Step 89: Investing in Real Estate

Step 89 of the 100 Steps Mission to Financial Independence: Investing in Real Estate
Step 89 of the 100 Steps Mission: Investing in Real Estate

We’ve looked at investing in the stock market in detail and how stocks and bonds offer the opportunity to create and maintain wealth over time (but remember that investing in the market always has the risk of losing a lot of your money too…). In order to spread risk when investing in the market, creating a balanced portfolio is generally the recommended way to go, in which your money is divided over many different companies, industries and markets and investing opportunities.

Whereas many investors have big chunks of their money (if not all) invested in a mix of bonds and shares, there are also other investment options to consider in addition to stocks and bonds that offer an extra diversification to your portfolio. In this step we’ll discuss one common alternative or addition: real estate, whereas the next step looks at investing in gold (and precious metals) as well as commodities to complement investment portfolios.

Investing in Real Estate

We have of course already discussed the option of buying another property and renting it out to a tenant as a way to invest your money in order to generate an additional income stream as well as the possibility of a capital gain on the estate itself in the long-term. This is one way of investing in real estate, but there are other market options to invest in real estate, including:

  • REITs – Real Estate Investment Trusts – similar to a mutual fund, REITs trade on the market. A trust pools together investors’ money in order to purchase real estate and rent it out to generate income. The advantage of REITs is that they must pay out a big chuck of their profits as dividend in order to keep their status as a REIT, meaning that returns can be very interesting. You of course don’t own the property but own a part (like a share) in the trusts’ property portfolio. Like stocks and bonds you can sell your part to other investors and REITs go up and  down in price similar to the rest of the market.
  • Real Estate Investment Group – This option is ideal if you want to actually own another property to rent out but don’t want to deal with the hassle that comes with it: finding tenants, collecting rent, dealing with maintenance issues etc. As an investor in a real estate investment group you buy one or more units or flats of a bigger apartment complex owned by an investing company. By buying a unit, you become part of the Real Estate Investment Group and become the owner of the flat, but the investing company will deal with all the day-to-day issues and operating of the units on a collective basis. They will take a part of the rent you generate so you still profit from renting out your property, but you have very little to do with the day-to-day operating.
  • Real estate trading – Also known as Flipping, this is a practice in which somebody buys a property, hold it for just a short amount of time, usually only a few months and then sell it again at a higher price. This is especially effective if one is able to buy a property in a hot spot or if one acquires a building that is highly undervalued and therefore a bargain to buy and then sell again. This is a different way of investing in real estate and contrary to capital gains over a long period of time, real estate trading is focused on capital gains made in just a few months. Bear in mind that taxes on short-term capital gains can be significantly higher though.

Investing in real estate can be housing, but can also include other types of real estate such as commercial property (think about offices and factories) as well as old age pensioner’s homes for which demands are increasing all the time due to aging populations.

 

Step 89 – Investing in Real Estate – in Detail

  • If you feel that investing in real estate is something you might want to add to your portfolio in order to diversify, whether that is to take up just 5% or as much as 50% or more of your investments, you want to make sure that this is the right decision to make depending on your goals and risk tolerance.
  • Investigate more about how you can invest in real estate and commit to reading more about it on the internet, on blogs, podcasts and if you still feel that this might be right for you after this, buy a book that is specifically about investing in real estate in your country and includes information on legal and tax consequences.
  • Remember the above is only an introduction to investing in real estate, if you are considering this investment option make sure you understand the risks, responsibilities and possible returns this option might give you.
  • Start investigating brokers or investment companies that offer real estate in their portfolio. Like before, read up on their terms and conditions, fees, transaction costs etc. to make sure that you fully understand the details and especially the legal side.
  • Remember that if you invest in real estate through an investment group, you’ll become the owner of another property so you need to be ready for this and willing to deal with the additional obligations.

Investing in Real Estate can be a great way to diversify your portfolio, especially if you want to get into owning rental properties, but don’t want to have the burden of all the logistics of tenants, maintenance and even legal issues. Make sure you inform yourself well however as investing in real estate can be a lot more complicated than investing in stocks and bonds.

Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.

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