With volatility returning to the stock and bond markets, many investors have turned to hard assets such as real estate as a way to shield themselves from market madness. The temptation is certainly strong.
But if you find that the temptation is greater than your financial resources, don't give up. There are several ways to get a start in real estate investing without an enormous outlay.
- A real estate investment trust gives small investors access to the commercial real estate market.
- A real estate investment group offers management services for owners of single residential units.
- Buying a property outright to lease and manage it demands a greater investment of time and money.
The Cheapest Option: REITs
First created in the 1960s as a way to allow individual investors to participate in the commercial real estate market, the real estate investment trust (REIT) is one of the cheapest and easiest options for adding real estate to a portfolio.
These are securities and are traded on the major exchanges like stocks. They invest in real estate directly, either through property purchases or through mortgage investments. Many REITs specialize in a particular type of real estate or a specific region.
You might look for a REIT that has a dividend reinvestment option for greater long-term growth.
A REIT offers the investor a relatively high dividend as well as a highly liquid method of investing in real estate. Most real estate investments are not easy or quick to get out of. An exchange-traded REIT is.
Moreover, you can start small with a little bit of cash. If you're in it for the long term, consider one of the REITs that offer a dividend reinvestment plan (DRIP).
Moving up the Cost Ladder: REIGs
For investors seeking to own physical real estate as opposed to shares of a company, a real estate investment group (REIG) or private partnership may be for you.
The REIG allows an individual investor to buy one or more units of living space within an apartment or condo building through an operating company. The operating company collectively manages all of the units and takes care of marketing them. In exchange, the operating company takes a percentage of the monthly rent.
A REIG represents a relatively cost-effective way to enter the real estate market as an investor. It also takes the management work off of your hands.
Some real estate investment partnerships accept an investment of $5,000 to $50,000. That's not enough to purchase a unit, but the partnership will pool money from several investors to fund a property that is shared and co-owned.
The goal is to find a REIG that will provide a monthly cash return on your investment.
Spending Some Dough
The tried and true way of investing in real estate is also the most expensive and time-consuming: becoming a landlord.
We're all familiar with the basic idea. An investor buys a residential or commercial property and rents it out to a tenant. The owner is responsible for paying the mortgage, taxes and maintenance costs. Ideally, the rent will cover the costs and maybe, over time, provide income or capital growth, or both.
There are plenty of costs. The concept of a mortgage without proof of income went out with the credit crisis of 2007-2008. Banks generally require that potential property owners come up with at least 20% of the property purchase price as a down payment.
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That means you will need a minimum of $20,000 up front for a property valued at $100,000. There are also closing costs, which typically run around 5% of the purchase price. More money will be needed to get the property in rentable condition. And you'll need a cash reserve to cope with emergency repairs and occupancy gaps.
It takes careful planning and plenty of research to buy the right property and make it pay.