A great deal of the wealth of the top 1 percent of Americans is built in real estate.
Aside from owning your home, it used to be that only the wealthy and well-connected were investing in real estate. Unless you knew the right people and were willing to put up a big chunk of money, there were relatively few methods for the average person to invest in real estate, aside from just buying properties and renting them out for income.
Real estate investment has, however, changed dramatically over the last couple of decades. Today, individual investors have access to many different real estate-related investments. Moreover, new platforms for investing in residential real estate (that don’t involve the headache of being a landlord) have also proliferated in the last few years.
Here are three ways for individual investors to make profits in real estate today.
Invest in REITS
Real estate investment trusts (REITs) are an increasingly popular option for real estate investing. You can purchase shares in a public REIT just like you buy mutual funds or stocks. The business model of a REIT is owning and/or developing income-producing assets in a particular segment of the real estate market. For example, you can invest in a REIT focusing on commercial real estate, maybe malls or office buildings, or a REIT specializing in residential real estate, like apartments or condos.
Many investment advisers suggest using REITs in your portfolio to balance out stock and bond funds and mitigate portfolio risk, as this asset class often does well when other investments are performing poorly.
Before investing in a REIT, make sure to understand how the trust is designed and how value is derived from its holdings. Keep in mind that the performance of a REIT is based on cash flow and profits from selling properties, and may not be impacted much by factors that typically drive the performance of stock and bond funds.
While most investment advisors today suggest considering real estate as an alternative investment, the majority suggest it should represent no more than 10-20 percent of your portfolio.
Take a Closer Look at Real Estate Investment Partnerships
Another way to invest in real estate is real estate investment partnerships. Current laws allow investment partnerships to be structured in a number of ways, including tenant in common projects, general partnerships, or limited liability partnerships (LLP) or limited liability corporations (LLC). These structures each have their own advantages and disadvantages, so always do your due diligence on your partners and potential liabilities before investing in a partnership.
Take a close look at how decisions will be made, and how managing partner/partners will be selected (and how they can be removed). Always insist on a written real estate partnership agreement, which should be reviewed by an attorney with experience in real estate transactions.
Limited liability partnerships are frequently established having an experienced property manager or real estate developer as the general partner. Investors are used to provide financing for the projects, and they are typically brought on as limited partners.
Diversify Your Portfolio with Peer-Based Residential Real Estate Platforms
You can also invest in residential real estate through peer-to-peer (P2P) lending platforms. Just a few years ago, almost all P2P lending platforms making real estate loans focused on commercial properties.
Fundrise (equity crowdfunding) was one of the first firms to offer residential real estate loan products, launching in mid-2014. SoFi has also recently begun mortgage underwriting. With SoFi, however, nearly all of their P2P home loans are for larger amounts to borrowers with excellent credit.
Other broader peer-based lending platforms based on residential real estate and mortgages that have launched recently include Elevate (UK), LendInvest (UK) and Income& (U.S.).
Academics argue the real estate investment sector has matured enough to become a new asset class along with stocks, bonds and cash. That’s why it’s not surprising that most investment advisors suggest real estate should be a substantial part of all larger portfolios today.