Quite often investors need to decide if they would be better off investing in real estate vs. stocks. Investing in real estate and stocks can both be rewarding. You can build wealth investing in both asset classes. But today, investors have new real estate investing options and new ways to make money.
Investing in real estate vs. the stock market is an important decision because both can be significant contributors to a successful, diversified portfolio. Investing in real estate vs the stock market is a very old debate. But both can co-exist in a diversified portfolio.
Let’s say for purposes of today, you decide you’ve got enough stock investments and want to invest some of your investing capital in the tangible asset of real estate. Let’s get right into how to start investing in real estate.
Then as a landlord you will collect the monthly rent from your tenant(s) and pay the bills on the property, the biggest of which are likely the bank debt service and the property taxes.
The positives of this option are that you are in control of the property you buy and the tenant(s) that you place in the property.
The negative to this real estate investing option is that you need to either be a hands on owner who is involved in the collection of rent and the payment of bills, or you need to hire a property manager to do this for you at a cost that will reduce the return on your investment.
Under this scenario you can make money through the appreciation on the property you bought plus any excess cash flow (when the actual rents collected exceeds any property expenses).
Other real estate investing options allow you to be less hands-on. This is called Passive Real Estate Investing.
Publicly traded REITS are stocks that own and operate income producing real estate. REITS can operate in all types of real estate, including office, residential and warehouses.
The Securities and Exchange Commission has issued guidelines related to the operation of REITS saying that REITS must have the bulk of their assets connected to real estate and must distribute at least 90% of its income to shareholders.
As a result of this income distribution policy, many REITS pay a much higher dividend then stocks that make up many of the stock market indexes like the S&P 500.
The biggest advantage to investing in a REIT is the ease of liquidity. You can buy or sell the stock of a REIT most weekdays just like you would for any other publicly traded stock.
The biggest disadvantage to investing in REITS is that you are at the mercy of the REIT management team to run the company well and to grow shareholder value.
There are many experienced management teams running the operations of REITS, so finding one that you are comfortable with does not need to be too difficult.
Under this scenario you make money when the stock price of the REITS appreciate plus any dividends that the REIT pays out from time to time.
Real estate crowdfunding became possible when legislation titled Jumpstart our Business Startups Act (“JOBS Act”) became effective in May 2016.
With the new legislation, smaller investors are now allowed to make a crowdfunding real estate investment that was never previously possible. As a result, a new niche industry was born around crowdfunding of real estate transactions.
Now with crowdfunding real estate you are able invest a relatively small amount in certain large private transactions that previously would have been off limits. When done well this type of investing will allow you to get attractive annual returns on your investment over time from these real estate deals
In many ways, owning a piece of a real estate crowdfunding transaction is similar to owning some shares of a stock in a company.
Under this scenario you make money when the value of property you invested in appreciates plus any excess cash flow distributed to owners over time.
Here are several crowdfunding platforms to consider if you are thinking about crowdfunding real estate transactions:
Fundrise – Fundrise is one of the first companies to do crowdfunding for real estate. They have raised more than $1.1 billion in debt and equity to fund approximately $5 billion in real estate transactions. Their minimum invest amount is very low at $1,000.
Prodigy Network – Prodigy Network has raised approximately $690 million of equity from 6,500 investors to support approximately $1 billion in real estate transactions. Much of their real estate portfolio is focused on New York City. Minimum investment at Prodigy Network is $10,000.
The answer depends on what type of investor you consider yourself. Only you can ultimately answer this question in consultation with your investment advisor.
Typically, as a general rule if you are a conservative investor where preservation of your capital is most important, you should stay away from investing in real estate.
However, new real estate investing options give investors new ways to diversify their portfolio while still allowing them to stay within their investing comfort zone.
If you are moderately or highly aggressive with your investment choices and are willing to take chances where you can lose some of your investment in the search for higher returns, then investing a portion of your investing capital into real estate can be rewarding.
And remember that investing in real estate can give you some tax advantages at tax time.
If you decide you are going to invest in real estate, which method outlined above is right for you?
All three scenarios above are viable ways to start investing in real estate successfully.
All have advantages and disadvantages so you will need to figure out which option best fits your lifestyle and risk tolerance.
As you are getting started investing in real estate, be sure to start investing with small dollar amounts and adjust those investment levels over time.