Real estate investing has been all the rage in recent years, and it's easy to see why. In 2022, stock market indexes such as the S&P 500 completely collapsed and the value of cryptocurrencies plummeted, even as the COVID-19 pandemic caused years of economic turmoil. , real estate managed to outperform.
Numbers don't lie. According to the National Association of Realtors (NAR), the median sales price of properties sold nationwide increased for 129 consecutive months as of November 2022. This means that the value of a home you bought 10 years ago has increased every month since the investment was made. For most of 2020 and 2021, and even well into 2022, New Jersey's real estate market has seen bidding wars and exemptions from inspections and appraisals just to get contracts.
While some real estate markets around the country are doing significantly better than others, potential investors need to know that it's not too late to start investing in real estate if you have the right mindset. there is. There are even real estate investment options that don't require investors to deal with physical property or the drudgery that comes with being a landlord.
If you're considering real estate for your 2023 portfolio and planning your strategy, read this article to learn about the best ways to invest in real estate this year.
Important points
- There are several different ways to invest in real estate, and many leading strategies don't even require you to deal with physical assets.
- Real estate investment trusts (REITs) allow you to invest in real estate through the stock market, but you can also consider real estate investment groups (REIGs) and real estate limited partnerships (RELPs).
- Before deciding which real estate investment is best for your portfolio, you need to decide whether you want to deal with physical real estate or become a “passive” real estate investor.
Investment in rental housing
While finding rental properties and managing properties can be pretty fun, the reality of managing rental properties is not so fun. Answering late-night calls or dealing with unruly tenants can be a real challenge, especially if you work a 9-to-5 job and work on properties during your free time. is incredibly draining.
Many real estate investors hire property managers to take on some of the necessary grunt work, but property managers require annual or monthly fees that eat into their profits. Additionally, today's high interest rates and soaring home prices have made it even more difficult to find a property with a high return on investment.
With all this in mind, you can consider investing in rental properties and using them for retirement income or other purposes. The key is to find an affordable property that yields enough rent to cover the mortgage and all other housing costs (including maintenance and repairs), while also providing a reasonable return. is.
Over time, it helps property renters pay off their mortgages and build equity and equity along the way. If they decide to own the rental property long-term, renters can also pay off the home in full and still have a stream of income coming in each month. During this time, the value of your property should also increase.
If you're considering investing in rental property, keep in mind that investment property mortgages typically require a down payment of at least 15% to 25% of the purchase price. Interest rates on investment properties are also typically higher, and property taxes on investment properties can also be higher. Ultimately, you need to take into account all the costs associated with the property and how much you can rent it for before deciding whether a particular rental home is a good investment.
Short term and vacation rentals
You can invest in rental properties with the aim of securing long-term tenants, but you can also invest in the opposite way. You may be able to secure higher yields by investing in short-term or vacation rental properties in areas that tend to receive more visitors.
Technology has made it easier than ever to sell a rental home in any part of the world. In fact, platforms like Airbnb and VRBO allow you to set up a page for each property you plan to rent, making the process seamless and handling most of the payment aspects of the transaction.
That being said, investing in short-term rentals has its own risks and downsides. First, short-term rental properties are often located in expensive tourist areas, so you have to pay a high list price just to move in. Short-term rentals also almost always require a property manager. Unless you plan on doing all the work yourself, do regular cleaning.
Short-term tenants are also known to put a lot of wear and tear on vacation rentals, so you need to have a plan in place to prevent damage and keep your property in tip-top condition. Finally, if your property is frequently vacant, vacancies can eat into your profits. Additionally, it is difficult to know or plan in advance how many vacancies will occur in a given year.
flipping house
If you watch HGTV frequently, you may feel like you have a pretty good idea of what it takes to sell real estate for a profit. Find a home that sells below market value, make important improvements, and then sell it for much more than you paid. What could go wrong?
Unfortunately, there are many things that can go wrong, even for experienced investors who want to buy and sell homes for a profit. First, house prices have been rising steadily for a decade now, and current interest rates are higher than they were a few years ago. Meanwhile, home sales are starting to slow after years of record numbers, and selling may not be quick or easy. In fact, according to a report by the National Association of Realtors (NAR), existing home sales in November 2022 decreased by 7.7% from the previous month and by a whopping 35.4% from the previous year.
