Investing in real estate can be a fantastic way to generate a reliable stream of revenue to add to your total household income. But did you know that there are multiple types of real estate investments you can make? The right type of real estate investment for you will depend on your level of investment and the amount of time you want to put into the real estate you purchase or maintain.
If you’re still searching for the best real estate investments, use our guide to decide which type of investment best suits your lifestyle and needs.
Best Passive Real Estate Investments
Real estate investing no longer needs to mean driving around searching for properties on the market or researching loan options. Real estate investment platforms allow investors to browse real estate investment options available to you and pool your money with other investors across the country.
These platforms may operate as a crowdfunding website (pooling resources together with other investors) or a financial tech company offering real estate investment trust, or REIT, options. Some examples of platforms that allow you to passively invest in real estate include DiversyFund, CrowdStreet and StreitWise.
If your platform is operating as a crowdfunding website, you’ll have the opportunity to put money into specific projects. You can browse the real estate investment projects on your platform of choice, along with investment requirements and risks.
The amount of money you’ll need to invest will vary depending on the project requirements and the platform you’re investing in. From there, your platform will put your investment together with other investors and carry out its business plan for each space. As an investor, you’ll receive dividends from the projects you’ve invested in proportional to the amount of money you put into the project.
Unlike other forms of real estate investing, these platforms offer a completely passive way to invest in a specific market — you won’t be responsible for collecting rent, doing maintenance or any of the other standard duties that come with property management.
If you’d like to learn more about one popular passive real estate investing platform, check out our DiversyFund Review. You can also browse alternative passive investment options below.
Best Active Real Estate Investments
If you want to take a more proactive role in your real estate investing journey, you might want to consider active real estate investing. Most active real estate investors purchase properties and rent them out to tenants, collecting rent in exchange for providing housing and maintenance. Active real estate investors usually don’t mind spending more time on their investments because they want to have more direct control over how their properties are managed.
Becoming a landlord is often more complicated than most investors assume. The best active real estate investments for you may vary depending on where you live. Here are a few key indicators you can look at when you’re considering investments.
- Rental affordability: Rental affordability statistics describe the percentage of a population that can afford to rent an apartment or home while also spending no more than 30% of their income on housing. High rental affordability means that you’ll likely find a tenant quickly — but you may not be able to charge as much in rent. On the other hand, low rental affordability means higher rent prices but fewer applicants for each space.
- Housing starts: This indicator tells you how many new housing constructions are in development within a certain area. If you buy in an area where there are many housing starts, your property might increase in value over time as more residents move in and demand increases.
- Average home prices: Average home prices and price movements are incredibly important to investors. Look for homes in an area where prices are increasing. This indicates that you’ll receive a positive return on your investment over time and that you’ll be able to charge higher rates for rent.
Many investors underestimate just how much work and responsibility is involved with the job. As a landlord, you aren’t just responsible for paying your mortgage loan and collecting rent — you also must keep up with the property’s maintenance and repairs while also navigating tenants’ rights and reasonable expectations of privacy. If you do decide that active real estate investing is right for you, consider taking a course on your state’s housing laws online or at your local community college.
Best Semi-Passive Real Estate Investments
If being a landlord isn’t right for you, you may want to consider semi-passive real estate investments. Some semi-passive investment strategies you may want to consider include:
- Hiring a property manager: Property management companies are expert home management services that understand your local laws and how to effectively find tenants and collect rent. If you own a home that you want to rent out but you don’t want to actively manage your property, consider hiring a property manager to handle the day-to-day tasks on your behalf.
Most property management companies charge a small percentage of each month’s rent. They may also forward the cost of any repairs to you at the end of the month or deduct expenses from the rent check you receive.
- Investing in an alternative real estate investment: Residential real estate investments typically require a large amount of upkeep to maintain. But homes and commercial spaces aren’t the only type of real estate investments you can make. Investing in an alternative type of real estate (for example, a self-serve parking lot or garage) may allow you to reap the benefits of being a real estate owner without as much day-to-day management.
- Renting out a space in your home short term: If you have a space in your home that you aren’t currently using or you’re adding another bedroom to your property, consider listing your space on a site like AirBnb or HomeStay. When you list your spare space as a short-term rental, you don’t need to worry about understanding tenants’ rights or chasing down rent every month. You also have complete control over when your space is available for rent — meaning that if a friend is staying over for a weekend, you can remove your space from listings for that period of time.
Though passive real estate investments usually require less active participation and upkeep than acting as a landlord, you should still do your research and make sure you’re ready for whatever maintenance is required for your investment of choice.
Best REIT Investments
You can also invest in real estate by purchasing real estate stocks and ETFs. Most real estate stocks operate as real estate investment trusts (REITs). A REIT is a company that owns and manages real estate or real estate debt. Most REITs make strategic commercial or residential real estate investments and then rent them out to tenants. The rent received is then distributed back to investors in the form of dividends. By law, a REIT must distribute at least 90% of its taxable income back to shareholders.
Some REITs and REIT ETFs investors are currently eyeing for 2020 include:
- Vanguard Real Estate ETF (NYSE: VNQ): The Vanguard Real Estate ETF is a nondiversified REIT that includes 183 real estate stocks. The majority of the REITs included in the VNQ portfolio are industrial and specialized REITs.
- iShares Residential Real Estate Capped ETF (NYSE: REZ): The iShares Residential Real Estate Capped ETF invests its assets in residential, healthcare and self-storage entities. The fund includes 43 holdings with the largest percentage of assets held in Public Storage, AvalonBay Communities and Equity Residential.
- Global Medical REIT, Inc. (NYSE: GMRE): If you prefer to invest directly in REIT stocks instead of ETFs, consider purchasing shares of Global Medical REIT. As the name suggests, the medical-focused REIT owns and operates healthcare facilities across the United States.
Best Brokers for Real Estate Investments
Wondering how to invest in REITs and REIT ETFs? The process begins by opening a brokerage account. If you don’t already have a brokerage account, consider one of our favorites below.
Building Your Real Estate Empire
No matter which type of real estate investment you decide to make, do your homework before you invest. If you decide to become an active investor, research sales data and rental rates in your area. If passive investments are right for you, investigate each fund or company’s financials before you invest your money.
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