You may already be familiar with investing in stocks — perhaps you own some or you’ve read some of our previous blog posts. However, investing in the stock market isn’t the only way you can make your money work for you. Real estate investing is a form of investing that has to do with the buying and selling of land or buildings.
REITs, also known as Real Estate Investment Trusts, are a form of passive real estate investing. REITs trade like stocks — you can buy and sell them whenever you please during normal trading hours. Unlike traditional forms of real estate investing, you don’t own a physical piece of real estate. Instead, you invest in a company that manages real estate and pays you a dividend. REITs are required to pay at least 90% of their income to their investors, which means you can expect a sizeable cash payment every month or quarter.
Another form of real estate investing is owning residential rental properties. In 2017, almost 36% of all housing units were rented. Renters are people who live in a property, but do not own it. Instead, they make payments to a landlord, the person who owns the property, every month. Rental properties allow investors to own a piece of property that generates monthly income whenever the renter makes a payment. Rental investing is a very common way to build wealth because, the property’s value should rise over time AND you’re making money as long as the property is occupied.
In addition to REITs and residential rental properties, flipping homes is another form of real estate investing. You’ve probably seen shows on TV where couples purchase a home, fix it up, and then sell it for a profit. That process is called flipping! Typically, investors purchase a home below market value. Then, they make improvements to the property — such as adding paint, new floors, or even a new roof — to increase its value. Finally, they sell the property for a price that is higher than cost to purchase and improve the house.
Commercial real estate is another form of real estate investing; however, it is a lot less common than those previously mentioned. Commercial real estate is the buying, renting, and selling of commercial land or buildings. For example, a warehouse or shopping mall may be considered a commercial property. Investing in commercial real estate typically costs more money do to permits, zoning, and property acquisition costs — but it’s not impossible!
The real estate market is very broad. In fact, the entire industry contributed $2.7 trillion dollars to the United States GDP, making real estate investing a no-brainer. A good investment portfolio is well-diversified, meaning its holdings vary from different types of assets. It is important to incorporate real estate into your investing portfolio because it can help provide balance in a sometimes-volatile stock market!