The ability to own property is a value that Americans hold true to their beliefs of independence and prosperity… damn that’s deep. So much so, it’s stated in the fifth amendment of our Bill of Rights. Owning a home is a sign of hard work and dedication to have a place you can call your own. Unfortunately, depending on where you live, this can be a hard goal to accomplish. Considering you often need 10-20% down payment, and monthly mortgage payments can be considered “rent” you’re paying the bank, the ability to buy a home takes saving, time, and income growth.
What if you wanted to start investing in real estate sooner? Sure, you may not have the money right now, but at least you can put your money to work and hope for a higher return on investment to cash out when it’s time to buy your first home. There are options for you that exist in REITs, Real Estate crowdfunding, and real estate index and mutual funds.
3 Ways to Start Passively Investing in Real Estate
1. Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) are shares in individual companies that own or finance income producing real estate. When you invest in a REIT, you are an investor in a commercial property along with many other people. A commercial property is something like an office building, hospital, retail strip mall, campus dorm, or hotel. What’s cool about REITs is that they pay the income they make off a property directly to the shareholders on an annual basis. That means that you’ll see dividends on these much quicker than you would with traditional stocks. By law, REITs have to distribute 90% of dividends to shareholders each year. These are some nice returns compared to volatile traditional stocks.
REITs give passive investors a chance to capitalize on an industry that traditionally only consists of corporations and high net worth individuals. There are few barriers to entry since they trade on traditional stock exchanges. Since REIT dividends are paid out from rents and leases on a property, the income you get is quite predictable. Just like landlords collect rent each month, you’ll collect dividends each year for fractions of the initial cost. The big downside is that the real estate market directly impacts REITs so in a market crash or bubble like 2008, there is potential to lose money.
2. Real Estate Crowdfunding
Crowdfunding has really taken off due to the Jobs Act passed in 2012 that opened up investment opportunities to the overall public. Prior to this, accredited investors who make over $200,000 a year were the only people allowed to contribute to companies or start-up ideas. The $200,000 a year threshold was so the common folk like myself weren’t robbed of all their net worth if investments went sour. Cue real estate crowdfunding, Kickstarter like funding for real estate.
Real estate crowdfunding is an alternative to REITs because investors have more control of the specific properties they are investing in. Also, crowdfunding has much less volatility than REITs. This is because the cost of construction on a single project is more or less fixed. REITs involve putting your money in a pool of many different properties where some could make money, while others lose money. While anyone with enough initial capital can get in on this, this is fairly new so those with experience in commercial real estate will have more knowledge on what investments are more likely to have the best profit margins.
Investors who want to join the crowdfunding hype do not get away from risk. Crowdfunding is not as regulated as REITs are so the 90% required annual dividends you get with REITs go out the window. On the other hand, if you’d like to invest $10,000 in a property development, you don’t have to deal with the burden of managing the property and collecting rent from tenants because the crowdfunding company does all the work for you. Companies include Fundrise, Realty Mogul, and Crowdstreet just to name a few.
3. REIT ETFs and Index Funds
Wait… didn’t we just go over these? No, this stuff is kind of confusing, let me explain. While REITs are individual stocks you can buy, they are the shares of a single company. REIT ETFs (exchange-traded funds) and index funds track the entire real estate sector. They are less risky and come with less fees in the same way traditional stocks come with more fees than ETFs and index funds. See? Not too hard to understand.
For novice investors, these REIT ETFs and index funds are your best bet for exposure in these markets. These are what I put in my portfolio to get a little taste of this investment opportunity that has done well over the last few years. More experienced investors that know the market should dive into REITs at specific companies as well as real estate crowdfunding. Understanding that since REIT ETFs and index funds are more passively managed, the potential for high returns aren’t as great as traditional REITs or crowdfunding properties, but if you aren’t experienced, this is just right for you.
Take a Chance on Real Estate Investing
Real estate is a great avenue to get invested in. There are people that own properties full-time and pay others to manage them. Buying and holding properties to rent out to tenants is one of the oldest forms of passive income. If you’re like me and not quite there yet, at least start doing research as to what type of properties you’d like to own.
One blogger that really inspires me is Paula Pant, a woman in her early 30’s who owns seven properties and is financially independent. I talked about her briefly in my post on top personal finance podcasts to listen to. She runs a blog at AffordAnything.com and is very transparent with how she makes money off her properties.
The road to wealth is not attained overnight. It takes hard work and dedication to your craft to build a life of financial freedom. Once you are invested in something, you’re going to pay more attention to it. Anything that’s free won’t hold your attention as much as something you actually pay for. Invest a small amount in REIT index funds or ETFs and you’ll track where your money is going. It’s a beautiful thing.
I personally made REITs a part of my portfolio to see how the ROI compares with the individual stocks and index funds I have. As a young investor, my philosophy is to take calculated risks. If they don’t work out, I have plenty of time to recover. Given that REITs trend up as inflation goes up, they have the potential to pay out consistent, moderate returns.