Investing in real estate can be a rewarding experience and a boost to your financial portfolio. Billionaire Andrew Carnegie famously said that 90% of millionaires got their wealth by investing in real estate. Now, it may have been a while since Andrew Carnegie invested in the market, but real estate remains a popular choice for millionaires (and average investors). Investors now have many more options than a few decades ago when deciding what kind of real estate they want to invest in. Real estate investments now fall into two distinct categories: one, in which investors take physical ownership of the real estate asset, and two, where investors don’t require physical possession of the property in order to reap the investment gains. These two groups can be further broken down into subcategories, so let’s take a deeper dive into types of real estate investments:
Physical real estate investments
If you’ve ever wanted to buy a house as an investment, flip properties, or own multiple residencies as a landlord, you’re looking for physical real estate investments. Depending on your time horizon, access to capital, and priorities, there are a few options available to own real estate assets:
Properties such as houses, apartment buildings, townhouses, and vacation houses are all classified as residential real estate. Income from residential properties is derived from collecting rent (or regular payments for short-term rentals) from property tenants or by an appreciation in the value of the property.
The costs associated with residential property may include borrowing costs, maintenance, insurance, legal fees, and more. If you employ someone or work with a property management company, you will also have to pay salaries or management fees. There are also legal responsibilities that come with being a residential property owner.
Commercial properties consist mostly of larger office buildings, retail space, gas stations, etc. If a business or organizations rents or leases your property, you own commercial property. It’s usually much more expensive to invest in commercial real estate than residential, but does offer longer leases and stable earnings.
Innovative real estate investments
Real Estate Investment Trusts (REITs) are shares of an organization that owns real estate properties. When the organization makes money through rental income, selling properties, etc., it distributes that income as a dividend to investors.
REITs are a popular choice for investors. They’re easily accessible on investment platforms that investors are likely already familiar with and can be bought or sold quickly. Shares of REITs usually have a high dividend yield and offer stable returns. In recent years, the REIT market has grown to offer even more options to investors so that they can invest by type of property (multifamily, office buildings) and industry sector (hospitality, healthcare)
There are some complexities – your dividends aren’t eligible for the low tax rates you can get on common stocks. Additionally, the type of REIT you invest in can impact your returns (for example, hospitality REITs during a pandemic).
Real estate crowdfunding, or community-funding, offers investors access to real estate investments that they would not have been able to benefit from on their own. Most crowdfunding platforms have a minimum investment threshold that is much lower than the property value of a house, for example (Diversyfund’s minimum for the growth REIT is $500). Crowdfunded real estate deals let you invest in properties that you otherwise wouldn’t be able to access. For example, not too many people could go out and buy a 200 unit apartment building.
There are differences to how each crowdfunding platform works, so it can be worthwhile to review the platform before investing. For example, some may outsource property management and maintenance to other companies while some utilize in-house talent. Real estate investment platforms can also vary by risk/return profile, industry sector, and more.
Writing down your own criteria and liquidity needs before you invest in crowdfunding platforms is important. If you’re going to need the cash in 5 years or less, real estate investing might not be the best approach for your money.
The Takeaway – as an aspiring real estate investor, which type of investment should you go for?
If you’re considering investing in real estate as an addition to your portfolio, take some time to map out your reasons and expectations for doing so. Doing your due diligence does not just mean coming up with a down payment or signing up for an online investment. Knowing your reasons for investing are important, and so is knowing the market where you’re investing while keeping an eye on future trends in real estate.
If you’d prefer to be more hands-off with your investments, REITs and crowdfunding platforms are easier ways to add real estate to your portfolio without owning physical property.