Real estate investing offers a great way to grow your savings and build wealth. While many people want to get involved in this possibly lucrative venture, the responsibilities that go along with owning property may be keeping them from acting on their interests. However, there are many options for investing in real estate that don’t include becoming a landlord.
Buy Real Estate ETFs
As mentioned in a previous post, an ETF is an exchange-traded fund that’s comparable to mutual funds in that they consist of stocks relating to a particular theme. However, unlike mutual funds, an ETF is traded publicly on the exchange. Vanguard’s VNQ is one such real estate themed ETF. This fund invests in REITs, or real estate investment trusts, which focus on stocks concerning commercial real estate, such as office buildings, hotels, and similar buildings.
Real Estate Mutual Funds
A more traditional route may be to invest in real estate mutual funds, which provide the possibility of growth without the high risk. DFREX is a favorite in this category, partly because it offers lower fees than other funds. Additionally, DFREX consistently performs well. The fund shows great promise for future gains, because it’s supported by decades of professionally driven research. Nobel Prize winners help to develop the fund’s strategy.
Invest Directly in REITs
This is another option for investing in real estate without taking actual ownership of any property. REITs are like funds in that they stick to a general theme, such as commercial real estate, so you can opt for whichever category appeals to you the most. If you choose to explore this option, do so with caution. The U.S. Securities and Exchange Commission (SEC) recently issued warnings against REITs that aren’t publicly traded. The agency highlighted a lack of liquidity, lack of value transparency, and high fees as factors that create unnecessarily high risk.
Invest with Commercial Real Estate Developers
These can be hotel corporations, resort or timeshare operators, or commercial contractors. By buying stock in these types of organizations, you can benefit from their growth without having the responsibility of buying property yourself. You will have to thoroughly research each company to ensure you’re making a sound investment, but, otherwise, this can be a promising alternative.
These are just a few ways you can invest in real estate without getting your hands dirty. Most people live lives that are too busy to add maintaining a rental property to their schedule, so these options let you reap the benefits of real estate investing more freely. As your money grows, you may find more opportunities for investing in real estate centric funds, stocks, and companies.
There are two ways investors make money in real estate: renting and selling for profit. Of course, the savvy investor can use both methods, even on the same property. Here we will go over some details of each method.
It should be emphasized that whether renting out a property or selling for raw profit, the importance of location can’t be overemphasized. The fact is that nearly any model of residential or commercial building can be replicated in many locations. However, the local amenities, culture, atmosphere, weather, or historical value cannot be duplicated. It is such factors that give rise to widely different prices and rents for otherwise identical structures.
Cash Flow: Rent
When renting, the first priority is attracting and retaining tenants. Generally, home-like rental properties or long-term commercial leases are a better option than short-term rentals that, admittedly, fetch a comparatively higher monthly rental. This is because vacancies take their toll and are bad for cash flow. Make sure to specify clear lines of responsibilities for tenants and the property owner. Maintenance, repairs, utilities and tax responsibilities accrue as costs to the property owner, so make sure that rental cash flow at least matches maintenance and other necessary expenditures.
Fix and Flip
Buying low and selling high is the holy script of investing. When buying real estate, beware that the purchase price essentially traps liquidity upon sale completion and for as long as it takes to renovate and resell the house. Also consider the opportunity cost of other income-producing activities, including renting, that the property owner could be doing. Such opportunity costs can add up, but if the buyer were to completely outsource the “fix” to others, the added cost would reduce or even eliminate the profit margin upon resale.
Note that both methods of making money from real estate entail unexpected costs along the way. Vacancies, irresponsible and toxic tenants, as well as competing units can take the steam out of anticipated cash flow from rental properties. Costly repairs, illiquid funds, and all-in marketing and resale costs can deflate profit margin from fix-and-flip properties. Consider the time and expertise required for each investment method and pick whatever works best. Real estate can be lucrative, but is not risk-free.
If working with a real estate appraiser feels like a frustrating and complicated matter, you’re not alone. There’s a reason it feels as though your appraiser is keeping something from you and that’s because he or she is keeping secrets. Here are a few things you probably didn’t know about your appraiser.
- Appraisers are Under Pressure
When the housing bubble burst a few years ago and created the Great Recession, mortgage lenders weren’t the only ones that took the heat. Appraisers also came under fire and the Dodd-Frank Wall Street Reform and Protection Act of 2010 now requires the government to keep a closer eye on all real estate appraisers. This is why the process is so much more complex and takes more time.
- Appraisers are No Longer Local
Those same reforms have created a situation in which appraisers are often sent to regions with which they have no familiarity. Since they don’t know the markets that are local to the properties they’re appraising, their estimates may be either too low or too high. This can keep a homeowner from getting the true value for their home and, conversely, can prevent a buyer from affording a home that should be within their range.
