Many investors like the idea of investing in real estate. Real estate has the allure of being considered “tangible.” After all, you can touch it, and there is the potential for regular income with real estate. Additionally, real estate can make a nice addition to a well-diversified investment portfolio. Many investors aren’t comfortable with the “traditional” makeup of cash, bonds, and stocks, and want to branch out a little.
There are ways to start investing in real estate, no matter how much capital you have readily available:
One of the most popular ways to invest in real estate is through the purchase of rental properties. You can buy a piece of property and then rent it out. For many investors, this works one of two ways:
- Outright purchase with cash: If you have the capital, you can buy a single family dwelling or a multi-family unit. In either case, you own the property and whatever you bring in for rent, minus expenses, is profit.
- Mortgage: You can borrow to purchase a rental property. However, you want to make sure that your income will be able to cover the cost of your mortgage, plus other expenses that come with running a rental property business.
For a more in depth discussion about cash vs mortgage purchase, read Should You Finance Your Rental Property Purchase or Pay Cash?
It’s also possible to join with others in a partnership to buy rental property. With the right approach, it’s possible to build up passive income with rental property, without the need for you to take on all the expenses yourself.
Additionally, if you take good care of the property, there is a chance that it will appreciate in value and that you will be able to sell the property for additional profits down the road. This is true of owning commercial real estate, as well as residential real estate.
It’s important to make the distinction between the home you buy as a primary residence and the real estate you buy for investment purposes. Rarely should you treat the home you live in as an “investment” in real estate.
But what if you don’t have the capital to purchase rental properties, or the desire to borrow what you need to make it happen? There are other options as well. If you don’t have the capital to buy property, or if you aren’t interested in tying up a large portion of your net worth in real estate, you can still get exposure to real estate investing through a Real Estate Investment Trust (REIT).
REITs are traded on exchanges, much like “regular” stocks. However, they invest most of their assets in real estate, and the income is mostly derived from real estate. You can access different types of REITs, focusing on commercial properties or residential properties, or even investments related to real estate (such as in self-storage companies).
On top of the possibility of capital appreciation as the value of the REIT increases, you also have access to dividends. Since REITs must pay out 90% of taxable income to shareholders, you receive a regular income stream on top of the possibility of capital appreciation. It doesn’t take very much money to invest in REITs, and many online discount brokerages offer access to REITs.
Real Estate Related Companies
If you don’t want to invest in a REIT, it’s possible to choose companies related to real estate for your investing dollars. There are a number of companies that are involved in real estate activities, from holding companies to commercial ventures, to realty companies, it’s possible to find companies that operate in the real estate industry.
When investing in these companies, you usually don’t need very much at all. Just open an online brokerage account, and you can start buying shares — or even partial shares. Many real estate companies also pay dividends, which means it’s possible for you to receive regular income on top of the capital appreciation you might enjoy.
There are ways to benefit from real estate investing. You don’t always have to buy property in order to add real estate to your portfolio. Consider your financial situation, and what you can afford to lose. Remember that there’s always risk with any investment — including real estate. Never invest what you can’t afford to lose.
Photo credit: TheDarkThing.
Miranda is a professional personal finance journalist. She is a contributor for several personal finance web sites. Her work has been mentioned in and linked to from, USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, The Wall Street Journal, and other publications. She also has her own personal finance blog: Planting Money Seeds.