Why to Invest in Real Estate

In the last few decades, real estate has become increasingly popular. As modern technology advanced, the investing landscape changed, too, introducing us to real estate-based ETFs, mutual funds, and REITs. Now, there are myriad ways to get involved with this lucrative asset – without breaking the bank.

Real estate investing, explained

It’s important to note that investing in traditional real estate is not quite like investing in the stock market.

Traditional real estate requires a much larger investment on multiple fronts. For one, you’ll likely spend a lot of time researching what you can afford and where. If you plan to flip or rent property, you’ll need to consider the costs of repairs, renovations, and maintenance. And while hiring a property manager to deal with the inevitable exploding toilet saves you time, it also cuts into your bottom line.

Then, of course, there’s the unavoidable fact that real estate requires more capital. Whereas most stocks run a few dozen to a few hundred dollars, you can easily spend hundreds of thousands of dollars on one house. And even if you only put down a few thousand on a property you intend to flip, you’re on the hook for the mortgage if the market goes belly-up.

However, there are many benefits:

  • Regular monthly income payments
  • The ability to use leverage (borrowing) to increase your returns
  • Diversification potential across different types of property

What this means for you

Up until now, we’ve primarily assumed that investing in real estate means buying traditional property. However, modern investing has introduced new methods to diversify your portfolio without signing a deed. We’re going to discuss both types of investments here.

Traditional ways to diversify with real estate

There are two primary ways to invest in physical real estate: buying rental properties and flipping houses.

Buying rental properties comes with the caveat of becoming a landlord. For some, collecting passive income via rent checks is the dream life. But you still have to be on call to deal with every exploding toilet and broken water heater – unless you’re willing to shell out thousands for a property manager.

Flipping houses is a whole other beast entirely. Typically, this process involves one of two strategies:

  • Buying, repairing and updating, and selling property as quickly as possible
  • Buying, holding, and selling property when the market ticks up

Each of these strategies comes with their own benefits and risks. It’s also possible to take on both roles at once – buying and fixing up a property in a rising market, and then selling when you believe the market has peaked. However, neither option guarantees that you’ll see returns.

Modern real estate diversification

Of course, modern markets have presented new options to circumvent the binary juxtaposition of investing in the stock market or real estate: real estate securities and trusts.

  • REITs: With a real estate investment trust, a corporation or trust uses investor funds to buy, rent, and sell properties. At least 90% of the profits go to shareholders as dividends, while the remaining amountpays operating costs. REITs often invest in malls, office buildings, and even mortgages.
  • Real estate mutual funds: These funds typically invest in REITs and other operating companies. Unlike a single trust or fund, they provide broader market diversification and increased liquidity – similar to how traditional mutual funds provide broader diversification than buying 10 shares of Microsoft.
  • Real estate ETFs: Exchange-traded funds also provide investors with broad market exposure in a single unit. Real estate ETFs provide the same benefits as traditional ETFs, but they focus on REITs and real estate stock.
  • REIGs: Real estate investment groups are similar to mutual funds. Investors buy individual units of living space through a company that owns apartment buildings and housing units. The company takes a percentage of the rent to manage all maintenance and advertising, while the investors collect passive income.
  • RELPs: Real estate limited partnerships are similar to REIGs, but they only exist until the properties under ownership are sold.

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