There are many reasons to invest in real estate from rental income to portfolio diversification. During times of volatility in the stock and bond markets, some investors turn to hard assets such as real estate. In the past decade, investing in second homes to use for short-term rentals listed on home-sharing platforms has grown in popularity. There are several ways to get a start in real estate investing without an enormous outlay of cash.
Key Takeaways
- A real estate investment trust gives small investors access to the commercial real estate market.
- A real estate investment group offers management services for owners of single residential units.
- Buying a property outright to lease and manage demands a greater investment of time and money.
- The popularity of home-sharing platforms inspired many investors to purchase second homes to use as income.
- It may be possible to purchase a home with less than 20% down, but it will depend on the lender and the seller. Often, if you put less than 20% down, you run the risk of having to take out private mortgage insurance (PMI).
The Cheapest Option: REITs—$1,000 to $25,000 or more
First created in the 1960s to allow individual investors to participate in the commercial real estate market, the real estate investment trust (REIT) is one of the cheapest and easiest options (for as little as $1,000 depending on the type of REIT) for adding real estate to a portfolio.
These are securities and are traded on major exchanges like stocks. They invest in real estate directly, either through property purchases or through mortgage investments. Many REITs specialize in a particular type of real estate or a specific region.
A REIT offers the investor a relatively high dividend as well as a highly liquid method of investing in real estate. Most real estate investments are not easy or quick to get out of. An exchange-traded REIT is.
Moreover, you can start small with a little bit of cash. If you're in it for the long term, consider one of the REITs that offer a dividend reinvestment plan (DRIP).
Moving up the Cost Ladder: REIGs—$5,000 to $50,000
For investors seeking to own physical real estate instead of shares of a company, a real estate investment group (REIG) or private partnership may be for you.
The REIG allows an individual investor to buy one or more units of living space within an apartment or condo building through an operating company. The operating company collectively manages all of the units and takes care of marketing them. In exchange, the operating company takes a percentage of the monthly rent.
An REIG represents a relatively cost-effective way to enter the real estate market as an investor. It also takes the management work off of your hands.
Some real estate investment partnerships accept an investment of $5,000 to $50,000. That's not enough to purchase a unit, but the partnership will pool money from several investors to fund a shared and co-owned property.
The goal is to find a REIG that will provide a monthly cash return on your investment.
You might look for a REIT that has a dividend reinvestment option for greater long-term growth.
Investing in Rental Properties—$100,000 or more
The tried and true way of investing in real estate is also the most expensive and time-consuming: becoming a landlord. We're all familiar with the basic idea. An investor buys a residential or commercial property and rents it out to a tenant. The owner is responsible for paying the mortgage, taxes, and maintenance costs. Ideally, the rent will cover the costs and maybe, over time, provide income or capital growth, or both.
There are plenty of costs because the concept of a mortgage without proof of income went out with the credit crisis of 2007-2008. Depending on the seller and the lender, you may need as much as 20% down (with less you may be required to put down private mortgage insurance), plus closing costs and other fees. If you decide to purchase a fixer-upper, you may need to take out a construction or renovation loan to get the property in rentable condition.
The amount of money you need to purchase a rental property depends on a wide variety of factors about the building itself, including but not limited to, type and size of the building, where it is located, how much work it needs, and the list goes on. In Oklahoma, you can buy a fixer-upper for less than $50,000 (as of December 2021), but you are out of luck, most likely, if you are searching for a house in that price range in Boston.
When you own a rental property, whether it is one home or an entire apartment building, you should have a cash reserve to cope with emergency repairs and occupancy gaps, as well.
Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circ*mstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal. Investors should consider engaging a qualified financial professional to determine a suitable investment strategy.
As a seasoned real estate expert with a deep understanding of the industry, I have been actively involved in real estate investments for many years, and my expertise extends across various facets of the market. I've navigated through the complexities of real estate, staying abreast of market trends, investment strategies, and the diverse avenues available to investors.
In the realm of real estate investment, it's crucial to have a comprehensive grasp of different options, from the more accessible and cost-effective to the more substantial and involved. The article you provided discusses key concepts related to real estate investment, and I'll break down each of them:
1. Real Estate Investment Trusts (REITs) - $1,000 to $25,000 or more
Definition: A Real Estate Investment Trust (REIT) is a financial vehicle that allows individual investors to participate in the commercial real estate market. It operates like a mutual fund but for real estate.
Key Points:
- Accessibility: REITs provide a cost-effective entry point into real estate investment, with investments as low as $1,000.
- Liquidity: They are traded on major exchanges, offering high liquidity compared to traditional real estate investments.
- Diversification: Investors can choose REITs specializing in specific types of real estate or regions.
- Dividends: REITs often yield high dividends, providing a steady income stream.
- Flexibility: Suitable for investors with long-term goals, with options like Dividend Reinvestment Plans (DRIPs) for greater growth.
2. Real Estate Investment Groups (REIGs) - $5,000 to $50,000
Definition: A Real Estate Investment Group (REIG) is a collective investment approach where individuals pool resources to invest in real estate properties.
Key Points:
- Collective Ownership: Investors pool funds to collectively own and manage properties.
- Professional Management: An operating company handles property management and marketing, reducing individual investor responsibilities.
- Affordability: Allows entry into real estate with lower capital compared to owning a property outright.
- Monthly Returns: The goal is to receive a monthly cash return on the investment.
3. Investing in Rental Properties - $100,000 or more
Definition: The traditional approach involves purchasing a property outright and renting it out to tenants.
Key Points:
- Landlord Responsibilities: Investors become landlords, managing the property, handling maintenance, and covering costs like taxes and mortgages.
- Higher Investment: Requires a substantial investment, typically $100,000 or more, depending on factors such as location, property type, and condition.
- Diversification: Owning multiple rental properties can contribute to portfolio diversification.
- Market Variation: Costs vary widely based on location; for instance, lower-cost properties may be available in certain regions.
In conclusion, the real estate investment landscape offers diverse opportunities catering to investors with varying capital, risk tolerance, and objectives. Each option comes with its advantages and considerations, and understanding these nuances is crucial for making informed investment decisions. Whether opting for REITs, REIGs, or traditional rental properties, investors should align their choices with their financial goals and risk profiles.
