One of the best ways to build an asset profile that is consolidated and fool-proof is to diversify your portfolio over multiple asset classes and plan far, far ahead. There are plenty of financial vehicles and assets where you can diversify your investment, including stocks, bonds, ETFs, mutuals funds and more. And there are physical assets that gain value over time. Real estate is one of the latter.
Here’s our guide on investing in real estate and getting your foot in the real estate market.
Real Estate Investing Options
Owning rental properties, or a single rental property is one of the few investments that offer investors truly passive income. There are many different ways you can invest in rental property or properties and many different methods you can use.
The benefits of investing in or owning a real estate rental property include:
- Steady rental income streams/cash flow.
- Great way to build net worth.
- Rental properties increase in value over time.
- Many tax-deductible expenses.
The downsides of investing in real estate rental properties include:
- It can be hard to get started with real estate investing.
- Vacancies will result in reduced monthly income, while you still need to maintain the mortgage payments.
- Managing tenants can become time-consuming.
Rental properties also include commercial real estate, where the landlord owns office buildings, warehouses, or other commercial real estate property and rents it out to businesses. Commercial properties can offer higher returns but come with more risks.
Real Estate Investment Groups (REIGs)
Real Estate Investment Groups are the typical investment avenue for people looking to get into real estate investing without owning property and managing them themselves. REIGs are groups of property or real estate investors who pool their money, resources and knowledge towards buying rental properties that provide monthly income. The group decides the specific investment strategy. Investing in an REIG includes investing in shares of the properties the REIG is currently holding.
The benefits of REIGs include:
- You don’t need as much starting capital to get into real estate investing.
- You don’t need to gain personal real estate knowledge and experience.
- You are investing in a wide range of real estate property types.
- Time is spread between members.
The disadvantages of using an REIG include:
- Group politics and human relationships may affect the performance of the REIG.
- They may charge a membership fee that will reduce your returns.
- Agreement terms can make it difficult for you to pull your money out.
Another standard method of investing in real estate is flipping houses or properties. House flipping, also called property flipping or house hacking, is the process of buying a property, home, or unit, then renovating, improving, or remodeling it to sell it for a profit. Flipping/house hacking can also be done with rental properties where the property gets purchased and renovated to increase the expected rental price.
Flipping properties usually requires a substantial time investment from the investor, and it can be perilous for first-time real estate investors.
The benefits of real estate flipping include:
- Can provide fast returns.
- Builds capital in a shorter period of time.
- Can help create leverage in the real estate/property market.
The downsides of house flipping/real estate flipping include:
- Not easy to do for new investors.
- Requires extensive real estate market, housing, and market value knowledge.
- A hot real estate market can be volatile, and you may lose money on a renovated property.
Real estate Investment Trust (REIT)
Real estate investment trusts (REITs) are a great option for investors looking to build exposure in real estate without going through the traditional transaction process. Real estate investment trusts are companies that own, operate, or finance income-generating real estate properties.
Real estate investment trusts offer steady income streams for investors but lack the capital appreciation that directly investing in real estate provides. Most real estate investment trusts are publicly traded stocks and can be bought or sold on most major exchanges or the stock market.
The benefits of real estate investment trusts include:
- Improves liquidity.
- Higher diversification.
- Stable source of cash flow.
The downsides of investing in real estate investment trusts are:
- Low capital appreciation and growth.
- Dividends are taxed as income.
- Subject to market risks.
Using Leverage For Your Real Estate Investments
Leverage uses borrowed capital to increase the potential return from an investment. Leverage in real estate is debt plus a small amount of equity in the form of a down payment to purchase the investment property.
Real estate prices fluctuate, just like any other asset class. Hence, it’s important to use leverage wisely to avoid taking on too much debt, then being stuck in a difficult position when property prices drop or tenants vacate units.
There are many ways to measure real estate returns when using leverage, such as gross yield, cap rate, annualized return or IRR.
Using too much leverage (for example, putting the smallest amount of equity into a property) can result in the investor having to deal with extra thin margins that don’t leave too much room for any variables, unexpected costs, or emergencies. It’s important not to think that past performance guarantees future results. Using more conservative down payments helps manage risk over a longer period.
Always remember that while real estate is a favorite investment class for seasoned investors, you should weigh the pros and cons before deciding to invest in real estate. Try to think of the possibility of worst-case scenarios and how you would navigate them.
While real estate provides an excellent hedge against inflation, it still comes with its risks. We recommend between 5-15% allocation in your portfolio to diversify while still having space for other assets.
At Hedgeful, we invest in REIGs and REITs to provide investors with steady streams of income/dividends without needing to physically own real estate. This approach keeps our real estate offering flexible while providing investors with solid returns and a highly diversified portfolio.