Many are the times when investors are looking to diversify their investment horizons, but are not sure whether venturing into real estate would be the best decision. Some consider investing in real estate assets to be highly risky, while others think it requires a lot of money and commitment. While part of this is true, here’s some good news about the highly lucrative housing market. There’s more to real estate than the traditional model of investing where you have to deal with commercial or residential tenants. In this post, we have put together four creative ways that you can use to expand your portfolio, increase your returns, and become a real estate mogul.
Invest in real estate investment trusts (REITs)
A REIT is a trust, association, or corporation that invests in real estate through properties, mortgages or both. They are listed on the stock market and traded like stocks. Typically, there are three types of REITs- mortgage REITs, equity REITs, and hybrid REITs.
Mortgage REITs invest in commercial and residential mortgages by loaning money for mortgages or purchasing existing mortgages and mortgage-backed securities. In this case, revenue is generated from the interest that accrues on mortgage loans. Equity REITs, which are arguably the most common type of REITs, invest in properties such as office buildings, shopping malls, hotels, and apartments. Here, revenue comes from the rents of properties they own or holdings they have a share in. Hybrid REITs are a combination of the two.
With this kind of trading model, all three types of REITs can expose you to the real estate sector without holding physical property. If you fancy real estate investing, but you’re strapped for time or don’t want to be actively involved, REITs could be an ideal option for you.
One more thing- non-traded REITs are risky due to their high fees, lack of liquidity, and lack of value transparency. For this reason, it’s wise to avoid non-traded REITs and purchase publicly-traded REITs instead.
Invest in real estate mutual funds
Just like REITS, mutual funds offer an easy and affordable way through which investors with limited capital can diversify their holdings. They provide a more liquid mode of investing in real estate without owning properties. Mutual funds are professionally managed funds that invest in real estate related stocks and bonds, or both. Investors purchase units or shares of the mutual fund, which are redeemed at a net asset value (NAV), usually calculated once every day. The current NAVs depend on the closing prices of securities listed in the fund’s portfolio.
The low costs of mutual funds, as well as their track records, make investors feel more confident about the potential returns in the future. Another key advantage of real estate investing through mutual funds is that their strategies are backed by valuable research from industry-leading economists and real estate experts.
Invest in real estate exchange-traded funds (ETFs)
An ETF is a collection of bonds or stocks in a single fund. Real estate ETF’s are similar to mutual funds or index funds in terms of diversification and costs. If you’re eyeing real estate as a potential investment, but also want to diversify and enjoy unparalleled non-correlation with other equities, then working with a real-estate themed ETF could be a smart idea. Vanguard’s VNQ and IYR are two examples of ETFs that offer investors targeted access to REITs and real estate stocks.
Invest in real estate focused deals or companies
There are dozens of companies that own or manage real estate assets without operating as investment trusts. The only difference is that you’ll have to conduct enough market research before finding them, and some might pay lower dividends compared to REITs. Examples of companies that focus on real estate could range from hotels and resort operators to commercial real estate developers and timeshare companies. Investing in or closing deals with such companies can be a lucrative way of venturing into real estate without breaking the bank.
If you’re planning to invest in real estate, keep in mind that there are several creative and more affordable ways of going about it. You only need to conduct enough research before committing to any of the above investment strategies.