How to Invest in Real Estate. Some of the most common ways to invest in real estate include homeownership, investment or rental properties, and house flipping. One type of real estate investor is a real estate wholesaler who contracts a home with a seller, then finds an interested party to buy it. Real estate wholesalers generally find and contract distressed properties but don’t do any renovations or additions.
The earnings from investment in real estate are garnered from revenue from rent or leases, and appreciation of the real estate’s value. According to ATTOM, which oversees the nation’s premier property database, the year-end 2021 U.S. home sales report shows that home sellers nationwide realized a profit of $94,092, a 45.3%return on investment, up 45% from $64,931 in 2020, and up 71% from $55,000 two years ago.3
Real estate is dramatically affected by its location and factors such as employment rates, the local economy, crime rates, transportation facilities, school quality, municipal services, and property taxes can affect the value of the real estate.
Pros
- Offers steady income
- Offers capital appreciation
- Diversifies portfolio
- Can be bought with leverage
Cons
- Is usually illiquid
- Influenced by highly local factors
- Requires big initial capital outlay
- May require active management and expertise
Investing in real estate indirectly is done through a real estate investment trust (REIT), a company that holds a portfolio of income-producing real estate. There are several types of REITs, including equity, mortgage, and hybrid REITs, and are classified based on how their shares are bought and sold, such as publicly-traded REITs, public non-traded REITs, and private REITs.
The most popular way to invest in a REIT is to buy shares that are publicly traded on an exchange. The shares trade like any other security traded on an exchange such as stocks and makes REITs very liquid and transparent. Income from REITs is earned through dividend payments and appreciation of the shares. In addition to individual REITs, investors can trade in real estate mutual funds and real estate exchange-traded funds (ETFs).
Another option for investing in real estate is via mortgage-backed securities (MBS), such as through the Vanguard Mortgage-Backed Securities ETF (VMBS), made up of federal agency-backed MBS that have minimum pools of $1 billion and minimum maturity of one year.4 or the iShares MBS ETF (MBB) which focuses on fixed-rate mortgage securities and tracks the Bloomberg U.S. MBS Index. Its holdings include bonds issued or guaranteed by government-sponsored enterprises such as Fannie Mae and Freddie Mac.5
What We Like
- Liquidity
- Diversification
- Steady dividends
- Risk-adjusted returns
What We Don’t Like
- Low growth/low capital appreciation
- Not tax-advantaged
- Subject to market risk
- High fees
