Real estate is an appealing investment for a whole host of reasons, from the potential for dividends to the diversification it brings to your portfolio. However, while some investors may be interested in real estate, they may not want to purchase property or become a landlord.
Fortunately, there are many ways to reap the benefits of this asset class, without having to buy a property or manage tenants. Consider the benefits and risks of the following ways you can invest in real estate:
1. Real Estate Investment Trusts
Real estate investment trusts (REITs) are companies that buy and develop income-producing commercial real estate as part of a large portfolio. They are often publicly traded, and investors can purchase shares via a broker, similar to stocks. There are also non-public REITs, and a broker can facilitate purchases of those as well. REITs often focus on a specific type of commercial real estate such as multi-family housing, office space or storage, given you added ways to diversify your investments.
- REITs offer an affordable way for investors to explore opportunities in commercial real estate without buying property.
- They allow investors to diversify their portfolios.
- REITs yield a dividend, which could be higher than other dividend-producing investments.
- Non-traded REITs aren’t very liquid; if you need to sell them quickly, it may be difficult as they’re not part of a public market.
- The non-public REITs don’t offer much transparency into pricing, and they determine share value after the offering closes. The latter makes it hard to determine the value of your holdings, perhaps for years after you’ve made the investment.
- REIT dividends are treated as ordinary income for tax purposes, and not entitled to reduced tax rates.
2. Real Estate ETFs
Interested in REITs, but not quite sure of which to choose? Real estate ETFs offer an alternative. The ETFs are a fund comprised of REITs. The approach allows investors to benefit from the commercial real estate market, earn dividends—which are often a desirable factor for real estate investors—and diversify their portfolio with a non-correlated asset.
- Real estate ETFs are highly liquid and relatively low cost.
- They aren’t as risky as investing in one property and they protect investors from the downside of single property failures.
- You can diversify your exposure further by looking into ETFs that include non-US-based REITs.
- What you may benefit from reduced risk, you may also experience reduced returns. You’ll earn less from a REIT EFT than if you invested in a high-performing individual REIT.
- There’s also an extra layer of fees for the ETF administration. These are typically very low, but they still take a portion of your total returns.
3. Real Estate Crowdfunding
You may be familiar with crowdfunding for special projects (Kickstarter) or personal needs (GoFundMe). But the concept has also provided a way for investors to take part in commercial real estate purchases. Real estate crowdfunding platforms enable individuals to invest a small amount directly into a large real estate project.
- Crowdfunding provides increased access to direct real estate investments, allowing investors to participate for as little as $500.
- There are lots of platforms and projects to choose from; investors can find investments that meet their objectives.
- The crowdfunding company facilitates all the details that make real estate investing a challenge, from managing the property to reselling it.
- Real estate crowdfunding is still relatively new—many of the older platforms are still less than a decade old. Investors need to not only investigate the project risk but also the crowdfunding platform.
- The investments aren’t as liquid as a publicly-traded REIT or ETF. You may need to commit your funds for a set amount of months or years.
4. Real Estate Partnerships
This would be the traditional way of "crowdfunding" a real-estate investment; you find other investors interested in partnering on a project. The partnership spreads out the risk and allows you to invest in a larger project than would be possible on your own. You need to be an accredited investor in order to participate in some real estate limited partnerships.
- Bet on the right property and you could create a nice income stream as well as potentially sell it for a hefty return.
- Individual members of the partnership bring different expertise, skill, and resources to the table.
- The partnership can divvy up the workload, reducing how much time you need to devote to your new business, while still benefiting from the investment.
- Investing in a single property is higher risk than investing in a portfolio or fund of multiple properties; if it underperforms, you’re out of luck.
- A partnership isn’t liquid—you won’t be able to get your money back unless the other partners agree to buy you out or the group sells the property.
5. Real Estate Focused Stocks
Instead of investing in real estate proper, you can invest in real-estate focused stocks such as property management companies or construction firms. In doing so, you indirectly participate in the real estate market, which drives business for related services and products.
- They're easy to invest in; same as purchasing other stocks in your portfolio.
- Stocks are also highly liquid—you can buy or sell them anytime.
- They diversify your portfolio and adds exposure to the real estate market, without the risk of owning property or property-specific funds.
- Real-estate-focused stocks my offer muted returns as compared to direct investment in real estate or real estate funds.
- They're also less likely to produce a steady income, compared to other investments such as a partnership or REITs.
Adding some exposure to real estate in your portfolio is a good idea, and there are many ways to do so without purchasing property and becoming a landlord. Explore how you can invest in real estate and you'll an asset class that diversifies your investments and may provide some added income in the process.