Real
estate can be a great way to invest. Property investments have excellent return
potential and diversify your portfolio to insulate you from recessions and
other adverse economic conditions. But what's the best way to invest in real
estate?
1.Buy a rental property
The
most obvious way to become a real estate investor is to buy an investment
property (or several). When I use the term "investment property," I’m
referring to a residential or commercial property that you plan to rent out to
tenants -- not a fix-and-flip, which we’ll cover later.
US real estate equity builder Kansas City Owning rental properties is an excellent way to invest in
real estate while building wealth and generating income. The return potential
is strong thanks to a combination of income, equity appreciation, and the easy
use of leverage when buying real estate.
However, owning rental
properties isn’t right for everyone, so consider these drawbacks before you
start looking:
Cost barriers: It can be very expensive to
buy your first rental property. Most lenders want at least 25% down for an
investment property loan and it’s smart to keep several months’ worth of
expenses in reserves.
Uncertainty: When it comes to rental
properties, vacancies happen and things break. While the overall return
potential can be great, rental properties have considerable short-term risk.
Time commitment: Even if you hire a property
management company, owning a rental can be a time-consuming form of real estate
investing.
2. Invest in a REIT or other
real estate stock
If
you’re not familiar, check out our introductory guide to REITs. But here’s the
quick version: REITs are specialized companies that own, operate, manage, or
otherwise derive their income from real estate assets. Many REITs trade on
stock exchanges, so you can buy them with the click of a mouse and very little
capital.
I’d
also put real estate mutual funds and real estate ETFs in this category. If you
don’t want to choose just one REIT, you can invest in a ready-made portfolio of
them. The Vanguard Real Estate ETF (NYSEMKT: VNQ) is one excellent example of a
real estate ETF that can help you get real estate exposure.
It’s
also important to mention that some real estate stocks aren’t classified as
REITs. Land developers and homebuilders are two other ways to invest in real
estate through the stock market.
3. Participate in a real
estate crowdfunding opportunity
US real estate equity builder Kansas City is an experienced real estate developer identifies an
investment opportunity. Typically, these involve one commercial real estate
asset and a value-adding modification. This could be as simple as restructuring
the property’s debt or as complex as a complete renovation. There's usually a
target end date when the developer plans to sell or refinance the property.
Instead of funding the entire project with their own money and bank financing,
the developer raises some of the necessary capital from investors like you in
exchange for an equity interest in the project.
4. Buy a vacation rental
A
vacation rental is different than a long-term rental property in a few key
ways.
On
the positive side, you may be able to use the home when it isn’t occupied. It
can also be significantly easier to finance a vacation rental, especially if it
meets your lender’s definition of a second home and you don’t use the rental
income to qualify. Finally, a vacation rental tends to bring in more income per
rented day than a comparable long-term rental property.
5. House hack your way to a
real estate portfolio
House
hacking is essentially a hybrid of buying a home to use as a primary residence
and buying a rental property. In general, the term refers to buying a
residential property with two to four units and living in one of the units
while renting the others out. But it can apply to buying a single-family home
and renting one or more of the rooms.
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