Everything You Need to Know About Real Estate Investing
One great thing to know about real estate investing is that you no longer need to be an expert. Thanks to the real estate investing approaches today that offer simplified processes, investors with all types of initial capital and desired involvement levels can confidently pursue the diversification of their portfolio. While due diligence is still required to truly understand the nature of any real estate investment, the process has been rejuvenated by technology to alleviate unnecessary frustration. Let us walk you through the types of investing with best practices on how to choose which method is best for your portfolio.
Why Invest in Real Estate?
• Investing in real estate is a great way to expand and strengthen your portfolio- The power of diversification can jolt a worn, conservative portfolio by utilizing the blending of a variety of asset classes that work together to reduce exposure to risk. By investing across multiple asset classes, an investor is still exposed to risk, but it is more of a systematic risk. When a person invests across stocks, bonds, cash, real estate and other classes, they are able to reduce their portfolio volatility because different assets move up and down at distinct rates and intervals. Since the real estate market cycle differs from the stock market and bond market cycles, bull and bear phases in real estate may not coincide exactly with those in other classes. So by adding real estate to a portfolio, an investor can potentially create more consistency and improve overall portfolio performance.
• Real estate often offers the potential of high returns, when compared to other asset classes- Real estate investments can provide both constant income flow as well as long-term growth, and historically have provided higher returns than most other asset classes. Real estate investments boast profits from dividends, interest income and/or capital appreciation. According to the National Association of Realtors (NAR), real estate value increased by an average of six percent per year over 30 years in the U.S., until the unprecedented decline that began in 2008. While past performance is not indicative of future returns, historically real estate has proven to be a profitable long-term investment.
Top 3 Ways to Invest in Real Estate
An investor will want to match up their unique portfolio and goals with the best method of investing for them.
- Direct Purchase
The most traditional way to invest in real estate is through directly purchasing a residential or commercial property. When using this method, the investor has complete control over the project, but with it comes the responsibility of property management and maintenance as well as a personal investment in the tenants. Often times, investors calculate-in the cost of a property manager in order to alleviate some of the direct responsibility and stress of the investment.
Another method in real estate investing that truly alleviates the investor of the responsibilities of managing a property is REITs, real estate investment trusts. REITs were originally created in order to enable small investors to invest in real estate without a large amount of capital and without the direct responsibilities of property maintenance. REITs typically invest in a portfolio if real estate investments, and their equity shares are often registered securities traded on a public exchange. Investors can purchase shares in a REIT the same way they would buy a publicly-traded stock. REITs take advantage of a special provision of the U.S. tax code, that allows them to avoid double taxation if 90% of earnings are distributed to shareholders. REITs therefore typically offer high dividends, compared to other listed securities.
Crowdfunding is a new, growing method for qualified individual investors to participate in private estate investing. It allows a large number of individuals with a small amount of capital to collectively invest in properties. This process has broadened the accessibility of real estate investments to a wider group of investors while helping the developers quickly attract capital for their projects. While the process is currently limited to accredited investors with an annual income of at least $200,000 or a net worth of at least $1 million, new regulations are on the horizon to open that door to an even bigger group of investors. And with the use of tech-enabled platforms, crowdfunding offers a seamless process from start to finish. While real estate has traditionally been limited to investments via private equity in a development company or through REITs, and was not always feasible as a direct investment for most individuals, crowdfunding is increasing the opportunity for both borrowers to reach investors and investors to reach real estate.
What are Historical Real Estate Investment Returns?
Historical returns are the past performance details of a type of investment. Investors, as well as analysts, review historical return information when they are trying to estimate future. The data is also used as a gauge for the amount of expected volatility in an investment; in other words, a way to account for the average unavoidable ups and downs. While there are many factors involved in selecting a real estate investment, with knowledge of the historical returns, an investor will then have a greater understanding of the typical risk and return ratio and will be in a better position to make decisions that benefit their personal portfolio. Historical data can be used as a tool to provide insight into how a market has traditionally reacted to a myriad of variables from economic cycles to world events, while keeping in mind never to assume that the future will be like the past.
Historically, both commercial and residential real estate investments have had a positive rate of return, and over the past twenty years have slightly outperformed the S&P 500 Index. Real estate can also be a useful tool in diversifying portfolio risk. However, it is still important that before investing, all of the available data pertaining to the potential investment is gathered and analyzed to help create a long-term or short-term investment strategy. Besides taking into account historical data, an investor must also navigate the current data that outlines the performance of real estate in the specific region of the potential investment property as well as information about upcoming developments and construction that might affect its worth.
What is the Criteria for Selecting Investments?
Whether an investor chooses to invest in real estate via REITs, crowdfunding or on their own, there are some basic criteria for selecting the investment that works best.
• An investor needs to be able to investigate the credibility of a fund or opportunity. This is where experienced and established crowdfunding platforms may be helpful, as they’ve conducted a level of due diligence in choosing and offering investments. If the investor chooses to purchase the property directly, they will be solely responsible for vetting the property.
• An investor needs to understand the liquidity of the investment as well as the return profile and fees. Investments such as REITs have a high level of liquidity whereas direct property purchases do not. The return on investment (ROI) is a figure that that will require the investor to gather all of the information and expectations of a property including fees, taxes and maintenance to figure out the percentage of the invested money that will be returned to them.
What are Some Common Mistakes to Avoid?
No matter what real estate investment route is chosen, there are a couple of common mistakes that should be avoided at all costs.
• The simple dismissal of researching an investment. It is understandable that an investor may be so excited about an opportunity that they want to jump right in and invest right away. It is important to remember that a lot of research is required to make an intelligent decision.
• Misunderstanding taxes. It is easy as a new investor in real estate to misunderstand the tax consequences of different types of investing. While one investment might have high returns, that money could be heavily taxed as income while other investment methods allow the investor to defer their taxes on gains.
Best Way to Get Started Investing in Real Estate? Talk to experts and work with reputable professionals.
The best way to get started with any real estate investment is to find reputable partners who you can trust. There are dozens of easily accessible platforms that use tech-enabled, user-friendly interfaces that guide you through all of the detailed information you may need to get started. Our platform at RealtyShares.com uses seamless technology to connect investors with private real estate investments and can fully navigate users through the process of crowdfunding, while a website like REIT.com can provide the answers to many questions an investor may have before investing in REITs. Whichever direction you choose for investing in real estate, the best first step is to be prepared.