If done properly, real estate investing can be an excellent way to diversify your portfolio. There are many ways to invest in real estate, and finding the right approach comes down to understanding which one suits your investor profile and financial needs.
Real estate investing provides investors an opportunity to earn capital in the short term and long term. In the short term, investing in real estate can provide a reliable flow of cash.
Companies such as Airbnb have allowed property owners to profit from renting out their homes. If you decide to rent out a home that steadily increases in value over time, your real estate investing will be a surefire, profitable long-term investment.
Rental properties are only one of the several ways an investor can take advantage of the real estate market. Below, we look at the top ways to invest in real estate and how you can diversify your portfolio through real estate investments.
Real Estate Investment Strategies
Like most methods of investing, when it comes to investing in real estate, there isn’t one real estate investment strategy that’s better than another.
Finding the right real estate investment strategy depends on the investor’s short vs. long term goals, the level of involvement they wish to have in the investment and whether they wish to seek active or passive real estate investing.
Active Real Estate Investing:
Active Real Estate investing is the ownership of the real estate asset. This includes owning rental properties or house-flipping. Active Real Estate Investing involves putting a lot of one’s money into the property up-front with the goal of achieving profit in a long-term strategy.
Active Real Estate Investing also includes a lot of effort, time, and expertise in order for the investment to be successful. Two types of Active Real Estate Investing are owning Rental Properties and House Flipping
Rental Property investments require you to essentially become a property manager and landlord all-in-one. Whether you own a residential, commercial, or industrial property, a rental property investment requires a lot of attention and expertise.
However, rental properties can become a great income producing real estate investment if an investor can find one in an area of high demand, where comparable houses aren’t staying on the market long and selling for asking price or above.
When purchasing a property you intent to rent out, it’s crucial to consider some crucial steps. First consider your location. Do you see a lot of interest in that current market? Has the population increased or declined in that market over recent years?
A good example is to look at recent city trends. In mid-2020, there has been an exodus out of the city and into the suburbs because people wanted to avoid crowded areas due to the pandemic.
However, people may be more inclined to rent temporarily in the city and not purchase a permanent residence, especially the younger crowd. So, this could still be a great rental option.
House Flipping requires the most expertise and active management of real estate investment. Essentially, this is where an investor buys an investment house with higher value potential, renovates the house, then sells it for a higher price than what it was purchased for plus improvements.
It’s also the most popular method of real estate investing, according to every other cable channel on TV. The reality of the situation is that it often takes more than an hour to transform a run-down home into a brand-new, state of the art house.
House flipping is a high-risk, high-reward real estate investment. This is because, as opposed to some passive real estate investing methods, all the initial cost of house flipping falls on the investor’s shoulders and the longer it takes to flip a house, the more costly the investment becomes. That is why house flipping is considered a short-term investment.
Passive Real Estate Investing
For those investors who may be less equipped to deal with the hands-on methods of restoring bathrooms, kitchens or dealing with tenants in multiple properties, there is Passive Real Estate Investing. Passive Real Estate Investing provides many more options and flexibility than Active Real Estate Investing while allowing the investor to shoulder a lot less of the load of being responsible for upfront capital and ongoing maintenance.
Passive Real Estate Investing options such as Real Estate Investment Trusts (REIT), Real Estate ETF’s, and Real Estate Crowdfunding can provide investor long term investment income as well as solid portfolio diversification with a lot less effort.
What are REITS?
Real Estate Investment Trust (REIT) is a company that provides investors a portfolio of real estate properties in which they can invest like stocks. REIT’s are a great option to add to your investment portfolio because they can often offer high dividends because they are required to distribute at least 90% of their taxable income to their shareholders. As we talk about in The Many Ways to Invest, dividends are an outstanding source of consistent, passive income over the long term.
Types of REITS
Equity REIT’s are companies that acquire, manage, renovate, and sell real estate. Equity REIT’s are often focused on a specific type of real estate such as apartments, industrial, hotel or retail. Equity REIT’s can also be residential which focus primarily on rental properties.
Mortgage REIT’s (otherwise known as debt REIT’s) are different from Equity REIT’s. Equity REIT’s typically generate income from rent, where mortgage REIT’s generate income from the interest on the mortgage loan. Mortgage REIT’s do not own property as an Equity REIT does but rather invests in mortgages.
Hybrid REIT’s are just what you assume, a blend of equity and mortgage REIT’s. These offer an attractive method for further diversifying your real estate investments in your portfolio.
Real Estate Crowdfunding
Real Estate Crowdfunding is a relatively new approach to investing in real estate. With the rise in Crowdfunding as an alternative to investing in the stock market, Real Estate Crowdfunding raises capital from investors for the purchase, development, or rehab of a real estate property.
The availability of new and user-friendly crowdfunding platforms gives investors easy accessibility to investing in a specific property or portfolio with other investors.
A crowdfunding real estate investment can offer several potential advantages for investors, including low fees, flexible or low initial cost of investment, added portfolio diversification, and no need to deal with middle-men such as brokerages or contractors for active real estate investing.
Not all Real Estate Crowdfunding platforms are created equal and just with other crowdfunding options, there are non-financial (donation or reward returns) and financial return options (lending and equity). Since you are here to build your wealth, let’s focus on the financial return options.
Lending Real Estate Crowdfunding results in the yield being produced by the interest rate of the loan. This could be an excellent opportunity for investors if the borrower is able to pay back the loan on time. However, since the investment is contingent on a borrower paying back the loan and its interest, the return is not set in stone.
Equity Real Estate Crowdfunding results in the yield being produced by the return on the sale of the real estate asset. So, for example, if you invest in acquiring a property with the intention of rehabbing and flipping it for profit, you will get a percentage of the profit based on your initial investment. This is a straight-forward investment method but obviously depends on the production of the project. If the project fails, you could lose your investment.
Best Real Estate Investing Apps
At Wealthplicity, we have rated and ranked some of the top investment apps on the market. For our full list of reviews, please visit our “Best of Investing Resources Page“
As we discussed, there are a variety of ways to invest in real estate so finding a real estate investing website or app to use truly depends on your investor profile and what you are looking for.
We took a look at the best real estate investing apps on the market today and rated them by a list of crucial criteria:
- Investor Fees -How much does it cost to use the platform and how complicated is the fee structure
- Deals – What is the total number of deals available and is there a good variety?
- Investor Requirements – Does the investor need to be accredited? What is the minimal investment required?
- Usability – How user friendly is the platform?
- Transparency – How hard is it to find critical information such as risk and results from deals?
With this criteria in mind, some of the best real estate apps for investors are:
Equity Investors, Passive Income Real Estate, Beginner real estate investors
Accredited investors, Commercial Real Estate Investors, real estate crowdfunding
Active real estate investors, Equity Investors