It seems like a tricky time to get into real estate.
On one hand, the Federal Reserve expects to raise interest rates multiple times this year. Higher rates imply bigger mortgage payments — and that could hurt the real estate market.
On the other hand, consumer prices are rising at their fastest pace in 40 years. People are looking to preserve their purchasing power. And real estate is one of the most effective inflation-fighting assets.
As inflation rises, the cost of raw materials and labor needed to build a house goes up. And that’s one reason why you almost always see real estate prices rise during high inflation periods.
Well-chosen properties can provide more than just price appreciation. Investors also get to earn a steady stream of rental income.
But while we all like the idea of collecting passive income, being a landlord does come with its hassles: mowing lawns, fixing leaky faucets, and dealing with difficult tenants, among other headaches.
These days, however, you have a variety of options to invest in real estate without becoming a landlord.
REITs stands for real estate investment trusts, which are companies that own income-producing real estate like apartment buildings, shopping centers and office towers.
You can think of a REIT as a giant landlord: It owns a large number of properties, collects rent from tenants, and passes that rent to shareholders in the form of regular dividend payments.
To qualify as a REIT, a company must pay out at least 90% of its taxable income to shareholders as dividends each year. In exchange, REITs pay little to no income tax at the corporate level.
Of course, REITs can still experience rough times. During the pandemic-induced recession in early 2020, several REITs cut back on their dividends. Their share prices also tumbled in the market sell-off.
Some REITs, on the other hand, manage to dish out reliable dividends through thick and thin. Realty Income, for instance, pays monthly dividends and has delivered 115 dividend increases since it went public in 1994.
It’s easy to invest in REITs because they’re publicly traded.
Unlike buying a house — where transactions can take weeks and even months to close — you can buy or sell shares in a REIT anytime you want throughout the trading day. That makes REITs one of the most liquid real estate investment options available.
Also, your investment can be as little or as large as you want — be it $100 or $100,000. While buying a house usually requires a hefty down payment and a mortgage, you can buy shares in a REIT with as much money as you are willing to spend.
While REITs aren’t known as the hottest stocks in the stock market, some have delivered some eye-catching returns: In 2021, the FTSE NAREIT All Equity REITs Index — which tracks publicly-traded REITs in the U.S. — rose 41.3%, topping the S&P 500’s already impressive 28.7% gain.
The sector is also seeing increased consolidation. Last year, mergers and acquisitions among REITs totaled an all-time high of $140 billion.
In February, Blackstone announced that it would acquire rental apartment owner Preferred Apartment Communities (APTS) in an all-cash transaction valued at $5.8 billion. If big asset managers are making significant moves into the space, retail investors might want to pay attention.
Crowdfunding has become a buzzword in recent years. It refers to the practice of funding a project by raising small amounts of money from a large number of people.
These days, many crowdfunding investing platforms allow you to own a percentage of physical real estate — from rental properties to commercial buildings to parcels of land. Their popularity has been growing wildly because they cater to different types of investors with various budgets.
Some options are targeted at accredited investors, and some platforms allow them to participate in individual deals with minimum investments that reach into the tens of thousands of dollars. To be an accredited investor, you need to have a net worth of over $1 million or an earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the past two years.
If you are not an accredited investor, there are many options that let you invest small sums if you like — even $100.
Such platforms make real estate investing more accessible to the general public by simplifying the process and lowering the barrier to entry. Rather than putting tens of thousands of dollars toward the down payment for a house you want to rent out, you can invest the sum of your choice to buy shares in properties.
Some crowdfunding platforms also pool money from investors to fund development projects. These deals typically require longer commitments from investors and offer a different set of risk-reward profiles compared to buying shares in established income-producing rental properties. For instance, the development could get delayed and you won’t earn rental income in your expected time frame.
Sponsors of crowdfunded real estate deals usually charge fees to investors — typically in the range of 0.5% to 2.5% of whatever you’ve invested.
Picking the right REIT or crowdfunded deal requires plenty of due diligence on your part. If you are looking for an easier, more diversified way to invest in real estate, consider exchange-traded funds.
You can think of an ETF as a portfolio of stocks. And as the name suggests, ETFs trade on major exchanges, making them convenient to buy and sell.
Investors use ETFs to gain access to a diversified portfolio. You don’t need to worry about which stocks to buy and sell. Some ETFs passively track an index, while others are actively managed. They all charge a fee — referred to as the management expense ratio — in exchange for managing the fund.
The Vanguard Real Estate ETF (VNQ), for example, provides investors with broad exposure to U.S. REITs. The fund holds 166 stocks and has total net assets of $81.8 billion. Over the past 10 years, VNQ has delivered an average annual return of 9.6%. Its management expense ratio is 0.12%.
You can also check out the Real Estate Select Sector SPDR Fund (XLRE), which aims to replicate the real estate sector of the S&P 500 Index. It currently has 29 holdings and has an expense ratio of 0.10%. Since the fund’s inception in October 2015, it has delivered an average annual return of 10.6%.
Investing in real estate isn’t risk-free — far from it.
While owning real estate can help you keep up with inflation and earn a passive income, property prices don’t always go up. Tenants could also have trouble paying rent, so the income stream that landlords rely on can be especially lumpy.
That said, real estate has historically been one of the most reliable ways to build wealth — particularly during times of hot inflation. And today, investment vehicles like REITs, crowdfunding companies and ETFs make owning real estate even easier.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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