In many ways, owning real estate is considered to be part and parcel of the American Dream. And beyond owning a home, investing in real estate can be an effective way to diversify a portfolio and start making significant financial gains.
But, as a beginner considering real estate as an investment for the first time, it can be daunting to know where to begin. Real estate is significantly different from other investment instruments, with its own set of risks, rewards, and strategies to consider.
In this article, we’ll offer a very broad overview of several different strategies that can be used to start investing in real estate, and discuss some of the other important considerations to keep in mind when it comes to this alternative investment strategy.
Buying a property and leasing it out to residential or commercial interests is one of the oldest and most fundamental forms of real estate investment. Broadly speaking, the property owner is responsible for paying the mortgage on the property, as well as property taxes and any costs that may come from maintaining the property. In exchange, the owner charges enough to cover these costs and, in time, generate a profit.
There are many things to consider before choosing this strategy, including weighing whether your focus will be on residential or commercial rentals (both have their upsides and drawbacks). This is also a fairly active investment strategy – it will require significant due diligence in researching markets, demographics, and trends, and may require the hands-on responsibility of interfacing with tenants and responding to their needs. In many cases, individuals will turn to professional property management companies to handle the active maintenance and “day-to-day” of their properties, so that they can assume a more passive role as an investor.
You do not have to go it alone as a real estate investor. There are different types of arrangements that can allow investors to band together to purchase properties, in order to share in the risks, responsibilities, and rewards.
One strategy is to co-invest with partners, and buy shares of a property. In this arrangement, each investor is simply responsible for his or her share of the property, and splits the returns among the investing group.
Another strategy may be to buy into a real estate investment group. In this strategy, most commonly, investors buy properties which are held by a larger company. As a result, the investor owns one or more investment units, but can leave management, maintenance, and other daily responsibilities to the parent company. This is a way for investors to mitigate risk, but there may be significant fees or complications involved, depending on any number of factors.
Real Estate Investment Trusts (REITs)
Real estate is publicly traded. Joining a real estate investment trust (REIT) is one way to get in on the action – and start drawing a regular income, as a result.
REITs are bought and sold on exchanges, much like stocks; when you purchase a REIT, you essentially purchase a small stake in a property, which is owned by a larger corporation or trust. When a profit is made, you receive dividends. In fact, corporations must pay off a very significant portion of their taxable profits as dividends in order to maintain their status as REITs, and avoid paying a corporate income tax.
REITs are fairly hands-off investments, and may be a solid strategy for investors hoping to receive a regular income in the form of dividends. REITs may come with a slightly higher level of risk than other types of investments, such as index funds. However, they typically offer fairly high yields, and are highly liquid. It is also possible to diversify your exposure by investing in REITs by way of a real estate-focused ETF or mutual fund.
Real Estate Debt
As CNN Money puts it:
“Another way to earn steady passive income through real estate is to invest in someone’s mortgage.”
Mortgage bonds and mortgage backed securities (MBS) have long been a fixture in the market, but it is becoming increasingly simple for individuals to invest, with the assistance of an experienced financial advisor. Mortgage bonds and MBSs are both asset-backed, and offer a relatively low degree of risk, predictable returns, and, as Forbes puts it, may offer investors “stronger standing than property owners in the event of a market correction.”
Other Considerations About Investing in Real Estate
As you weigh the pros and cons of real estate and other types of alternative investments, it’s important to take stock of what sets these strategies apart.
With real estate investing, for instance, there is a high degree of research required; no matter what degree of experience you have, it’s vital to take time to get to know a potential market, including property values, market trends, and any local regulations or oversight that could affect development in that area. It’s also important to consider what goes into real estate investing, taking stock of the potential risks, understanding the unique timeline that is often involved, and figuring out the strategies involved in raising capital and managing tax considerations.
One of the most important steps you can take as an investor considering diversifying through real estate is to discuss matters with a financial advisor with experience in the field. That’s where FourStar Wealth Advisors can step in to help.
FourStar Wealth Advisors is an independent Registered Investment Advisor firm founded on providing the most impactful and tailored wealth management solutions to clients. To do this, FourStar Wealth Advisors utilizes the latest technology and a broad range of investment solutions to ensure that each client has the proper tools and resources to put them in the best possible position, at every stage of life’s journey.
We are a firm on the forefront of wealth management and investment innovation, offering a large suite and expertise for the different types of problems that can occur for high-net-worth clients. If you have any questions, don’t hesitate to get in touch with our team today to keep the conversation going, or give us a call at 312-667-1750.
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