Investing in real estate is a long-established strategy to help build wealth and generate income, and there’s more than one way to go about it.
You can choose to invest in real estate directly by purchasing property yourself, or indirectly through pooled investment vehicles. These strategies are not for everyone, however. Based on your financial goals, we can help you evaluate whether and how to incorporate real estate investing into your financial strategy, including associated costs, taxes and risks.
Here are five common strategies to invest in real estate and their potential advantages and trade-offs.
1. Publicly traded real estate investment trusts (REITs)
Traded REITs are public companies that invest in commercial real estate. These companies can be bought and sold on an exchange similar to other stocks. With REITs, you can earn a share of the income produced through commercial properties without purchasing the real estate yourself.
These investments may be a good option if you’d like to benefit from the income that real estate can generate but don’t want the responsibility of managing a physical property. However, there are some potential downsides to be aware of, such as the potential for market volatility. Because these investments are publicly traded, they are more closely correlated with stock market ups and downs.
2. Private real estate funds
Investors may also consider gaining exposure to real estate through pooled investment vehicles that buy and sell commercial real estate. These funds encompass a variety of strategies, and investment decisions are made by professional third-party investment managers. Fund structures may include non-traded REITs, non-traded closed end funds and private LPs or LLCs.
These investments may deliver a durable income stream and may exhibit pricing resilience relative to publicly traded REITs. This may be appealing for those investors who are seeking steady income, asset appreciation and portfolio diversification.
However, private real estate is a long-term investment with limited liquidity and is not an appropriate option for all investors, nor are they available to all investors as they are generally private placement offerings and only open to accredited investors.
3. Long-term rental properties
Perhaps the most traditional way to earn income with real estate is purchasing a property and renting it out to tenants on a long-term basis. By setting the rent at a price point that covers your expenses and allows for a profit, you can create a stream of passive income while also potentially building equity. In time, you may be able to borrow against the equity gained from one property to finance another.
Long-term rental properties are not a hands-off investment, however. In addition to fronting a down payment and other fees to purchase the property, maintaining it also requires a significant amount of ongoing time, money and effort. Among a landlord’s many responsibilities include vetting and securing tenants, rent collection, property repairs and maintenance. Some investors take on these responsibilities themselves to maximize their returns, while others outsource these duties to a property management company.
4. Short-term rental properties
Short-term rental properties, also known as vacation rentals, are residential properties that are rented out on a temporary basis — often for 30 days or less. In recent years, the use of short-term rental properties to generate income has become an increasingly popular strategy as online marketplaces for rentals have been adopted by the public on a large scale.
Like long-term rental properties, this strategy requires a direct investment by purchasing the property, which requires a down payment and other closing fees. However, short-term rentals can require more ongoing attention than their longer-term counterparts and may come with added costs and responsibilities. For example, you may need to furnish the property and have plans for customer service, maintenance, security and cleaning.
5. Purchasing, renovating and selling houses
If you have the time, resources and experience to renovate homes, house flipping may be a strategy to contemplate. It involves buying a home, renovating it to increase its value and then selling it for a profit — ideally within a short period.
However, flipping a home isn’t for the hands-off or risk-adverse investor. It requires the investor to have a strong understanding of the local real estate market, as well as solid project management skills and construction experience. Time is also a critical factor in earning a return: You’ll have to pay the mortgage and interest, property taxes, homeowners’ insurance and other holding costs for each month the project lasts.
Which real estate investment strategy is right for you?
Real estate can be a powerful tool to help build wealth and generate income. If you would like to discuss any of these potential strategies and how they may fit your financial goals and your portfolio, reach out to discuss.