% on you to make it happen!

    1. That is awesome that you’ve got two roommates to help you right now!

      My husband and I definitely want a rental property at some point, but it’s all about timing for us as far as feeling comfortable investing the capital into another property!

  2. We subscribe to the 1% rule when it comes to buying a rental property. We have had difficulty finding properties that stay compliant with the rule so we have sat out the real estate game until it makes more sense for us to jump in 🙂

    1. I totally hear you! We haven’t looked too seriously yet, but we’ve done some research and it’s almost impossible for us to buy something in our county for a rental property unless we got a fixer upper. I would really love to do a rental in another state that we could use as a vacation home down the line, though!

      1. Great post. I don’t really find REITs all that attractive but am interested in buy and hold rental property. I agree with MSM. The 1% rule is a good rule of thumb. I am currently looking at a small single family residence to purchase and rent out. It would be my first one. I Am a big fan of investing in index funds but do think that real estate is a great way to diversify your investments.

        1. Real estate doesn’t isn’t for everyone, but as you said, it is a great way to diversify. There are some out there that are low risk with high returns; however, index funds are among the safest.

  3. Great read, Courtney!

    My wife and I have one rental home and we’re not really interested in owning others, but I am interested in real estate investments.

    Your bit on REITs sounds like something I need to look into.

    Thanks for the info!

  4. Sometimes I go to open houses just to see what the home looks like as a hobby and to get improvement ideas, lol. Anyway, I have a couple of REITs and prefer those because you can easily get in and out of the position, the yield is usually pretty good, through research you can easily find an established and reputable one and it’s a lot more passive than owning/managing a rental property and dealing with tenants.

    I thought about having a property to rent and eventually own as a vacation home, but the drawback for my wife and I is we wouldn’t want to go to the same place so many times 🙂

    1. Don’t worry! My husband and I have done that, as well! We also like to see what houses in our area are selling for and what they look like inside just for comparison (not that we’re even in the market to sell).

      I totally get what you mean! We originally talked about potentially buying a vacation home on an island, but we also like to visit all different places, so we decided against that. We went to South Carolina this year, though, and fell in LOVE with Charleston and it’s a short flight away, so that’s somewhere we would definitely consider (because we can still go elsewhere at different points in the year!).

  5. Nice post. I’m currently staying with my uncle, who’s a real estate mogul in Capistrano Beach, Dana Point (and Orange County at large) and I’m trying to pick up as much as I can from him.

    His #1 tip: If you know value, you’ll never lose money.

    Seems pretty straightforward. At times, though, I feel like he doesn’t know any more about real estate than the average investor. I think a lot of people should keep that in mind (especially you guys, looking at that 7.6% dividend): sometimes it pays to take risks.

    Sometimes you lose it all, though. Diversification is good.

    1. Sounds like you’ve got quite the mentor, which is great!

      I believe that your uncle, amongst many other real estate investors, probably don’t know more than the average investor. As you alluded, it’s got a lot to do with someone’s willingness to take on risk. Also, lack of capital is another issue when investing in real estate.

      1. That’s the exact impression I get from him.

        And you’d be surprised about “lack of capital.” He started this year out broke and is now well on his way to a million, lol. If you’re willing to take on major risks (and you have the ability to capitalize), you can do anything.

        You have to learn when to walk away from the table, though.

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