One of the ways that I’ve been trying to further diversify my overall portfolio is by adding real estate exposure to the mix. You can add real estate to your own portfolio as well. The good news is that you don’t even need a great deal of capital to invest in real estate.
In fact, there are several different ways that you can invest in real estate, and you can choose your preferred strategy, depending on your financial situation and your personality preferences.
1. Rental Property
One of the more common ways to invest in real estate is to purchase rental property. When investing in renal property, you can set up a real estate business designed to help you build up tenants and regular income.
As our guest Brandon Turner, from BiggerPockets points out, it’s possible to get started with a small amount of money. Use the FHA loan program to purchase a duplex, and you can do so with as little as 3.5% down, and then you can live in one unit while you rent out the other. Once you build up your situation, you can start making other deals.
This approach isn’t for everyone, though. You need to be cut out to be a landlord if you want to succeed with your sanity intact. It’s also important to be on the lookout for bad tenants so you can avoid them. I don’t like the idea of renting to others, even if I could get to the point of hiring a management company to take care of everything. However, I know a number of people that enjoy rental property.
2. Flipping Houses
Another way to invest in real estate by purchasing a home is to engage in flipping houses. You need to be careful with how you flip homes, but it can be lucrative if you know what you are doing.
Many home flippers choose to purchase foreclosures and other distressed homes that they can get for less than market value. Then, they can turn around and sell the homes for profit. However, you need to know how to inexpensively fix up homes that have been damaged, or know how to stage a home so that it sells for more later. If you can make it work, it can be one way to earn money from real estate. However, you might need more capital to participate in this activity.
3. Real Estate Crowdfunding
If you are an accredited investor, and have adequate capital, you can use a new form of investing called real estate crowdfunding. Recently, a law was passed that allows for investment crowdfunding. This means that you can get a portion of different types of real estate, from residential to commercial.
However, this type of investing is still relatively new. It’s somewhat similar to investing partnerships that invest in real estate, but instead you can access the investments online, and you don’t necessarily need to enter a partnership or join a real estate investing club. For some investors, this might be a desirable solution — especially since it often costs less to become involved with real estate investment crowdfunding than it does to join a real estate investing club.
4. Real Estate Investment Trust
This is the way I gain real estate exposure. It is the simplest and least expensive way to invest in real estate. Real Estate Investment Trusts (REITs) allow you exposure to a group of real estate assets, and you can usually invest with a very small amount of money. Many REITs are available on exchanges and trade like stocks. Plus, they pay dividends. If you are looking for an easy way to add real estate exposure to your portfolio, REITs can help. You should be aware, though, that you aren’t actually investing in property when you invest in a REIT.
What About Your Primary Residence?
Many people view a primary residence as an investment, but I have a hard time seeing the home you live in as an investment. Not only do you have an expensive mortgage with interest costs, but you also have maintenance and repairs. Even if your home appreciates in value over time, by the time you pay interest and add up other costs of homeownership, it can be difficult to even break even.
The main advantage of a primary residence is that you can build equity, which you can access later. Of course, accessing that equity means that you either have to pay interest by getting a loan secured by that equity, or that you sell your home for a large chunk of capital, and then use that money to make another purchase, or to invest in some way.
I don’t like to think of a primary residence as an investment, but others feel differently. There are other ways to invest in real estate beyond the 4 listed here. Do you invest in real estate? What is your preferred real estate investment strategy?