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Real estate investing

Want to invest in real estate but you don't have the big lump of cash to begin with?

There are 2 ways you could go about this, you could invest in REIT index funds (stock market) or Real estate crowdfunding.

Let's explore each one.

R.E.I.T. is an acronym for Real Estate Investment Trusts. These are companies that own, operate or invest in financing real estate or operating real estate.

Most are publicly traded companies in the stock market, those are called public. There are companies which are private, some are only available to the ultra wealthy. These companies have to meet certain criteria to be able to be labeled a REIT and be publicly traded.

Some REIT have very specific investments which will make their investment risky or not depending on the market, for example some will own Hotels, others will own Hospitals etc.

Within a REIT you have 3 different types -

-Equity - owns properties producing income.

-Mortgage - owns mortgages on properties.

-Hybrid - mix of both.

Pros:

-Liquid - you can buy and sell as you please, unlike owning a property which you would have to wait until it sells or a tenant occupies it.

-Diversification - good way of holding real estate in your portfolio without the typical headaches associated with real estate (tenant not paying rent or destroying the property, etc).

-Stable cash flow through dividends.

Cons:

-Appreciation - does not appreciate well.

-Market risk - a downturn can affect your capital.

-Taxed as regular income.

-Interest rate sensitivity - rising interest rates mean bad news for REIT'S.

An example of a REIT is VGSLX which is an index fund from vanguard. If you have read some of my other posts you would know I like cheap management fees associated with the fund and good performance. VGSLX will give you a broad exposure to the REIT in the stock market, not tying you down to a specific sector. Good way to diversify your portfolio or get your feet wet in real estate investing without the need for a large capital or the risk. At the date of writing VGSLX is -12.7% YTD, COVID-19 has really done a number in the real estate industry. But remember, winter does not last forever and people need a place to live.

Real estate Crowdfunding is another way to invest in real estate without a large capital. The way this works is a company gets money from a large pool of investors to buy/manage actual physical properties. The returns in this investment is better than VGSLX. However, real estate crowdfunding usually has less liquidity than VGSLX, for example if you want to sell tomorrow it may take a while before you get your money back.

Out of the different real estate crowdfunding companies I have invested in Fundrise. (No, they did not pay me to invest in their platform, I just did my due diligence and happened to like the set up). Fundrise happens to be very user friendly. You can start investing with as little as $500 in what they call a "starter portfolio". After you have invested you will get a detail of the properties in which your money was invested. The fees could be a bit more complicated to understand than the usual index funds: Asset management fee 0.85% and an advisory fee of 0.15%. The returns are better, however your outlook on this type of investment is long term, at least 5 years or more.


Pros -

-Better returns

-Less susceptible to the stock market swings.

-Investing in actual physical properties you can actually see.

-Stable cash flow through dividends and at times capital gains from properties being sold.


Cons -

-Less liquid investment (if you want to get your money back it can take a while)

-Complex fees.

-Long outlook on your investment timeline. Usually >5 years.

The times of putting your money in the bank to grow are long gone. To make your money grow over time you need to take on some calculated risk, REITs and Real estate crowdfunding are 2 ways to make that happen.

Till next time,

JL

Disclaimer - This blog is meant purely for educational discussion of finance. It contains only general information about financial matters. It is not financial advice, and it should not be treated as such.

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