Simple Alternative Ways to Invest in Real Estate
The real estate industry is one of the safest sectors you can invest in. For one, in most periods, property prices and the land underneath them always go up. Rental real estate projects also provide an excellent source of passive income to the developers. So, which are the best alternatives to invest in real estate?
Real Estate Investment Trusts (REITs)
A Real Estate Investment Trust (REIT) is a company that operates in the real estate sector but has some tax-friendly policies attached. Most REITs are publicly listed in the New York Stock Exchange (NYSE) and Nasdaq.
Unlike other companies, REITs have several requirements that they must meet. For example, they are required to return at least 90% of their annual profits to shareholders through dividends. They are also required to make at least 75% of their revenue from rent, interest, or mortgages.
Since REITs are publicly traded companies, the barriers to entry are relatively minimal. Furthermore, brokers like Robinhood, Schwab, and TD Ameritrade don’t charge a commission to invest, and they don’t have a minimum balance.
REITs tend to be attractive because of the huge sums of money they pay to their shareholders every through dividends. On average, the annual dividend yield of REITs is about 5%, which is substantially higher than the S&P 500 average of about 2%.
There are several types of REITs:
Healthcare REITs. These are companies that focus on the healthcare sector, like hospitals. Examples are Ventas and WellTower.
Retail REITs. These are firms that own malls and other shopping centers. They include Simon Property and Federal Realty.
Tower REITs. These are companies that house cellphone towers for companies like AT&T and T-Mobile. Examples are American Tower and SBA Communications.
Prison REITs. These are firms that provide prison services to the federal government and states. Examples are CoreCivic and GEO Group.
There are other types of REITs that you can invest in, like residential, office, mortgage, public storage, and forestland.
Some of the benefits of investing in REITs are their regular dividends and their low barriers to entry.
Real estate service providers
In addition to REITs, another way of investing in real estate is to invest in public companies that have a close relationship with the real estate sector. As such, while these companies don’t build or operate homes and other properties, they have a close relationship with the sector. Fortunately, there are hundreds of such companies:
Real estate agents are businesses that market and sell homes and offices. Some of these publicly traded firms are RE/MAX, Realogy, and CBRE.
Real estate tech firms include companies providing a variety of real estate technology services. They include Zillow, RealPage, and RedFin, among others.
Builders are the companies that build and sell homes. Some of the best-known are Lennar, PulteGroup, and Toll Brothers.
Home appliances, like Home Depot and Lowe’s, sell products that are used across the property sector.
As you can see, these companies are not directly in the real estate sector. They neither build nor manage them. However, to some extent, their returns are usually tied to the sector. Like REITs, these companies are easy to invest in since all you need is a free account and some cash.
For these publicly-listed companies, another way of investing in the sector collectively is through an exchange-traded fund (ETF). Some of the top ETFs for real estate are the Vanguard Real Estate Index Fund and the iShares US real estate fund (ETF). These funds are also offered by all brokers, including Robinhood and Schwab.
Online real estate investments
The internet is changing how people do things, including how they invest. For example, it is possible to invest in peer-to-peer lending through centralized platforms like LendingClub and Prosper and Decentralized platforms like Aave and Compound.
Most importantly, it is possible to invest in real estate through several companies like RealtyMogul and Fundrise. RealtyMogul is a company that has raised more than $45 million. It helps companies and individuals to invest in several commercial real estate projects. The company does all the due diligence and only posts those that meet a certain criteria.
Fundrise, on the other hand, is the company that has raised more than $55 million. It works by raising money online and investing them in real estate. It has bought investments worth more than $5.5 billion since it was founded. It charges its investors $0.15 for every $1,000 you have invested. It also charges a 0.85% annual management fee, which is relatively affordable.
In addition to these, other top companies you can use to invest in real estate online are Diversyfund, Groundfloor, and Streitwise, among others.
The benefit of using these companies to invest in real estate is that they are easy to use. The disadvantage is that the returns can be small, and since they are new firms, they have not been tested for long.
Another alternative way of investing in real estate is through what is known as flipping. This is simply the process in which you buy a house, upgrade it, and then sell it at a higher price. Flipping is quite a traditional method that is used by thousands of Americans to make money. Technology companies have also made it easy to sell homes. And in the past few years, companies like Zillow and Redfin have also started to offer the service.
Flipping works in a very simple way. You find a cheap home, buy it, hire an interior designer and do the necessary fixes, and then sell it at a profit. You can buy the house using popular platforms like Zillow and Trulia. You then market them using the same sites and get leads.
The advantage of flipping is that it can be highly rewarding. It is possible to double your money within a few months. The challenge is that selling the refurbished home could take time.
The real estate sector is a multibillion-dollar industry with many areas. It can also be highly rewarding, especially if you do it right. In this article, we have looked at some of the best alternative ways of investing in the industry. Which one do you recommend?
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