- Who Does the Appraiser Really Work For?
In a normal home-buying scenario, the buyer pays the fee for the appraiser, which can fall anywhere within the $350 to $500 range. Even so, the appraiser doesn’t work for you and his reports go directly to the lender. This means that neither the buyer nor the seller will likely see the appraisal firsthand. According to federal law, you have to be given a copy of the appraisal, if you submit a written request for it. However, most people aren’t aware of the law, so they never see the appraisal for which they paid.
- Always Get a Second Opinion
It can be beneficial to get an appraisal of your own in advance, so you’ll have something to compare to the official appraiser’s findings. This can be fairly simple by asking your real estate agent to deliver a broker’s price opinion. While your lender may not accept the broker’s opinion in place of the appraisal, it does provide that point of reference. A difference in estimates can end up saving you as much as $20,000 on a home purchase.
Appraisers won’t tell you everything about their jobs. This is partly because they have to react to pressure from banks and that affects every appraisal. By staying alert and seeking outside advice, you may be able to better ensure your appraisal is fair and on point with the area market.
The most obvious way to capitalize on the current booming housing market is to invest in traditional real estate opportunities. However, there is a myriad of other ways to grow your wealth through real estate by going through less risky back channels. Here are a few ideas to get you started:
EXPLORE NEW HOME CONSTRUCTION: Limited inventory of existing homes has led to an even bigger boom in the new home construction sector. Real estate experts expect this trend to continue for decades to come, making this industry sector a safe bet for your investment dollars.
PUT MONEY INTO REAL ESTATE FUNDS: As the stock market continues to see unprecedented growth, many financial experts are recommending investing in both real estate focused exchange-traded funds (ETF), as well as real estate specific mutual funds. By diversifying your accounts across a wide range of real estate markets, you will mitigate risk and have the opportunity to jump into emerging global housing markets.
LOOK ONLINE FOR OPPORTUNITIES: In today’s high tech market, digital is king. The real estate industry has not been left out of this trend and it seems like new online real estate companies are popping up every day. To capitalize on this emerging market, it would be wise to look into investing your real estate dollars into commercial and residential markets while receiving cash flow dividends in return.
INVEST IN A REAL ESTATE SPECIFIC COMPANY: Savvy investors often look to bypass the traditional real estate investments, instead choosing to place their funds into companies focused on real estate. Some examples of this type of company would be classic residential real estate companies, resorts, and timeshares.
REAL ESTATE INVESTMENT TRUSTS: These REIT’s are a popular way to put your money into this strong housing market without having to hold any physical property. This strategy is also an ideal way for novices to the field of real estate to get their feet wet and learn about the market without taking on the risk of buying property or having to learn how to be a property manager. Because REIT’s are required by law to provide a minimum of 90 percent of their taxable income to shareholder dividends, investors are guaranteed cash flow.
Mark Twain famously advised, “Buy land, they’re not making it anymore.” For most of modern history, this has been sage advice. Now, more than ever, following this advice can often lead to big investment returns.
The stock market has seen a nine-year run up. Many experts expect a correction. Cryptocurrency has been hot, but it’s speculative and risky. Bitcoin and its brethren are no place to park money you are counting on for the future. What if you want more safety but a decent, predictable return?
Real estate investing provides the perfect solution. It provides real returns without the risk of a chunk of your cash disappearing overnight. However, many potential investors fail to realize that you can get started in real estate with as little as a few hundred dollars.
As noted in an article on Penny Hoarder, real estate starter portfolios, such as the Fundrise Starter Portfolio, have investment minimums of just $500, at a time. Investors buy shares of a diverse real estate portfolio that encompasses rental properties, land investments, commercial real estate, and other large projects. Investors have access to a dashboard that shows the properties they are invested in and their performance. The Fundrise Starter Portfolio pays a quarterly dividend and enjoyed an 11.44 percent gain in 2017.
For small investors who want direct ownership, raw land offers big opportunities. The price is generally cheap, and so is the ongoing costs of ownership, as explained by Fortune Builders writer JD Esajian. Property taxes can be as little as $100 per year. You are free to develop the land or sell it at a profit. Many raw land deals can be funded with just a few thousand dollars or less. Buyers should always beware if the land comes with any covenants or restrictions and consider only buying land unencumbered by a homeowners’ association. For example, a neighborhood association could restrict certain types of development or require development by a certain date. They can also prevent you from selling your land or force you to sell it.
Those enjoy being hands-on do well with fix-and-flip investment properties. Many lenders provide loans based on the after repaired value, which, if you find the right property, can mean $0 down and even cash in your pocket to fund the improvements. If being this hands on doesn’t interest you, you can get in on the lending side. Many private lenders are seeking investors with investment minimums of just a few thousand.