Buying and owning real estate is an investment strategy that can be satisfying and lucrative. Unlike investors in stocks and bonds, prospective real estate owners can use leverage to buy a property by paying a portion of the total cost upfront and then settling the balance, plus interest, over time. REITs allow you to invest in real estate without physical real estate. Often, compared to mutual funds, they are companies that own commercial real estate, such as office buildings, retail spaces, apartments, and hotels.
REITs tend to pay high dividends, making them a common investment in retirement. Investors who don't need or want regular income can automatically reinvest those dividends to further increase their investment. At my financial planning firm, we focus on serving clients in their 30s and 50s, and we see firsthand how popular the idea that real estate is a way to get rich (relatively) quickly. That would be nice if real estate were an obvious passive income generator, as many people think it is.
The problem is that the narrative doesn't align with reality. Of course, you could outsource the headache and use a licensed property management company. That's a viable option and one that is used by many serious real estate investors. But that leaves even less room for profit, considering that standard property management fees can account for 10% of your monthly rent.
While there are some simplified formulas, such as the 1% rule, which suggests that the rent you could charge on a rental property must equal 1% of the purchase price of that property to be a good deal, they are too generalized to be strict and fast rules for success. Bloggers and podcasters tend to make real estate investing seem deceptively simple, so it's easy to think that you can handle everything on your own. Unless you feel very passionate about investing in real estate and are willing to devote time, energy and money to such a massive project, it's probably best to build your assets through other avenues. Other real estate investments, such as REITs, have had average annual returns of up to 11.28%, according to Nareit, even a vanilla S%26P 500 ETF has provided average annual returns of around 10% in the long term.
Although land speculation is often a form of short-term real estate investment, a smart investor who understands the needs of the industry he is courting (oil and gas miners, farmers, home builders, or commercial developers) can make a considerable profit by choosing the right plot of land at the right price at the right time. Fundrise, Crowdstreet and DiversyFund, three popular platforms, offer a range of different options depending on how much money you have to invest, from real estate funds to individual real estate projects. Many of these online platforms allow you to invest in specific real estate development projects, rather than large generic portfolios of properties. Real estate can be a solid investment and one that has the potential to provide a stable income and generate wealth.
It is important for the success of a new real estate investor to build and foster these types of relationships. But they come at the price of higher volatility and lower diversification benefits, since they have a much greater correlation with the general stock market than direct real estate investments. This may include details on the assets acquired and management's perspective on the viability and performance of specific real estate investments and as an asset class. If you don't have DIY skills, consider investing in real estate through a REIT or crowdfunding platform rather than directly in a property.
While investing in real estate with rental properties offers greater earning potential, it also requires a lot of effort on your part. Ask any experienced real estate investor who manages properties with tenants about their unexpected to-do list, and they'll tell you about repairs that greatly exceed the budget, evictions and entanglements with the court system, or other horror stories about rents gone wrong. Remember, you can invest in real estate through the marketplace through REITs or real estate investment trusts. Like day traders who are a far cry from buy-and-hold investors, real estate flippers are a completely different breed of buy and rent landlords.
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