Types of Real Estate Investing: Which is Right For You?
By Space Coast Daily // October 16, 2020
Real estate investing may not be as sexy as buying shares of TSLA or some other up-and-coming company, but it’s still a great way to grow your wealth.
That being said, there isn’t just one way to invest in real estate. In fact, there are many different ways. In this article we will look at the advantages (and disadvantages) of each type.
Indeed, whether you’re going the buy and hold real estate route or something different, each type of real estate investing comes with its pros and cons. But, hopefully, you will be able to find one that works for you due to the wide variety.
Without further ado, let’s dive right into the list.
Owning Your Own Properties
Owning your own properties is probably the simplest form of real estate investing that everyone knows about. In this case, you would buy a single-family home or perhaps a duplex and rent it out to individuals or families. Using an affordable housing calculator can help find a property within your price range.
This can certainly be a nice way to start investing in real estate and can provide some decent cash flow. That being said, it can have its downsides as well. To start, you need the capital upfront to invest in the property, even if you can take advantage of home buying rebates.
That is especially true if you find yourself with tenants who are less than ideal. If they are delinquent on their rent or cause a lot of damage to the property, you as the landlord must address those issues. Make sure you’re familiar with how many missed payments before foreclosure if this is your first time owning a property.
Still, owning your own property does give you the greatest degree of control over your investment properties. If you are a DIYer and prefer to fix things yourself, then being a landlord is probably your best bet.
Plus, there are several tax advantages as you will be able to write off various expenses on your own properties. That isn’t the case with every method listed here.
You may have heard of house hacking before – even if you weren’t exactly sure what it is. This arrangement is a bit of a hybrid.
House hacking can take many forms, but it typically looks like buying either a duplex or a triplex, living in one of the units, and renting out the other(s). In some cases, people may choose to rent out spare bedrooms in their own house, but you may have to sacrifice some privacy in that case.
House hacking can serve to both create cash flow and also to help lower your mortgage (if you have one). In some cases, you could easily bring in more than the amount of your mortgage, meaning you essentially owe nothing and can even turn a small profit on top of that.
Of course, house hacking comes with all of the downsides mentioned in the previous section. Plus, if your tenants exercise particularly egregious behavior, it could be even worse if you are living on the other side of the wall from them.
This sort of thing doesn’t always happen, but it’s something to keep in mind. You would probably want to vet your tenants as thoroughly as possible if you were to go this route.
Using an Investment Property Marketplace
Using an investment property marketplace can make real estate investing much simpler (take a look at this Roofstock review as an example). Plus, it can make it worth considering for those who otherwise wouldn’t.
Why? Because they are geared toward investors rather than homebuyers. The result is that many of the normally separate parts of real estate investing are rolled into one seamless experience.
That includes things like financing, finding a property manager, and calculating investment projections.
Investment property marketplaces are great for those who want to start investing in real estate but lack either the time or the knowledge to take everything on themselves.
There is a small fee of course, but they are reasonable, especially when you consider how much simpler they make things for investors.
Real Estate Investment Trust (REIT)
REITs are a little different than the other investments mentioned so far. With a real estate investment trust, you don’t invest in specific properties; instead, you invest in a real estate company.
These companies own and operate various types of properties. They can be either residential or commercial properties, but they are typically large-scale properties – bigger than an individual investor would typically buy.
Investors buy shares in the company much like they would with stocks and then earn dividends in return. These shares usually have a high payout ratio, meaning the bulk of earnings are kicked back to investors.
Because these shares work much like stocks, you can actually buy shares on the open market on whichever brokerage you prefer. They also may be included in some ETFs and mutual funds.
Plus, shares in a REIT are liquid, so you can cash out at any time if necessary. That is one reason REITs can be more attractive than owning your own properties. The same goes for crowdfunded real estate (more on that shortly).
One of the biggest downsides to REITs is that as the investor, you have on say in what types of properties your investments are funding. If there is a particular type of property you prefer to avoid, your only option is to try to find a REIT that doesn’t deal with it.
Crowdfunded Real Estate
Crowdfunded real estate has some similarities to REITs in that you pool your money with others in order to fund large real estate projects.
The key difference with crowdfunded real estate is that you invest in specific projects rather than investing in a company. In other words, this addresses the downside to investing in a REIT.
In addition, crowdfunding can have higher returns than REITs since you are investing in specific projects. If the project is especially lucrative, investors will earn a pretty penny.
But sure enough, crowdfunding is not without its downsides. The biggest one is the fact that they are not liquid like REITs are. Although some claim to have a “redemption plan” that may allow you to withdraw your money early, in many cases, your money may be tied up for years.
Should You Invest in Real Estate?
Everyone’s finances are different, so it’s tough to give a blanket recommendation here. In general, though, real estate can be a great investment. It can provide some nice cash flow plus diversity for those who normally only invest in stocks.
And as we’ve learned in this article, there are many different ways to invest. In the past, investors didn’t have many options other than buying their own properties.
That is no longer true, however. These days, you can use an investment property marketplace, buy shares in a REIT, or put your money in a crowdfunded real estate project.
Of course, you always have the option of buying real estate “the old-fashioned way” as well.
However, you choose to invest, real estate can round out your portfolio nicely and help make it a little less volatile during uncertain times.