How To Invest In Real Estate: Your Guide to Getting Started
Land is one of the oldest investments in the world — areas with bountiful resources have been contested and fought over for thousands of years. Everyone needs land, but there is only so much of it to go around.
On the surface, real estate investing sounds as if it might not be too complicated. You could buy some land or a house, sit back, and wait for the market to raise its value. However, once the various real estate market layers are peeled back, a different perspective emerges.
Before jumping into real estate investing, it helps to know more about this market segment and understand how properties are broken down into investments for modern investors.
What Is Real Estate Investing?
Real estate investing is more than buying land and selling it at a higher price. Instead, different types of investments are based on five property types:
- Undeveloped land
- Special use
You invest in real estate when you purchase a property or a security derived from property to generate returns. How you proceed depends on how you want to invest, how much money you have to invest and your risk tolerance.
Some of the more popular methods of real estate investing are:
- Purchasing and renting residential real estate
- Buying land
- Real estate investment trusts
- Real estate investment groups
- Crowdfunding sources
Physical Real Estate Investments
Most people are familiar with purchasing land or homes and selling or renting them for a profit. You take physical possession of the asset and work it to create income. This is real estate investing in its most basic form and typically includes buying, selling or renting the following types:
- Residential homes/rentals
- Historic properties
- House flips
The fun begins when you become involved with the different securities or companies that invest in real estate.
Real Estate Securities
Real estate investment trusts are companies that are formed to generate income from real estate of all types. REITs can consist of commercial and residential real estate, historic properties, or any of the other types of real estate.
The trusts are operated similarly to mutual funds because the properties owned by the trust are divided into shares and sold to trust investors. How they are divided, traded and managed depends on the REIT type. The property in the trust can be owned, operated or financed by the company and typically — but not always — focuses on certain types of real estate.
REIT Mutual Funds
The assets held by the fund are securitized and managed by the staff, then traded within the fund. You buy and sell securities from the fund managers instead of on an exchange.
REIT mutual funds trade like vanilla stock mutual funds — prices are not set until after the markets close, so mutual funds are generally traded outside of market hours. These real estate investments are excellent for investors who don’t have time during the week to trade. They can work with buy-and-hold strategies as well.
REIT exchange-traded funds are baskets of securities based upon underlying real estate assets. Traded electronically through an exchange on trading days, REIT ETFs provide an easily accessible and affordable way for you to invest in real estate.
REIT ETFs trade using real-time pricing, so they’re geared more toward investors who actively trade during the day.
A type of real estate investment with more risk, global REITs let you invest in foreign real estate. The risks of global REITs are numerous — in addition to the normal risks of real estate investing and investing in general, you’d need to understand the foreign policies, economic factors, taxes and global influencers of the countries that can be invested in.
Global REITs aren’t necessarily invested in physical real estate in emerging economies or foreign countries. Many are heavily invested in retail, development, residential and industrial properties, while others are invested in lodging and resorts.
Real Estate Groups
You can find real estate investment groups or partnerships to invest in. Although they require a significant buy-in, time and maintenance funds, there are three popular types.
Real estate investment groups, real estate limited partnerships, and real estate investment associations (also known as real estate investment partnerships) are all reasonably similar. They are formed by a group of people who pool their funds to purchase property for investment purposes.
Except for REIPs and REIAs, they are generally out of reach for average investors as they target wealthy individuals and financial institutions. REIPs and REIAs are usually formed for residential rental properties, such as apartment complexes. They can be found in cities throughout the U.S. Families, friends and sometimes organizations pool their resources and purchase real estate for income.
Real Estate Crowdfunding
Crowdfunding is making its way into everything. Online real estate crowdfunding platforms let you join in on the investing game for much less than you might need with one of the other investment types.
With crowdfunding, money is pooled together for usually out-of-reach investment types like commercial or larger residential properties. Buy-ins can be low and fees modest.
How Do You Start Investing In Real Estate?
There are several ways to get your hands on real estate for investing purposes. How you do it depends on the type of investment, your risk tolerance, your investing strategy and how much available capital you have. Here’s a look at options that are available.
Buy Into REITs
To get started with a REIT, you’ll need to find a broker that offers them. Vanguard, a popular broker, offers an exchange-traded fund that invests in stocks issued by the companies that own the properties. The Vanguard Real Estate ETF (VNQ) has assets in American Tower Corp., Prologis, Crown Castle International Corp. and many others.
Find a broker you’re comfortable with and learn about their REITs or related investments.
Find a Group To Invest With
If you’re interested in REIGs for commercial and residential properties, you can learn more about investing clubs in your area by searching for real estate investor associations online or networking with other investors in your area.
Rent Out a Room
If you already own a home and have an extra room, you can rent it out to generate more income.
Flip Investment Properties
If you have the financial means, you can purchase homes and get them back into condition to rent or sell. This is known as flipping and can be quite lucrative if you have the knowledge, money and time to put into it.
Join a Crowdfunding Platform
Crowdfunding might be one of the most accessible means of real estate investing besides REITs with a broker. CrowdStreet, Fundrise, PeerStreet, and RealtyMogul are a few of the crowdfunding real estate investing platforms available.
What To Consider Before Investing In Real Estate
Real estate is often touted as being the one investment that never loses value. However, this couldn’t be further from the truth. The financial crisis of 2008 was caused, in part, by real estate investors who became greedy. Mortgages were given to people who didn’t have the means to pay them back on a widespread scale, and financial institutions created securities from these mortgages, which had a very high risk of defaulting — and most of them did.
With that in mind, find real estate investments you can trust from brokers that are vetted and approved by the Securities and Exchange Commission.
If used wisely, you can use real estate in your portfolio to generate gains and hedge your other investment risks. You should be aware of the properties the investment vehicle uses and what fees you might be expected to pay.
Keep in Mind
It helps to understand that investing in physical real estate is much riskier than a security. Physical property is not a liquid asset, so if you need to get in and out of a position quickly, you should consider securitized investing methods such as REIT ETFs or mutual funds. If you buy a property and the market dives, you’re more than likely stuck with it unless you can stomach the loss.
REIT mutual funds have more liquidity than physical property but are less liquid than ETFs. Do your due diligence, and remember not to invest more than you can afford to lose.
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- Investor.gov. "Real Estate Investment Trusts (REITs)."
- Charles Schwab. "Global REITs: Why Invest in Global Real Estate?"
- U.S. News & World Report. 2021. "7 Best Real Estate Crowdfunding Platforms for Investing in 2021."