Real estate can be a lucrative type of investment. However, if you’re buying property, initial costs can be high, meaning real estate has a higher barrier to entry compared to other investments. Luckily, there are several ways to invest in real estate beyond becoming a landlord. Here are four of the most common:
1. Purchasing a primary residence
Investing in a primary residence can be a great way to build equity and perhaps eventually sell for a profit. It’s also a good way to see if you’re comfortable being a homeowner and managing maintenance and repairs when necessary. However, it’s important to remember that, when you invest in a primary residence, your home is also your personal living space, so you’ll need to be comfortable with the idea of living there long-term. Additionally, the value of your home may not always go up – it could fluctuate if the market changes.
2. Buying a rental property
If you’re looking to generate income from your investment, buying a rental property may be a good option. Rental properties can generate income and you may even be able to sell for a profit in the future.
If you’re buying a rental property, you’ll need to be prepared to be a landlord, which means dealing with tenants and maintaining the property. Depending on your location, it may be challenging to find renters and, and, depending on the state of the home, repairs may be costly. There’s also the potential for vacancy periods, when you won’t be generating any rental income but will still be responsible for the mortgage, utilities, and general maintenance.
3. Investing in real estate funds
Real estate investment trusts (REITs) and other real estate funds can offer a more hands-off way to invest in the market. These types of investments let you buy shares (usually traded on the open market) in the trust. REITs lease space, collect rent on their properties, and typically give that income to shareholders as dividends. Because shares in real estate funds often cost less than a down payment, they can be a way to invest in real estate with a lower barrier to entry.
4. Going in with a business partner
If you don’t have the capital to invest on your own, or don’t want to take on all the duties of becoming a landlord, going in with a business partner can be a good way to get started investing in real estate. This arrangement can provide more stability, because each partner will typically contribute equally to the investment. It can also be a great way to share responsibilities and utilize each partner’s strengths and skills. However, it’s important to choose a partner you trust and who shares your vision for the investment.
Choosing how to invest
There are a few ways to invest in real estate, including buying properties directly, going into business with a partner, or choosing a real estate fund. Investing in real estate can help you build wealth over time, but it’s important to understand the risks and rewards of each option before you get started. Consider the options and responsibilities carefully before you choose whether you want to invest in real estate and how to move forward if you do.
No investment strategy can guarantee a profit or protect against loss. Specific sector investing such as real estate can be subject to different and greater risks than more diversified investments. Equity REITs may be affected by changes in the value of the underlying property owned by the trust. Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments.