With volatility returning to the stock and bond markets over the last few years, many investors have turned to hard assets such as real estate as a way to shield themselves from the market's madness. The temptation to do so is certainly strong. Thanks to the continued mess in the housing market, prices on all types of real estate are getting lower and lower. Those low prices have made it easier for average people to add these assets to their investments.
However, given the number of choices and ways to go about investing in the asset classes, finding out where to begin or how much capital one needs is a daunting task. Luckily for you, Investopedia has taken some of the painful guess work out of figuring out where to start. In this article, we'll look at some of the choices available and familiarize you with how much capital it takes to get started.
The Cheapest Option
First created in the 1960s as a way to allow regular retail investors to participate in the commercial real estate market, REITs are some of the cheapest and easiest options for adding real estate to a portfolio. These securities are traded on the major exchanges like stocks and invest in real estate directly, either through properties or through mortgage investment. Some REITs will invest specifically in one area of real estate or in one geographic location. In exchange for offering investors high-dividend distributions, REITs receive special tax considerations and offer a highly liquid method of investing in real estate.
More importantly, REITs provide one of the lowest starting capital cost options for getting into the asset class. Several major REITs offer dividend reinvestment plans (DRIPs). These plans can provide access to commercial real estate for as little as the cost of one share of stock with little in the way of fees. Likewise, almost every major mutual fund company offers a REIT focused option. Many of these come with low starting investments between $500 and $2,500.
Moving up the Cost Ladder
For those investors looking to own physical real estate as opposed to shares of a company, real estate investment groups (REIG) or private partnerships may be for you. At their core, REIGs allow investors to buy one or multiple units of self-contained living space within an apartment or condo building through an operating company. This operating company collectively manages all the units, taking care of maintenance and advertising. In exchange for this management, the operating company takes a percentage of the monthly rent.
Investors still own the property and REIGs represent a relatively cost effective way to enter the real estate market. Generally, real estate investment partnerships usually take an investment between $5,000 and $50,000. While $5,000 isn't enough to purchase a unit in the average building, several partnerships exist that pool money from multiple investors to purchase a property that is shared and co-owned by several investors. Overall, REIGs and real estate partnerships like this provide a monthly cash return on your investment.
Spending Some Dough
Perhaps the most tried and true way of investing in real estate is also the most expensive: becoming a landlord. We are all familiar with the basic idea. An investor will personally buy a property and rents it out to a tenant. The owner of the apartment, townhouse or office building is responsible for paying the property's mortgage, taxes and maintenance costs. Ideally, the owner will charge enough rent to cover all of the aforementioned costs.
There are plenty of costs. Since the wake of credit crisis, the concept of a no-doc mortgage is long gone. That means banks generally require that potential property owners come up with at least 20% of the property purchase price as a down payment. That means you will need a minimum of $20,000 up front for a property valued at $100,000. That doesn't even include closing costs, which typically run around $5,000 or any additional funds needed to get the property in rentable condition. Overall, these higher costs could end costing more than a would-be real estate investor realizes in the long run.
The Bottom Line
Whether it's through physically owning a building or through a REIT, real estate can be a great long term addition to a portfolio and there are plenty of ways to get started. The three previous examples show how the asset class can fit into almost an investors budget.