Real estate is an excellent place to put your money since it combines the returns of paper assets like stocks and bonds with the security of owning land, which is a fixed asset and recognized inflation hedge. Furthermore, you don't have to go out and buy a run-down house and fix it up to get involved in real estate investing. Some of the best real estate investments don't even require you to own property.
Trust Deed Investing
If you'd like to get a fixed return, much like a bond, but participate in the real estate market, consider trust deed investing, also known as the private mortgage market. In this investment, you lend money to investors who then use it to buy investment real estate properties. Typically, private mortgages carry rates of return in the 7 to 11 percent range and have relatively short terms of up to three years. Once the borrower pays off his mortgage, you can lend your money out to someone else. Some trust deeds also require investors to make sizable down payments, reducing the risk that they won't make your loan payments.
Real Estate Investment Trusts
A real estate investment trust is similar to a mutual fund, but instead of owning shares of stock, it owns investment real estate properties. You can choose from a broad range of REITs that invest in different types of properties in different areas of the world. Publicly-traded REITs are sold on major stock exchanges, just like any other share of stock, so they are extremely liquid. They also pay large dividends, which are their way of disbursing the profits that they earn from renting out properties and selling them for profits. While REITs don't convey the tax advantages of real estate ownership, they offer excellent returns and let you participate in the market's performance without any of the burdens of ownership.
Tenant in Common Investments
Sometimes also called a syndication, a tenant-in-common investment is a way for you buy a small piece of a building together with, usually, up to 34 other people. The TIC structure lets you buy pieces of large buildings even if you only have enough money to buy a small one. This is desirable to investors that want the diversification benefits of having multiple tenants or that want to own higher-quality properties. TICs are usually managed by third parties, usually sheltering you from a great deal of management responsibility.
For many investors, the rental house is the quintessential real estate investment. Rental houses come in three broad classes of investments. You could buy a vacation property that you rent out most of year and occasionally enjoy on a personal basis. Alternately, you could buy a house that needs rehabilitation, fix it up, and either rent or sell it. Finally, you can purchase a house that is in turnkey condition and rent it out. All of these properties can be excellent investments. The turnkey house offers cash flow with less work on your part while the vacation property, if bought right, can offer the potential for appreciation. Rehab houses offer the opportunity to quickly create equity by increasing the property's value.
Duplexes, Triplexes and Four-Plexes
Given that many residential financing programs cover properties with up to four units, multi-unit properties can also be an excellent option. Buying one of these typically provides you with more cash flow than a single-unit property. It also helps to diversify your risk, since you have up to four different tenants paying rent. If one tenant in a four-unit building doesn't pay his rent or moves out, you can still use the rent from the other three units to pay your bills.
- Prudential Real Estate Investors: The Case for Commercial Real Estate
- LandThink: Land Hedges Both Inflation and Systemic Risk
- Trust Deed Capital: Investor Frequently Asked Questions
- National Association of Real Estate Investment Trusts: The REIT Story
- 1st Bank 1031 Corporation: What is a TIC?
- The Wall Street Journal: Think Small: Getting Started As a Real-Estate Investor
- Maclennan Investment Group: Why Young Professionals Should Buy a Duplex, Triplex, or Fourplex
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.