When most people think about investing in real estate, they immediately presume it means purchasing a home. But, buying apartments, condos, and single-family homes are not the only options when it comes to investing in this asset class. Additionally, purchasing physical property is expensive, and comes with a significant amount of added responsibility. Thankfully, if you’re looking to capitalize on an asset class that often behaves independently of the stock market, meaning that it can provide diversification to most portfolios, there are a few different options to consider. The following explains three separate real estate investment strategies investors should explore as an alternative to owning physical real estate:
Real Estate Mutual Funds:
There are many real estate mutual funds available to individual investors. Each come with their own level of diversification, investment minimum, and fee structure. Additionally, they generally offer lower barriers to entry and high liquidity, allowing ordinary investors access to a professionally-managed fund. A real estate mutual fund can include shares of stock in a number of REITs as well as a number of real estate companies. While liquidity is often viewed as a benefit, the public markets’ high efficiency and transparency can come as a drawback, making it challenging to earn scaleable returns. It’s also important to keep in mind that since mutual fund assets are publicly-traded, they’re more susceptible to fluctuations in the public market.
A real estate investment trust (REIT) is a company that owns, operates or finances income-producing real estate. REITs were established to allow all investors access to purchase shares of commercial real estate portfolio’s and receive dividend-based income. A benefit that was previously reserved for high-net worth individuals or larger financial intermediaries only. There are several types of REITs: Equity REITs – Buy, own and manage income-producing real estate. The income is primarily from rental revenue that the real estate generates. Mortgage REITs – Lend money to real estate owners/operators through mortgages/loans or purchase mortgage-backed securities. They generate revenue primarily from the interest on mortgages/loans. Hybrid REITs – Uses a blend of both the equity and mortgage REIT investment strategies. In addition, REITs may be further classified based on how they’re bought and held: Publicly Traded – Publicly traded REITs are listed on national securities exchanges like Nasdaq or the NYSE, where they are bought and sold, and are subject to the volatility of the stock market. They are registered with and regulated by the Securities and Exchange Commission (SEC) and are subject to many filing requirements. Public Non-Traded – Public non-traded REITs (sometimes referred to as non-listed REITs) are required to publicly report financial earnings information to the SEC, however, their shares are not traded on any national stock exchange. Which means that shares of non-traded REITs are not directly affected by stock market volatility, but they are less liquid. Private – Private REITs are not registered with the SEC, and their shares are not listed on any public exchanges. This means that even though shares of private REITs are not subject to stock market volatility – like non-traded REITs, these companies do not offer investors full financial transparency.
Real Estate Crowdfunding:
Crowdfunding raises small amounts of money from a large amount of people in order to fund a project or venture. When it comes to crowdfunding as a way to raise capital, initially, crowdfunding was only accessible to accredited investors – those who have a net worth of at least $1 million excluding residence or have at least $200,000 of income or $300,000 of combined income if married. However, after May 16, 2016, non-accredited investors were given access to invest through crowdfunding platforms too.
For real estate, there are two different ways you can choose to invest through crowdfunding: equity crowdfunding platforms and real estate crowdfunding. Equity crowdfunding is where you, and many other investors invest into a corporation in exchange for equity shares. The company then uses the pooled funds for its stated purpose, like to purchase real estate. This type of crowdfunding is often used for start-up companies which requires an abundance of due diligence. Real estate crowdfunding is where multiple investors pool their funds to acquire either real property or a mortgage note secured by a commercial property. Either way, you own a direct proportionate share of that asset.
Choose The Best Option For You:
Investing in individual properties requires a lot of capital and involvement by you. And, if you’re looking to reap the benefits of real estate without having to deal with the hassle of tenant troubles, evictions, foreclosures, mortgages, and more, the options outlined above can allow you to achieve that. As with any investment, there is risk and you have to determine what kind and level of risk you’re comfortable with. However, once you have a good understanding of your investment goals and how real estate can play a part, you can confidently invest and make real estate a portion of your portfolio for both short-term and long-term investment goals.
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Disclaimer: This information is for educational purposes only, and is not intended to represent investment, tax, or other financial advice. Please consult a qualified tax professional regarding the applicability of the above to your personal situation and the specific requirements and limitations of the above.
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