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What's the Best Way to Invest in Real Estate

The real estate investment market has been on a roller coaster ride these past few years, but this is nothing new; it goes up and down unpredictably, like the stock market. If you’re not sure what real estate investing is, it involves buying, managing, renting and selling real estate to make a profit. And according to Realty Mogul, real estate investing isn’t restricted to land and structures like homes; it includes “improvements” that can be water rights, mineral rights and improvements to existing properties and land. Real estate investors can be individuals, businesses or other entities that purchase, lease or acquire rights to real estate or the kinds of rights described above.

Options for Real Estate Investing

There are many ways to invest in real estate, and The College Investor explains five options. One of the most common is a real estate investment trust (REIT) that is made up of several investors on larger residential or commercial deals. You don’t have to be an accredited investor, and don’t always have to invest a lot of money. Look for ones that don’t charge investor fees and offer a good number of properties for diversification.

REITs are often described as passive real estate investing, because the investors don’t have to get their hands dirty. These trusts are set up to invest in stocks, bonds and mortgage instruments within the real estate industry, and you can choose from different kinds like mortgages, equity and hybrid. Equity mortgages invest in properties, and hybrid REITs invest in properties and mortgages. How you earn money from them? You get paid on the interest that other people pay for their mortgages. Kiplinger posts that the top three REITs for 2022 are American Tower (it invests in cell towers), Americold (temperature-controlled warehouses) and Digital Realty (Fortune 500 data centers).

What is Real Estate Crowdfunding?

These platforms match up people who want to invest in real estate and real estate property, and business owners who are looking to raise capital for upcoming projects. Those requiring capital structure their crowdfunding investment opportunities as equity or debt financing. Then, investors research different options and offer equity or debt-based investments; if all goes well, they receive some of the profits.

REITs and crowdfunding sound similar at first glance, but there are key differences as explained by Investopedia. REITS buy up properties through exchange-traded funds (ETFs) and mutual funds, and distribute rental income to shareholders; the monies are dividends. Crowdfunding helps entrepreneurs raise needed capital for their projects from large groups of investors, and this is done through crowdfunding websites. The profits are then distributed to the investors.

Getting Physical with Real Estate Investments

Buying a rental property is not usually as passive as investing, unless the place is move-in ready and has no other major issues that you need to contend with. Many investors purchase rentals sight unseen, but it is best to do the due diligence before investing. Websites like Roofstock allow investors to purchase rental properties that already have tenants (and cash flows). The downsides of owning rentals are large initial cash investments, costs for making repairs and upgrades and dealing with tenants when they are difficult.

Flipping homes is a riskier proposition, because you also have to purchase a home and then invest a lot of time and money to turn it around. If real estate prices drop during your renovation or it doesn’t sell, you might not be able to make a profit or even get back what you paid for home and upgrades. The best flip homes are originally listed for below their actual values, and only need cosmetic repairs.

There’s no one answer to the question, “What’s the best way to invest in real estate?” because it depends on how much money you have to start with and how much risk you are willing to take. The market has certainly been unprecedented these past few years, and some real estate investors have made out like bandits. Passive investing often presents less risk, but whichever route you choose be sure to first invest a good amount of time researching these different options.

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