You also need to have considerable experience renovating properties to flip houses and make a steady profit. At the very least, you should contact a qualified contractor who can (and does) do the work for a fair price.
crowdfunding real estate platform
Real estate crowdfunding offers a “passive” real estate investment that doesn’t require you to visit a property, estimate annual maintenance and repair costs, or deal with tenant calls or issues. Instead, you get the option to invest in shares in a real estate transaction, and the company facilitating your investment handles all of the property management aspects.
Fundrise is one of the most popular real estate crowdfunding platforms and has proven its reliability since its founding in 2012. The platform allows everyday investors to buy shares in real estate funds from as little as $10, and these funds are then used to invest. A wide range of high quality assets including commercial and residential real estate.
Fundrise makes money by renting out properties to individuals and commercial tenants and selling them once they have been valued at a sufficient profit. That said, keep in mind that returns are not guaranteed on this platform and tend to fluctuate over time. As an example, a Fundrise investor earned an average return of 7.31% in 2020, but in 2021 he returned 22.99% and in 2022 he returned just 1.50%.
Other real estate crowdfunding platforms to check out include Crowdstreet and RealtyMogul.
invest in farmland
Maybe you want to diversify from residential or commercial real estate into an asset that will remain in demand until the end of time: food. In that case, you could consider investing in farmland that provides regular rental income and increases in value over time.
FarmTogether is a platform that allows investors to research and purchase actual farmland across the country, allowing them to put money into farmland without having to look for real estate or find farmers to lease. is. In fact, investors can put their money toward investments in farmland, such as almond orchards, organic vineyards, and pecan orchards.
Although the FarmTogether platform was only founded in 2017, the company has been helping investors achieve solid returns. Currently, FarmTogether is advertising an estimated net return of 6% to 13% to new and current investors.
Note: FarmTogether is intended for accredited investors only, so not everyone can use the platform.
Real Estate Investment Group (REIG)
A real estate investment group (REIG) is a group of investors who share their money, time, and knowledge of the real estate industry to generate income. These groups are operated at a local level by investors who know the market and each other well, but also exist at larger organizational scales. Some REIGs require recurring membership fees, while others do not. With this in mind, you should thoroughly research REIG and how it works before joining.
REIG offers a number of benefits, including allowing investors to leverage the group's collective purchasing power and knowledge. Because REIGs have different members who take on different tasks and roles based on their knowledge and expertise, investing with a REIG can also be much more passive than buying and managing real estate yourself. .
The downsides of REIGs vary, but may include potential conflicts or disagreements with other group members, and the standard risk of loss due to selected investments or market movements.
Real estate investment trust (REIT)
Real estate investment trusts (REITs) offer a more formal alternative to REIGs. This type of investment allows individuals to invest in real estate with the aim of achieving regular income or building long-term wealth.
REITs can own and manage any number of real estate investments, including office buildings, apartments, hotels, resorts, warehouses, and more. Unlike crowdfunding real estate platforms, which buy and sell properties over time to generate profits, REITs focus on investing in income-producing properties that are held for the long term.
Many REITs are publicly registered with the U.S. Securities and Exchange Commission (SEC), so investors may be able to buy and sell REITs on a stock exchange. That said, the SEC notes that many REITs are registered but not publicly traded, and these come with unique risks.
Before investing in a REIT, you should research your options and know whether the REIT is publicly traded, the SEC warns. After all, non-traded REITs are illiquid investments and you may not always have access to your funds when you need them or in a timely manner.
Real Estate Business Limited Partnership (RELP)
Finally, you can consider investing in a Real Estate Limited Partnership (RELP). This type of investment is often seen as an alternative with some of the benefits of REITs and REIGs.
For example, a RELP is an investment in which multiple group members pool their funds to invest in real estate that generates regular income, similar to a REIG. However, RELPs have a general partner who oversees most of the work involved, including all exploration and property acquisition.
The RELP's general manager also takes full responsibility for the investments, and regular group members can passively invest in real estate without taking responsibility for individual projects.
In any case, a real estate limited partnership (RELP) is intended to help all members invest in transactions that they would not be able to access or facilitate on their own. These partnerships also invest in all types of real estate, including residential properties, commercial buildings, land development projects, and more.
