Real estate investments will bring diversification to your portfolio—and getting on the market can be as simple as buying a mutual fund.
If you've ever had a landlord, you certainly don't dream of being one: Field calls for oversized bugs and overflowing toilets don't seem to be the most glamorous task.
But well done, investing in real estate can be lucrative, if not flashy. It will help diversify the current investment portfolio and provide an external revenue source. And many of the best real estate investments don't need every call and call from the tenant.
The problem is that many potential buyers do not know when or how to invest in real estate. Here are some of the best ways to make real estate profits, from low maintenance to high maintenance.
Using the online real estate investment tool
If you're acquainted with companies such as Prosper and LendingClub—which link borrowers to investors willing to lend them money for a variety of personal needs, such as weddings or home renovations—you'll understand online real estate investment.
These platforms connect real estate developers to investors who want to fund projects, either through debt or equity. Investors expect to earn monthly or quarterly dividends in return for taking a large amount of risk and paying a network fee. Like many real estate investments, these are speculative and illiquid—you can't quickly unload the way you can trade the stock.
The rub is you would need the investment to make the money. Many of these platforms are available only to accredited investors, identified by the Securities and Exchange Commission as individuals who have earned income of more than $200,000 ($300,000 with a spouse) in each of the last two years or who have a net income of $1 million or more, not including a primary residence. Alternatives for those who cannot fulfill this criterion include Fundrise and RealtyMogul.
Consider about investing in rental properties
Tiffany Alexy did not plan to become a real estate investor when she purchased her first rental property at the age of 21. Then at a senior college in Raleigh, North Carolina, she decided to attend high school locally and felt buying would be better than renting.
"I went to Craigslist and found a four-bedroom, four-bathroom condo that was built in a student-house theme. I bought it, lived in one suite, and rented out the other three," says Alexy.
The setup covered all of her expenses and pulled in an additional $100 a month in cash—far from a graduate student shift, and enough for Alexy to catch a real estate bug. Now at the age of 27, she has five rentals and is the broker and owner of the Alexy Realty Company in Raleigh.
Alexy entered the market using a technique often referred to as house hacking, a term coined by BiggerPockets, an online resource for real estate investors. It basically means that you are occupying your investment property, either by renting out spaces, as Alexy did, or by renting out units in a multi-unit house. David Meyer, vice president of growth and on-site marketing, says house hacking allows investors to purchase properties of up to four units and still qualify for a residential loan.
Of course, you can also buy and rent an entire investment property. Select one with combined costs that are smaller than the sum you would spend in rent. And if you don't want to be the person who turns up with a toolbelt to repair a leak—or even the person who calls that person—you'll still need to pay for the property manager.
Purchase REITs (real estate investment trusts)
REITs allow you to invest in real estate without physical real estate. They are also businesses that own commercial real estate, such as office buildings, retail spaces, apartments and hotels, relative to mutual funds. REITs tend to pay large dividends, making them a common investment in retirement. Investors that do not need or want daily income will automatically reinvest such dividends in order to further boost their investment.
Are REITs a safe investment, huh? They can be, but they can be varied and nuanced, too. Others trade on an exchange like a stock; others are not publicly traded. The type of REIT you buy can be a major factor in the amount of risk you take, since non-traded REITs are not readily sold and can be difficult to value. New investors should usually stick to publicly traded REITs that you can buy from brokerage firms.
You're going to need a brokerage account for that. If you don't already have one, it takes less than 15 minutes to open one and several businesses do not need an initial investment (though the REIT itself is likely to have a minimum investment).
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