How to Wisely Invest in Real Estate
There can be more to a financial portfolio than stocks, bonds, and mutual funds. Real estate can also be a smart investment for many people, even those who don't have the ability (or desire) to buy property. If you would like to invest in real estate, then here are four ways you can get started.
Buy Real Estate Investment Trusts (REITs).
Real Estate Investment Trusts (REITs) make it possible to earn money from real estate without ever having to purchase property. These trusts own, operate, or finance income-generating real estate—and much like mutual funds, they pool the money of multiple investors, who then earn dividends from its real estate investments. What's more, REITs "often produce a very attractive dividend yield," says Tamar Asken, CFP and realtor at real estate brokerage Avenue 8. That can make them ideal for investors who are close to retirement—though they're not without risk.
REITs are also an easy investment to make: Many require a small initial investment, and can be opened in as little as 15 minutes. To invest in one, work with a financial planner who can advise you on the best trusts to purchase and walk you through what you can expect after you buy one.
Purchase a rental property.
Whether you purchase a home that you can rent out, or a commercial space you can lease to a small business, a rental property is another way to invest in real estate. However, purchasing a rental property is a big commitment: It requires a lot of money up-front, and being a landlord isn't always an easy task. "Don't underestimate the value of time required to be a landlord," says Dava Davin, founder and CEO of Portside Real Estate Group. "Things like tenant calls for emergencies, late payments and vacancies all need to be considered. Personally, I only invest in commercial properties where I am guaranteed not to have late-night or weekend emergencies."
On the plus side, having a rental property means you should have reliable and passive income every month. Asken adds that low interest rates make purchasing property more attractive. "Your mortgage rate may never be lower," than it is today," she says, "and eventually you will pay down your principal and have meaningful equity, along with some substantial tax benefits."
Offer up a short-term rental.
Do you have an extra room in your house or apartment that you don't use? If so, Davin says you can use it to "invest" in real estate by renting the space to a tenant on a short-term basis. For example, in Maine, where Davin's business is based, "many investors rent on a short-term basis in the summer and fall during the peak in tourism," which gives them a little extra income for a few months each year, she says.
If you rent out your extra space, be prepared for a few extra costs—to your wallet as well as your time. Those costs could be "deep cleans after each guest…and being on call for guest needs," says Davin. "Some investors find that short-term rentals can get old quickly, even though they are lucrative," who adds it may be less hassle to turn short-term rentals into long-term ones.
Flip an investment property.
For those who want to purchase property but don't want to be landlords, "house flipping can be profitable," says Asken. Flipping a house happens when you purchase an underpriced property that needs repairs—whether minor or major—then sell it for a profit, rather than living in it or renting it out. But while TV personalities make this look easy, it's not always a simple endeavor. If you want to flip and sell a property, it's smart to work with someone who's done it before; having a second opinion (and the benefit of someone else's experience) can reduce your risk.