Whether you’ve been listening to money podcasts (like Listen Money Matters) or reading investment blogs incessantly to prepare yourself for the nightmare that is your holiday budget, you’re not alone.
I’ve recently been asked a bit about real estate and my own mindset when considering property as a long-term investment (and possible method of passive income) so I thought I’d take a moment to break a few of these opportunities down, and offer up some real estate investing tips.
Historically, real estate has been a stable investment. It’s a great method of diversification (here’s the breakdown of that ever-popular word), and thanks to some changes back in 2016 (which I’ll get into), it’s become much easier to explore as an investment option.
So, how do you know if it’s the right road for you? While it’s not a path you can cross with $2 in the bank, you can work up to a few interesting opportunities.
Let’s first talk about real estate in the context of my favorite topic: long-term investing…
What are REITs?
REITs, or real estate investment trusts, operate like any other stock. Investors pool their money to buy a share of commercial real estate (like this badass highrise in Miami) and then earn income from the dividends or a portion of the company’s earnings. Remember, when you get paid in dividends, you pay income tax on that money. REITs are traded like any other stock.
The 3 types of REITS:
Equity REITs: These are trusts (corporations or associations) that invest in properties like apartments, office buildings, shopping malls, and hotels. Revenue is made through rent.
Mortgage REITs: These are investments in residential and commercial mortgages. Meaning these ones loan money for mortgages, or purchase existing mortgages or mortgaged-based securities (MBS), which are basically like bonds, made up of home loans bought from issuing banks. Psst: If this sounds all-too-familiar, that’s because it is. MBS is a type of asset-backed security that was the leading man in the 2007-2008 mortgage crisis.
Hybrid REITs: Simply put, these are a combo of both equity and mortgage REITs.
Why is this helpful to you? Well, REITs are used to help diversify your long-term portfolio. Remember, it’s all in the long game. I’m a particular fan as many platforms offer relatively low entry costs. REITs in their traditional stock-like nature are highly liquid (you can get in and get out quickly) and are also pretty flexible.
This is a type of mutual fund (a portfolio of stocks, bonds and other securities) that primarily focuses on investing in securities offered by public real estate companies. They also invest in REITs. These investments give you the same professional portfolio management support.
The majority of these funds are invested in commercial and corporate properties. Some also include investments in land, apartment complexes, and agricultural space. Since these don’t trade, they’re a lot less liquid. Their main aim is appreciation (or the rise in the value of securities in the portfolio).
Why is this helpful to you? While REITs are the path to follow if you’re looking for liquidity and have shorter-term investment goals (think: that house you can’t stop following on Zillow), Real Estate Funds are appealing when you want to play the long game and watch your investment appreciate over time.
Ok, so the two we covered above are the traditional classes of real estate investments. But, there’s also now a new form of REIT investing called, crowdfunding real estate investment.
Crowdfunding Real Estate is probably exactly what you think it is. In 2016, the Title III clause of the 2012 Jumpstart Our Business Startups (JOBS) Act was put into effect for crowdfunding. This clause allows non-accredited investors of any size to pool their money together to buy multi-family units, commercial properties, or bundles of single-family homes.
Some platforms like RealCrowd or CrowdStreet take on the same ‘crowdfunding’ method but require you to be an accredited investor (meaning you net 1 million or rake in at least $200,000 each year). The minimum ‘buy-in’ for a platform like RealCrowd is around $25,000.
Why is this helpful to you? Like most of us, you might not be an accredited investor (if you are, I’m sending you a HUGE high-five and toasting you with a cup of my morning brew). There are a few new options to allow you to enter into real estate crowdfunding platforms for much lower minimums without any kind of accreditation.
RealtyMogul, for example, offers options for both camps. Their MogulREIT I product is a public, non-traded REIT with a minimum buy-in for non-accredited investors set at $1,000. Another crowd favorite (see what I did there?) is Fundrise.
Fundrise offers one of the lowest-ever minimums to unaccredited investors at $500. You also get a 90-day money-back guarantee. With Fundrise, you’ll invest in a diversified portfolio of real estate projects across the US.
They acquire the projects, and you join a pool of investors to support it. Like a combination of REITs and real estate funds, you’ll receive returns from quarterly dividends and appreciation in the value of your shares.
Remember, just like REITs and real estate funds, crowdfunding platforms for real estate operate like a long-term investment. Fundrise recommends a minimum time of about five years.
Ok, so what if you’ve come into some money and want to play a more liquid, passive income play? Well, if that’s the case you might be thinking about cutting out the platforms above and finding a property to purchase and rent out (hence, the passive income).
Again, the market’s look promising, and we’re not anticipating another 2007-2008 disaster in our lifetime, so you’re probably walking down the right path. Let’s take a look at some interesting strategies to consider on your quest to becoming a landlord (or real estate baron?).
First, let’s consider the pros to owning a rental property:
Monthly income from tenants
Many expenses can be tax-deductible
Great, we all like passive income. But, is owning a rental property going to be as passive as you might think?
That brings us to the cons. The single biggest con of owning a rental property is actually serving as a landlord. You remember being a first-time tenant, right? Yeah, those are the same people you have the potential to encounter.
There’s a lot of not-so-sexy features to homeownership. That said, if you choose a market that’s projected to grow, you could be seriously improving your net worth over time.
The other obvious big con is a mortgage. Down payments can be tricky. The higher your down payment rate is, the lower your mortgage rate. While there are now strategies to get you to a 5 percent rather than the standard 20 percent down, you’ll need to make sure you are not getting screwed in the monthly payments. Use this article from NerdWallet to help guide you through the evaluation process.
Where do you buy a home? Alright so if you’ve worked out a payment strategy and you’re still interested in finding a property, the other big consideration, of course, is where to buy. It can be tricky to own a home in a random town in a state you’ve never been to.
Sure, if you bought in a big city, you’d know the rental turnover rates would be good, but if you’re like me and live far away from those cities, it might be a bigger headache than is worth the effort. (Not to mention, it’s also probably going to be a lot more expensive.)
My advice? Pick a place near where you live or visit frequently. Evaluate the rental rates over the past 10-15 years. Zillow can help with that. Then consider down payment rates and mortgages for those areas. Just because New York City is always booming doesn’t mean an investment outside Minneapolis or Cleveland is a bad idea.
Consider the growth rate of a neighboring city (psst: did some tech giant just move HQ there? That’s a good sign for you…).
Once you’ve decided on your town, try to find a home with added value (dead-end streets, good enough views, etc.).
Do a lot (!) of homework on mortgage rates and be realistic with what you can afford.
Consider management fees. If you don’t live nearby, you’ll need someone to be there when the tenant calls you at 2 am because they’ve flooded the bathroom (yes, it will happen.).
Consider how long it will take for you to turn a profit. Once you pay off the mortgage, you should be making money every month.
Make sure it will bring you joy! It’s not worth it if you think of it as yet another job.
So, are you ready to snatch up some property? Awesome. If you now need to save up to hit that ownership status, try using the Goals in our app. It’s an easy way to see how quickly you can realistically save for a down-payment or an entry fee into one of the portfolio options!
Go get it, Nav.igator!
We’re changing the narrative around money but change can’t happen with a one-sided conversation. That’s why we’re excited to bring different voices and experts to share their wisdom. Send us an email and let us know what you think. And remember the nav.it money app offers you free tools for checking in and managing your money moves.