Real estate has the potential to be a compelling asset class that offers unique opportunities for both income and capital appreciation. The allure of real estate investing lies in its potential ability to generate passive income, tax benefits, and portfolio diversification. In this comprehensive guide, we’ll explore four types of real estate investment. We provide insight into their benefits, risks, and their potential fit within your investment strategy.
Online Real Estate Investing Platforms
Benefits:
● Diversification: Online real estate platforms offer access to a wide range of investment opportunities. This allows you to diversify your portfolio across different asset types and geographic locations.
● Lower Minimums: Many online platforms have low minimum investment requirements, making real estate accessible to a broader range of investors.
● Information for Individual Due Diligence: Online platforms provide extensive information about investment opportunities. This enables investors to conduct thorough due diligence before making investment decisions.
● Access Across Asset Types, Geography, and Sponsors: These platforms give you the flexibility to choose from a variety of investment options.
● Potential Tax Benefits: Some real estate investments on these platforms may offer tax benefits, such as cost segregation. This can help you determine whether income or capital appreciation is more important to your investment strategy.
● Professionally Managed: The properties you invest in are typically professionally managed. This reduces the burden of day-to-day property management.
Risks:
● Need to Do Your Own Due Diligence: While online platforms provide information and often do their own due diligence, investors are responsible for conducting their own due diligence. This can be challenging if you lack in-depth knowledge of specific geographic areas, property types or sponsors.
● Illiquid Assets: Real estate investments are generally illiquid, meaning they may not be easy to sell quickly and often have long hold periods.
● Lack of Control Over Timing of Exit: Investors typically have no control over the timing of their exit from the investment.
● Performance: There is a risk to the execution of the business plan, and actual performance may not meet project expectations due to a variety of factors ranging from macroeconomic trends, the expertise of the operator, and the local market performance
Non-traded Real Estate Investment Trusts (REITs)
Benefits:
● Low Minimums: Non-traded REITs typically have lower minimum investment requirements. This allows investors to access a diversified real estate portfolio with a relatively small investment.
● Diversified Portfolio: REITs pool investor funds to acquire and manage a portfolio of diverse income-producing real estate properties. For a low minimum, you are instantly diversified across multiple real estate assets.
● Choice of Investment Strategy: Investors can choose from different types of REITs depending on their investment goals.
● Professionally Managed: Properties within REIT portfolios are professionally managed by real estate developers. This reduces the need for hands-on property management.
Risks:
● Illiquid Assets: Many non-traded REITs do offer a share repurchase program. However these programs have limitations given the underlying real estate assets are illiquid so there may be substantial delays in executing repurchase requests.
● Underlying Real Estate Risk: The performance of non-traded REITs is directly tied to the performance of the underlying real estate assets.
● Limited Control Over Exits: Investors in non-traded REITs do not have control over the timing of property sales within the portfolio.
● Non-traded REITs are a suitable option if you’re looking for a lower-cost entry into the real estate market.
House Flipping
Benefits:
● Control the Exit: House flipping allows you to have full control over the buying and selling process. This enables you to determine the timing of your exit.
● Pick the Specific Asset: You can select the individual properties you want to invest in. So you have the flexibility to target assets that align with your investment strategy.
● Develop the Business Plan: You have the autonomy to develop and execute a business plan that aligns with your investment objectives.
Risks:
● All the Work Is on You: As a house flipper, you are responsible for everything. This includes identifying potential assets, managing renovations, and handling the sale of the property.
● All Eggs in One Basket: Your investment strategy is concentrated on individual properties. This can pose risks if the market turns against you or if a particular project doesn’t yield the expected returns.
● Risk of Market Fluctuations: House flipping can be affected by real estate market cycles. You must be prepared to navigate market ups and downs.
● House flipping can be a suitable choice if you prefer to have more control. Just make sure you enjoy the creative aspects of property renovation, and are comfortable with the associated risks.
Rental Properties
Benefits:
● You Are in Control: Rental property ownership provides control over your investment, including property selection, location, and asset class.
● Manage the Exit: As the landlord, you have the flexibility to decide when to sell the property.
● Choose Your Property: You can choose rental properties in areas that align with your investment goals.
Risks:
● Larger Check Size: Compared to some other real estate investment options, purchasing rental properties often requires a more substantial upfront investment.
● Harder to Diversify: It may be more challenging to achieve diversification when investing in individual rental properties.
● Tenant and Property Management: Owning rental properties comes with additional responsibility. Including managing tenants, maintaining the property, and handling potential issues such as vacancies, repairs, and property management.
Why Should I Add Real Estate to My Portfolio?
Real estate is considered a non-correlated asset class. That means it doesn’t necessarily move in tandem with traditional financial assets like stocks and bonds. Including real estate investments in your portfolio can reduce overall risk and enhance diversification.
Real estate investments can generate consistent rental income, making them a popular choice for income-focused investors. Rental properties and Real Estate Investment Trusts (REITs) may provide regular cash flow, helping to balance out your investment income.
Investing in real estate offers various tax advantages, such as deductions for mortgage interest, property depreciation, and potential tax credits. These tax benefits can reduce your overall tax liability.
Real estate is considered a hedge against inflation. Your real estate valuation tends to increase over time. So, real estate investments can preserve and potentially increase your wealth as the cost of living rises.
What Is Direct vs. Indirect Real Estate Investing?
Direct Real Estate Investing involves purchasing physical properties such as houses, apartments, or commercial buildings. Direct real estate investors are responsible for property management, including leasing, maintenance, and other day-to-day operations. This method offers more control but requires active involvement and potentially higher upfront costs.
Indirect Real Estate Investing involves owning shares or interests in real estate properties through financial instruments. Investors in these indirect methods typically have limited involvement in property management and enjoy more passive income. It’s a suitable choice if you prefer a hands-off approach or have limited capital to invest directly.
Is Real Estate Crowdfunding Risky?
Real estate crowdfunding involves pooling funds from multiple investors to collectively invest in real estate projects. While it offers a range of benefits, it’s crucial to acknowledge that all investments, including real estate crowdfunding, carry inherent risks.
Conclusion
Good real estate investment can be a valuable addition to your portfolio. There are various ways to invest in real estate, each with its unique benefits and risks. As with any investment, seeking guidance from a financial advisor or real estate expert is always a good idea. An expert can help you make informed decisions and build a robust real estate investment strategy.