Your US Real Estate Investing Options – From Your Own Home To Property Funds

10 mins

Your US Real Estate Investing Options – From Your Own Home To Property Funds

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Why invest in real estate?

Heads up: this Pack is aimed at Finimizers in the USA. Click here if you'd like to dive into UK property.

A well-balanced investment portfolio generally contains your garden variety stocks and bonds and – if you’re feeling spicy – a mix of “alternative investments”. Much like the early aughts' musical genre of the same name, alternative is a bit of a catch-all. When it comes to investing, it covers everything from hedge funds, crowdfunding, and art to cryptocurrencies, private equity, and venture capital. They often offer the potential for higher returns – along with higher risks.

But there’s one group of alternative investments that has both a real-world utility – and, compared to others, comparatively low risk: real estate, or property.

Why invest in real estate? Because apartments and office blocks aren’t directly traded on an exchange, property values don’t fluctuate daily – making real estate a more “slow and stable” investment. And as the owner of a property, you stand to benefit from any rise in its value when it comes to selling, from the income it can generate if you rent to tenants – and, of course, from the utility you get from living in or using it yourself.

Interestingly, homeownership has a very strong cultural component. In other words, the American dream of owning your own home is not universal. While 65% of Americans are homeowners, in countries like France and Germany it’s fairly common to not own any property at all.

Buying a house isn’t the only way to invest in real estate. Some investors may prefer to invest in real estate via the stock market, buying shares in companies which own properties and act as landlords, generating income in the form of rent.

Because they’re listed companies, of course, the values of their stocks are subject to daily swings… But these companies are also “asset-backed” – i.e. they own real estate which investors can see and touch, which has a relatively stable value – and which the company can sell if it needs additional cash. That means their investors should be less likely to take flight in times of market turbulence than if they were backing, say, some tech companies whose assets aren’t as tangible (how do you touch a website?).

In an economic downturn, however, it’s worth remembering that real estate prices may fall as well as stocks’ – potentially hitting you with a double whammy.

Note: 2008 S&P 500 and house prices indexed to 100. (Source: Finimize, S&P Dow Jones Indices)
Note: 2008 S&P 500 and house prices indexed to 100. (Source: Finimize, S&P Dow Jones Indices)

How has real estate performed as an investment? Although house prices tend to tick up over time, US stocks have increased by more than average house prices over the past decade. But that measurement doesn’t take into account rental income, which makes up the bulk of real estate companies’ income. In fact, real estate stocks have risen by more than the stock market as a whole in the last decade – making them an investment well worth considering.

In this Pack we’ll look at the different ways you can get invested in the real estate market – and the pros and cons of each.

The takeaway: Real estate is an alternative investment class that can offer stability – and the potential for big returns.

How to invest

Not all real estate investments are equal. Depending on your goals as an investor, some may suit you more than others.

Traditional buying. The most obvious way to invest is to buy a property. Assuming the value goes up over time, you can sell it later for a profit. You can also buy property with the intention of renting it out (known as "buy-to-let"), which nets you some rental income on top of that resale value – as long as you’re making enough to cover the mortgage, and then some.

One of the key benefits of investing in real estate directly is control. As the owner, you decide the fate of your investment: if and when to sell, how much rent to charge, and what color to paint the front door. You also have the ability to generate rental income over time – and if you have long-term tenants, it’s a relatively stable source of income (one of the reasons buy-to-let is very popular among retirees). And, of course, if your property increases in value, you stand to make substantial gains if you choose to sell.

But the large down payment often needed to buy a house or apartment can be off-putting. While federal assistance can help make buying your primary residence very affordable, the conventional loans involved in buy-to-let purchases typically require a down payment of at least 5% of the property’s price – and if you want to avoid paying for mandatory mortgage insurance, that rises to 20%. An average property in New York City would therefore require a $250,000 down payment – too pricey for the average American, especially if you’re paying a mortgage to keep a roof over your own head. And then there are property taxes, as well as the cost and time spent looking after your tenants, to consider…

Buying via private funds. Instead of going at it alone, you could look into joining a private real estate fund – where a group of private investors pool their money to purchase a property and hire a company to manage it for them. But such funds aren’t very accessible to the average investor, with the large minimum amounts required precluding all but the wealthiest of individuals from participating.

And investors in real estate funds typically agree to having their money tied up for a set amount of time – so they can’t cash out whenever they want (making such funds an "illiquid" investment).

Buying via the stock market. A more liquid way to invest is through real estate investment trusts (or REITs). These were established in the US way back in 1960 to provide an easier way for people to invest in real estate – and many are listed on the stock market.

At least 75% of a REIT’s profits must come from real estate rental, mortgage interest payments, or property sales, and they’re required to distribute 90% of their taxable income to investors as dividends. This reliable form of income (tenants’ leases are often agreed for years ahead) can make REITs an attractive investment.

