The universe of real estate provides many roads to profit, through both active and passive investing.
Active Investing
When you actively invest in real estate, you have hands-on involvement in building, buying and/or managing properties. You can rent out your properties for income, build new properties for sale, or flip existing properties after buying and renovating them.
Active investing requires time, knowledge, money and often sweat. Building or flipping a property is very intensive. Flipping usually requires a lot of sweat equity, as there is often little budget to hire out the work. Renting is less time-consuming, and you can farm out a lot of the work to rental agents who collect rents, maintain the property and sign leases. But if you have only a few rental properties, you might perform all these tasks yourself and minimize your costs.
Active investing gives you control over the selection of properties, based on your views about location, type of real estate, budget, time-frame and other considerations. Your choice of properties includes apartments, single- or multi-family homes, mixed-use and commercial properties, or a combination of several types. Unless you have a large budget, you might be able to invest in only one or a few actively-managed properties at a time. Physical proximity to your properties might be a factor, especially if you personally take care maintenance issues. The downside of active control is the active headache factor, especially if you have demanding tenants or difficult building/flipping conditions.
Passive Investing
If active investing isn’t for you, passive real estate investing allows you to participate in this important asset class without working up a sweat. There are several vehicles for passive real estate investing, most notably real estate investment trusts, or REITs. These are like mutual funds for properties and are available as public or private securities. In a REIT, the investment manager selects which properties to buy and sell and is responsible for all decisions – your only involvement is deciding when to buy or sell your shares, and how many shares to own. REITS provide instant diversification, allowing you to allocate a set amount of your portfolio all at once. Wealthier individuals can invest in private syndicate deals or real estate hedge funds. The common thread is that another entity is doing all the work, while you are collecting your share of profits (or losses).
Many REITS require a modest initial investment, often in the $2,500 to $5,000 range. Some REITs specialize in residential or commercial properties, but others contain a mix. Other real-estate-related investments include property liens, mortgage-backed securities, homebuilders’ shares, and mineral rights. You can also buy shares in a real estate project through crowdfunding, in which you buy shares exempt from SEC registration via an online portal, subject to certain restrictions based upon your income. The new rules allow everyone to participate in crowdfunding, not just accredited (i.e., wealthy) investors. Crowdfunding is normally a form of passive investing, as the stock you purchase give you a share of profits generated by the project.