It seems like a difficult time to get into real estate.
On the one hand, the US Federal Reserve is expected to raise interest rates several times this year. Higher interest rates mean higher mortgage payments — and that could hurt the real estate market.
On the other hand, consumer prices are rising at the fastest rate in 40 years. People want to maintain their purchasing power. And real estate is one of the most effective investments in fighting inflation.
When inflation rises, the cost of raw materials and labor needed to build a home increases. And that’s one of the reasons why real estate prices almost always rise during periods of high inflation.
Well-chosen real estate can offer more than just a price increase. Investors can also earn a steady stream of rental income.
But while we all like the idea of accumulating passive income, being a landlord comes with its own headaches: mowing the lawn, fixing leaky faucets, and dealing with difficult tenants, among other headaches.
However, these days you have a variety of options to invest in real estate without becoming a landlord.
Invest in REITs
REITs stand for Real Estate Investment Trusts, i.e. companies that own high-yield properties such as residential buildings, shopping centers and office blocks.
You can think of a REIT as a giant landlord: it owns a large number of properties, collects rents from tenants, and passes those rents back to shareholders in the form of regular dividend payments.
To qualify as a REIT, a company must return at least 90% of its taxable income to shareholders in dividends each year. In turn, corporate-level REITs pay little to no income tax.
Of course, REITs can still face tough times. During the pandemic-driven recession of early 2020, several REITs cut their dividends. Their share prices also plummeted during the market sell-off.
Some REITs, on the other hand, manage to pay out reliable dividends through thick and thin. Realty Income, for example, pays monthly dividends and has made 115 dividend increases since going public in 1994.
It’s easy to invest in REITs because they’re publicly traded.
Unlike buying a home, where transactions can take weeks and even months to complete, you can buy or sell shares in a REIT at any time during the trading day. That makes REITs one of the most liquid real estate investment options out there.
Plus, your investment can be as small or as large as you want — be it $100 or $100,000. While buying a home typically requires a large down payment and a mortgage, you can buy shares in a REIT with as much money as you’re willing to spend.
While REITs aren’t known for being the hottest stocks on the stock market, some have delivered some notable returns: In 2021, the FTSE NAREIT All Equity REITs Index — which tracks publicly traded REITs in the US — rose 41.3%, hitting the The top of the S&P 500 is already posting an impressive 28.7% gain.
The industry is also experiencing increasing consolidation. Last year REIT mergers and acquisitions hit an all-time high of $140 billion.
In February, Blackstone announced it would acquire rental homeowner Preferred Apartment Communities (APTS) in a $5.8 billion cash transaction. If big money managers make significant moves into the space, retail investors might want to watch out.
Invest in an online crowdfunding platform
Crowdfunding has become a buzzword in recent years. It refers to the practice of funding a project by raising small amounts of money from a large number of people.
Today, many crowdfunding investment platforms allow you to own a certain percentage of physical real estate – from rental properties to commercial buildings to land. Their popularity has increased greatly because they appeal to different types of investors with different budgets.
Some options cater to accredited investors, and some platforms allow them to participate in single trades with minimum investments running into tens of thousands of dollars. To be an accredited investor, you must have a net worth of over $1 million or an income of over $200,000 (or $300,000 together with a spouse) in the last two years.
If you’re not an accredited investor, there are plenty of options that will allow you to invest small sums if you want – even $100.
Such platforms make real estate investing more accessible to the general public by simplifying the process and lowering the barrier to entry. Instead of investing tens of thousands of dollars to pay down a house you want to rent out, you can invest the amount of your choice to buy shares in real estate.
Some crowdfunding platforms also pool funds from investors to fund development projects. These deals typically require longer commitments from investors and offer a different risk/reward profile than buying stakes in established, income-generating rental properties. For example, development could be delayed and you will not receive rental income in your expected period.
Crowdfunded real estate deal sponsors typically charge investors fees — typically in the range of 0.5% to 2.5% of what you invested.
Invest in ETFs
Choosing the right REIT or crowdfunding deal requires a lot of due diligence on your part. If you’re looking for a simpler and more diversified way to invest in real estate, consider exchange-traded funds.
You can think of an ETF as a portfolio of stocks. And as the name suggests, ETFs are traded on the major exchanges, making them convenient to buy and sell.
Investors use ETFs to gain access to a diversified portfolio. You don’t have to worry about which stocks to buy and sell. Some ETFs passively track an index, while others are actively managed. They all charge a fee – known as the management expense ratio – in return for managing the fund.
For example, the Vanguard Real Estate ETF (VNQ) gives investors broad exposure to US REITs. The fund holds 166 stocks and has total net assets of $81.8 billion. Over the past 10 years, VNQ has achieved an average annual return of 9.6%. The administrative expense ratio is 0.12%.
You can also check out the Real Estate Select Sector SPDR Fund (XLRE), which aims to track the real estate sector of the S&P 500 Index. It currently has 29 holdings and an expense ratio of 0.10%. Since the fund’s inception in October 2015, it has delivered an average annual return of 10.6%.
The final result
Investing in real estate is not risk free – far from it.
While owning real estate can help you keep up with inflation and generate passive income, real estate prices don’t always go up. Tenants might also struggle to pay rent, so the source of income landlords rely on can be particularly lumpy.
That said, real estate has historically been one of the most reliable ways to build wealth — especially during times of hot inflation. And today, investment vehicles like REITs, crowdfunding companies, and ETFs make owning real estate even easier.
This article is informational only and should not be construed as advice. It is provided without any guarantee.