One well-liked strategy for increasing wealth and diversifying a portfolio is real estate investing. The real estate market offers various options for investors with different risk appetites, time commitments, and capital availability.
This article examines many real estate investment strategies, each with special advantages and things to keep in mind.
Real Estate Investment Trusts (REITs)
REITs let you invest in real estate without the need to hold an actual property. To invest in this, you need to find a reliable REIT management firm that can generate income for you over the long run. These businesses are the ones that manage, own, or finance real estate and generate revenue in a variety of sectors.
Like stocks, investors can purchase shares of REITs and get dividends from the rental income the properties provide. REITs provide liquidity, diversification, and a relatively low entry cost compared to direct property ownership.
Many Americans are investing heavily in REITs due to their steady income-generating revenue system. A report from the National Association of REIT (Nareit) shows that an estimated 168 million Americans owned REIT stock in 2023. Compared to 2022’s estimated 150 million, this shows a 12% growth in terms of investors.
This growing investment is largely driven by the continuous growth of the real estate market and the vast options available. REITs in America control around $4.5 trillion worth of real estate assets. In fact, professional experts think that the sum will keep going up in the future. Thus, it gives investors a sense of protection and sustainability.
Are REITs a Good Investment Now?
Investing in listed REITs presently makes sense for three main reasons. One of the causes is that, in the past, at times of diminishing growth and yields, REITs have outperformed equities and bonds. In addition to the limited supply and robust demand, REIT prices are far below the historical median.
Rental Properties
One of the traditional ways to invest in real estate is to own rental units. This is buying residential properties and leasing them to regular contributors who provide you with money. A consistent cash flow is provided by rental revenue, and over time, property appreciation can raise the investment’s worth.
However, maintaining the property, interacting with renters, and taking care of maintenance concerns take time and effort as a landlord. For those who prefer a hands-off approach, hiring a property management company can be a viable solution.
If you are looking for an investment in rental properties, it is important that you consider the demand in the market. For example, a Statista report shows that single-family homes were the most preferred type of property by tenants in 2022.
Moreover, the report also revealed that around 100 million people lived in a rental home. This shows that many people live in rental properties, and you can use this as an opportunity to generate a steady income.
Real Estate Investment Groups (REIGs)
For people who wish to own rental properties but don’t want to deal with the difficulties of management, there are REIGs. REIGs work by doing the initial investment to get a set of apartment blocks or condos. They then bring in the investors and let them put their money into purchasing any number of units within the buildings.
The company operating the REIG manages all aspects of property management, from maintenance to finding tenants. Investors benefit from the rental income and property appreciation minus the operational headaches. This method requires careful selection of the group to ensure trust and performance.
What Does an Investment Group Do?
An investing club is a collection of people who pool their money to make investments. Investment clubs are often set up as partnerships; following a review of several assets, the group votes by majority to purchase or sell.
How Does a REIT Differ From a REIG?
Since REITs are listed on major stock exchanges, they are often more liquid than REIGs. While REITS are managed by a qualified team that makes all investment choices, REIGs may provide investors with greater direct influence over their investments.
Furthermore, REIGs are subject to fewer regulations and are not as regulated as REITs. SEC laws require REITs to disclose financial information and payout 90% of their profits as dividends. However, that is not the case with REIGs, as they have more flexibility in terms of transparency and payout.
House Flipping
Purchasing homes, giving them updates, and then reselling them for a greater price is known as house flipping. If used properly, this strategy can result in large returns, but there are hazards involved. A great sense of undervalued properties, a solid grasp of remodeling expenses, and familiarity with the local real estate market are essential for successful property flipping.
It’s a more hands-on approach that demands time, effort, and often a substantial amount of capital. Flippers must be prepared for potential setbacks, such as unexpected renovation costs or longer-than-expected selling times.
However, this is not always profitable unless you do some research, invest time, and pick the right properties for flipping. Data from a 2023 report states that around 308,922 single-family homes and condos were flipped that year in the US. While the number may seem huge, it represented 29.3% from 436,807 in 2022. In fact, it was the largest year-over-year drop since 2008.
As mentioned, you need to conduct thorough research to find the right properties for flipping. The location is an important factor to take into account when conducting your study. A property’s location has a significant impact on both its present and future selling value.
Therefore, you need to find a property that is located close to essential amenities, such as:
- Schools
- Parks
- Local markets
- Public transportation, etc.
You can also use Google to find locations that are best for flipping homes. For example, a CNBC article mentions a report from Joybird that lists the best states for this process.
Several factors, including the median home price, days on the market, property tax rate, etc., were considered for the listings. It was found that Louisiana was the best state for house flipping, followed by Michigan, Alabama, and Delaware.
Is House Flipping a Risk?
One of the largest dangers is that you might not be able to recoup the whole cost of the repairs and improvements. Additionally, you might not be able to sell the home for a profit. When flipping properties, you also need to be mindful of the possibility of fraud and scams. Not every home is a suitable fit for a flip.
Real Estate Limited Partnerships (RELPs)
The advantages of REITs and REIGs are combined in Real Estate Limited Partnerships or RELPs. In a RELP, one partner (the general partner) manages the property, while the others (limited partners) provide capital.
Limited partners earn a share of the income and profits without being involved in daily management. This investment method offers a hands-off approach with potentially high returns. It does, however, include some dangers, including illiquidity and dependence on the knowledge and moral character of the general partner.
What Is the Difference Between a REIT and a RELP?
A RELP is a private investment vehicle, while a REIT is a publicly listed business that holds income-producing real estate. REIT shareholders get dividends from investment income, mostly rent. Distributions of capital gains from the sale of assets are also given to them. Unlike real estate direct participation programs (DPPs) and real estate limited partnerships (RELPs), REITs do not pass on losses to shareholders.
Numerous investment options are available in real estate, each with unique benefits and drawbacks. Whether you prefer a steady income from rentals or the accessibility of REITs, there’s an option to suit different investment goals and risk tolerances.
Making wise selections and succeeding requires fully researching each strategy and comprehending its subtleties. By exploring these different avenues, investors can find the right fit for their financial objectives and build a robust, diversified portfolio.