There are numerous ways to start real estate investing. Find out which one best fits you.
There are many ways you can get started investing in real estate, but there’s no single best way to invest in real estate. What matters is finding the method that fits your budget and how much time you can spend managing your investment.
Why should you start investing in real estate?
According to data from Forbes, more billionaires made their wealth through real estate investments than any other category–by far.
The combination of a consistent cash stream, capital appreciation, and tax breaks have helped lay the foundation of great fortunes and stable retirements. But billionaires aren’t the only people who know how to invest in real estate. You can do it, too.
Let’s explore 10 investment options available to you and see which ones may be suited for your next investment. First, though, let’s answer a common question:
Is real estate a good investment?
The short answer is ‘yes’. Investing in real estate is absolutely essential for anyone looking to secure their financial future. Real estate should be one of the core pillars of your investment portfolio for two crucial reasons:
- According to a recent research paper from the San Francisco Federal Reserve, real estate has historically generated rates of return comparable to stocks and equities with much lower volatility.
- Real estate investment returns are largely not correlated with stocks or bonds. (Hat tip to Ben Carlson over at A Wealth of Common Sense for his work on this topic).
These two points may sound a bit academic. What it means for you is high rates of return without the roller coaster ride of investing in stocks.
Real estate investments also have a hidden benefit that we don’t normally think about: illiquidity. Some investment advisors tell you that investing in illiquid assets is bad because you might need that money quickly. Trying to unwind a real estate investment can take a lot of time and incur large financial penalties and taxes.
The hidden benefit of illiquidity is that it prevents us from becoming our own worst enemies. Great investing requires staying invested long-term without being swayed by the ups and downs of the stock or real estate markets. By putting up financial barriers that keep you from making decisions based on fear or greed, real estate investing lets you reap the benefits of the most powerful wealth-building tool ever imagined: compounded annual returns.
How to invest in real estate
There are dozens of paths you can choose to get into real estate investing. The nice part is that, if done well, no one path is absolutely better than the others. So instead of saying which one is best, we’ll look at how to invest in real estate using 10 different methods, what makes each one unique, and how they may fit your investment style and financial standing.
1. Real estate investment trusts (REITs)
Advantages of REITs:
- Low-cost starting point
- Great for investors looking for capital appreciation and dividend growth
- Ideally held in tax-advantaged investment accounts
Real estate investment trusts are companies where investors pool their money to invest in a portfolio of properties that they may not have access to individually.
REITs make money by leasing, renting or selling properties they own. Since they’re set up as trusts, there are rules on what kind of assets they can own and how they return capital to shareholders through dividends. Most REITs specialize in a particular type of assets, such as residential properties, mortgages, healthcare facilities, or infrastructure.
According to Nareit, the aggregate returns of all real estate investment trusts over the past 20 years have been 10.26% annually. Also, there are hundreds of publicly-traded REITs with different growth rates and dividend yields, so you can invest for higher long-term growth or for more short-term income with more modest growth outlooks.
Investing in REITs
Buying publicly-traded REITs is the same as buying stocks. You can buy them through a typical brokerage account and most tax-advantaged accounts such as IRAs, 529 college savings plans, and health savings plans.
2. Real estate stocks, mutual funds, and exchange-traded funds (ETFs)
Advantages of real estate stocks:
- Low-cost entry point
- Primarily for capital appreciation and growth, but some offer dividends
- Ideally held in tax-advantaged investment accounts
This method of investing in real estate isn’t as commonly discussed as the others on this list, but it’s a great way to take advantage of the real estate market without having to buy property yourself. Many stocks are closely tied to real estate and give you exposure to the asset class and provide growth over time.
Real estate stocks are widely varied. You can invest in homebuilders, real estate agencies, government-supported mortgage buyers, home improvement suppliers, construction companies, and many more businesses.
Similarly, you can invest in a portfolio of these stocks through mutual funds and real estate ETFs. While most real estate ETFs hold REIT shares, there are some real-estate-adjacent options. One such example is the SPDR S&P Homebuilders ETF (NYSEMKT: XHB), which holds 34 companies spanning home improvement retail, building products, household appliances, homebuilders, and home furnishings.
How to invest in real estate stocks
Just like investing in different types of stocks and REITs, you can buy real estate stocks through a brokerage account or tax-advantaged accounts like 401ks, traditional and Roth IRAs, and 529s.
|PASSIVE REAL ESTATE INVESTMENT STRATEGIES||ACTIVE REAL ESTATE INVESTMENT STRATEGIES|
|REITs||Rental properties (short- and long-term)|
|Mortgage debt||Flipping houses|
|Stocks, mutual funds, and ETFs||Land (developing)|
|Crowdfunded real estate||Foreclosures and REO properties|
|Land (speculative buying and selling)||Commercial real estate|