Real estate has long been considered a reliable and profitable asset class. From rental income to property appreciation, there are various ways to generate income and grow your wealth through real estate investments.
This article will cover several methods to invest in real estate, including direct property ownership, real estate investment trusts (REITs), crowdfunding, and more.
1. Direct Property Ownership
One of the most traditional ways to invest in real estate is through direct property ownership. This method involves purchasing a property, such as a residential or commercial building, and generating income through rent, leasing, or property appreciation. Just to give you context, the average housing sales price of a home in the US was $535,800 in Q4 20221.
There are several advantages to this approach, including:
- Control over property management and decision-making
- Potential for passive rental income
- Tax benefits, such as depreciation deductions and mortgage interest deductions2
However, direct property ownership also comes with some drawbacks, such as the need for a large upfront capital investment, ongoing maintenance and property management responsibilities, and the illiquid nature of real estate assets.
2. Real Estate Investment Trusts (REITs)
Real estate investment trusts (REITs) are companies that own, operate, or finance income-producing real estate properties3. By investing in a REIT, you can indirectly own a diversified portfolio of properties without the hassles of direct property ownership.
Some of the advantages of investing in REITs include:
- Liquidity: REITs are traded on major stock exchanges, making it easy to buy and sell shares.
- Diversification: Investing in a REIT can help diversify your investment portfolio by providing exposure to various property types and geographic locations.
- Dividends: Most REITs distribute at least 90% of their taxable income to shareholders in the form of dividends, providing a steady income stream.
To get started with REITs, you can open an account with a brokerage platform like Trading 212, Interactive Brokers, or DEGIRO, which offer user-friendly interfaces and low fees.
Trading 212 offers commission-free trading on stocks and ETFs, including REITs, which can save you money in the long run. Moreover, Trading 212 has a well-designed mobile app that allows you to monitor and manage your investments on the go4.
Interactive Brokers offers a wide range of REITs from multiple exchanges across the globe. The platform’s advanced research tools, extensive market data, and low trading fees make it a strong choice for investors who want to dive deep into REIT analysis and optimize their trading strategies5.
As for DEGIRO, it provides access to a wide range of REITs listed on various international exchanges. The platform’s low trading fees and transparent pricing structure make it an attractive option for cost-conscious investors. DEGIRO also offers a web-based platform and a mobile app, allowing users to manage their investments with ease6.
Real estate crowdfunding platforms connect investors with property developers and owners seeking funding for their projects7. By pooling resources with other investors, you can participate in larger deals with lower upfront capital requirements.
Some benefits of real estate crowdfunding include:
- Accessibility: Crowdfunding platforms enable investors to participate in deals with lower minimum investments than traditional real estate investing.
- Diversification: Investors can spread their investments across multiple projects, reducing risk.
- Passive income: Depending on the project, investors can earn income through rental revenue, interest, or profit-sharing.
However, real estate crowdfunding can also be riskier than traditional investment methods, as project success depends on the developer’s ability to execute and the overall market conditions.
4. Real Estate Investment Groups (REIGs)
Real estate investment groups (REIGs) are organizations that pool investor funds to purchase, manage, and sell properties8. By joining an REIG, you can benefit from professional property management and take advantage of group purchasing power.
Some advantages of REIGs include9:
- Hands-off approach: REIGs typically handle all property management responsibilities, allowing investors to earn passive income without the day-to-day hassles of property ownership.
- Networking opportunities: REIGs provide a platform for investors to connect, share knowledge, and collaborate on deals.
However, REIGs often charge management fees, which can reduce your overall returns.
5. Real Estate Limited Partnerships (RELPs)
Real estate limited partnerships (RELPs) are investment structures in which a general partner manages the property, while limited partners provide capital and share in the profits10. RELPs can offer:
- High returns: Depending on the success of the project, limited partners may enjoy a substantial return on their investment.
- Tax benefits: RELPs often provide favorable tax treatment, such as pass-through income and depreciation deductions.
- Limited liability: Limited partners are only liable for the amount they invested, reducing their financial risk.
However, RELPs also come with certain disadvantages, such as reduced control over the property and a lack of liquidity due to the partnership’s finite lifespan.
Investing in real estate can be a lucrative way to grow your wealth and diversify your investment portfolio. From traditional methods like direct property ownership to more innovative approaches like crowdfunding, there are multiple avenues to explore in the real estate investment landscape.
Regardless of your chosen investment method, it’s essential to conduct thorough research, assess your risk tolerance, and seek professional advice when needed. By taking the time to understand each investment option, you can make informed decisions that align with your financial goals and help you build a prosperous real estate portfolio.
- Average Sales Price of Houses Sold for the United States by FRED Economic Data
- 8 Tax Deductions For Homeowners: Your Breaks And Benefits by Rocket Mortgage
- Real Estate Investment Trust (REIT): How They Work and How to Invest by Investopedia
- Trading 212 Review by Investing in the Web
- Interactive Brokers Review by StockBrokers
- DEGIRO Review by Investing in the Web
- Real Estate Crowdfunding: What It Is And How It Works by Rocket Mortgage
- Real Estate Investment Group (REIG): Definition and How They Work by Investopedia
- How REIGs Work and if They’re Right for You by The Motley Fool
- Real Estate Partnership by Business Insider