Real estate is a popular investment, both for capital appreciation and as income. However, there are challenges. Buying land is expensive. Unless you have a lot of initial capital to stake, you could be locked out, and once you make the purchase, you have a lot to lose if the investment goes wrong. So once you own land, you have to manage it. If you want to sell, that means renovation and updates. If you want to generate income, that means managing the property. There are ways, however, to invest in real estate without actually owning property. For help with retail investing, consider working with a financial advisor.
Real estate investment funds
The most affordable option on this list is probably real estate investment trusts, or REITs. These are fund-based businesses, such as an ETF or mutual fund, that specifically hold a portfolio of real estate investments.
Each REIT invests differently. For example, some will manage debt, owning mortgages or other home loans and generating returns based on the interest paid. Others own the land directly and either lease their properties or sell that property for a return. The precise nature of the portfolio will differ from fund to fund, but they are always based on an underlying investment in real estate as an asset class.
Real Estate Funds
You can also invest in real estate funds through ETFs and mutual funds. This is a strong option for investors who would like access to this market, but who would also like more diversification. A REIT holds primarily or exclusively investment property.
ETF or mutual fund shares the same basic structure as a REIT. Namely, they are portfolios where you buy shares and then receive a return based on your proportional ownership. With an ETF or mutual fund, however, you get a wider variety of assets in the underlying portfolio.
Stocks and bonds in real estate companies
Above, we note that you can invest in ETFs and mutual funds which in turn invest in the real estate market. Many of these hold shares in publicly traded real estate companies. If you want to make a more direct investment in real estate, you can just buy that stock yourself. Large landowners, often organized as separate REITs, often operate as publicly traded companies. Other companies specialize in construction or equipment used in large construction projects.
You can also invest directly in real estate companies by buying their bonds. Bonds are especially common among companies that invest in real estate. They will frequently issue these debt assets to raise capital for land purchases and construction. As an investor, buying these bonds allows you to invest in the long-term success of the company. At the same time, this offers you a more stable form of investment than buying stocks. You get stable income investment assets, as opposed to the boom or bust model that tends to follow stock purchases.
Masters in Limited Partnership
You can also buy shares in limited partnerships or MLPs. An MLP is a company that sells shares, known as units, like a publicly traded company. MLPs often sell their shares on public stock exchanges and tend to enjoy stock-like liquidity. At the same time, an MLP operates as a partnership. The firm will have general partners who manage the operations of the firm and limited partners who provide the capital of the firm. Any investor who buys shares in the MLP is considered a limited partner.
By law, MLPs must operate in the real estate sector or in sectors adjacent to the real estate sector. This typically means they work directly in real estate, such as land development and property management, or in the extraction of natural resources and otherwise take value from the real estate. MLPs tend to be higher risk, higher return assets. They can generate strong returns and capital returns for investors, but are also subject to significant volatility and potential losses.
The bottom line
Investing in real estate can be a great way to diversify your portfolio, but it’s expensive and often difficult to do directly. Instead, by investing in assets such as REITs, stocks, bonds, and master limited partnerships, you can buy into this market for much lower odds.
Property investment tips
Real estate mutual funds are created specifically for people who want to invest in real estate without buying property. There are three main types and each has its pros and cons.
A financial advisor can help you understand how to invest effectively in real estate. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisors at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goals, get started now.
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