REITs typically own large portfolios of commercial real estate, providing investors with some diversification. But the specific types of properties they own are ultimately key to their performance as an investment. For example, a REIT focused on warehouses – vital infrastructure for booming ecommerce operations – may well have performed better in recent years than a REIT with lots of retail tenants whose brick-and-mortar stores are being frequented less and less by shoppers.

One thing to keep in mind, however, is that while publicly listed REITs may diversify your portfolio by adding real estate to the mix, they’re still stocks – and their values may therefore move in sync with wider stock markets from day to day. Nevertheless, REITs have historically provided stronger returns than owning real estate directly.

There are two main types of REIT to be aware of, which represent different approaches to investing in real estate. “Equity REITs” are what you might expect: companies buy properties, fill them with tenants, and collect rental income. “Mortgage REITs”, on the other hand, use their cash to buy or issue mortgages on properties and then collect income in the form of borrowers’ regular monthly interest payments.

These aren’t your only options though: in the next session we’ll look at the new kids on the block.

The takeaway: REITs are a more flexible way of investing in real estate – though they don't offer the control of traditional buying.

New ways to invest

Recent years have seen several upstart tech platforms looking to democratize access to real estate investing. Their services can be split into two main types:

  • Real estate crowdfunding lets investors purchase a fractional share of a property alongside others.
  • Real estate lending enables investors to club together and loan cash to a person or company, secured by a property that borrower owns.

Investors who own a share of a property – as with stocks – stand to make a profit when values are rising over a long period, along with a share of potential profits from rent (a bit like a stock’s dividend). Of course, ownership also carries the risk of losses if property values drop.

Investors who make real estate-backed loans lose the potential for windfall gains, but gain access to predictable returns over shorter periods – no matter whether house prices rise or fall. And if the lender defaults, the property can be sold to pay you back.

As well as opening up real estate investment to those without huge sums of money (or the time to look after tenants), the diverse bunch of new property investment platforms offer something for investors of diverse risk appetites. For example, some platforms let risk-comfortable investors buy into individual properties. Other platforms, meanwhile, allow investors to spread their cash across several properties, creating some diversification.

Many of these platforms champion their accessibility and affordability compared to more traditional options – you can invest in real estate with as little as $500, as opposed to the tens of thousands required to buy a home outright or to join private property funds.

That said, several new real estate investing platforms are aimed at relatively experienced property investors – and might not suit the average person. And as with the private funds mentioned earlier, you may have to agree to tying up your investment for a set period of time, meaning you won’t be able to withdraw funds immediately. Furthermore, you’ll forgo some of the control you’d otherwise have if you invested directly into a property.

The takeaway: Crowdfunding and lending platforms offer new ways to invest in real estate that may be more accessible to the average investor.

Things to consider before investing

Before you dive in, here are some of the major factors you should consider when you start investing in real estate.

Capital. How much cash do you have available to invest in real estate? Historically, you needed enough money for a down payment to begin your journey up the property ladder by purchasing a property directly. But today, there are platforms that enable you to become a real estate investor with much smaller sums – in some cases as little as $500.

Time. As with investing in general, you can choose to be very hands-on (a.k.a. active), hands-off (a.k.a. passive), or a mix of the two. Active real estate investment involves buying a property yourself, maintaining its upkeep, and managing tenants – as well as their often numerous demands. Passive real estate investors pay professionals to acquire and manage properties for them.

There’s also the compromise option of buying a property yourself – but paying someone else to deal with your tenants when the plumbing inevitably packs up.

Liquidity. Keep in mind when and how quickly you may need access to your money. With traditional real estate ownership, that could involve a protracted search for a buyer willing to pay what you’re asking. Certain private funds and investing platforms can also lock up cash for extended periods. REITs can be bought and sold easily – they’re highly “liquid” – which might better suit some investors.

Value. Depending on your age, goals, and appetite for risk, the amount of your portfolio that’s sensible to put into property can vary significantly. In practice, the vast expense involved in traditional ownership of bricks and mortar means it can easily end up accounting for the lion’s share of your investments. Even the uber-rich have a chunky 21% of their money tied up in physical property (excluding main and second homes), according to realtor Knight Frank’s 2019 wealth report.

That’s it! You’re home and dry. So shut the door, draw the blinds, and hunker down in front of the TV with a box set and a cold one.

In this Pack, you’ve learned:

🔹Real estate returns can outperform the wider stock market

🔹You can invest by buying a home yourself, but that requires a big down payment – and private funds have high minimums and lengthy terms

🔹REITs are designed to help regular people invest in real estate, though not all REITs are equal

🔹New real estate investment platforms offer an alternative way to invest.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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