Real Estate Investment Strategies Every Investor Should Consider

Investing in real estate is a great way to diversify your portfolio with investments that aren't primarily tied to stock movements. Most financial planners recommend that every investor own some form of real estate to maintain a balanced investment. And with the stock market more volatile than ever, thinking about alternative investments is more important than ever. In this article, we've rounded up eight of the most popular real estate investment strategies you should consider.

In this Guide

Real Estate Strategies Overview

There are many options when it comes to investing in real estate. Selling homes is a very active way to invest in real estate. On the other hand, buying shares of a real estate mutual fund is very passive. And there are many strategies in between. Looking for a specific strategy that fits your investment needs? Consider the pros and cons of these eight most popular strategies.

1. Rental Property Investing

Rental investing involves finding, buying, and managing residential properties (single-family homes, duplexes, townhomes, and condominiums) for profit. Most investors own rental units that have “cash flow,” meaning that the monthly rental income exceeds the monthly rental costs. That's not always possible in an expensive and fast-growing market. And investors can choose to equal or even finance a portion of the monthly expenses with the expectation of holding and selling the property for more money in the future.

Investing in rental properties is best suited for those with the skills and interest to play a very active role, including home research, selection and acquisition, property management, maintenance and tenant management. If you need help finding a good rental property, you can use a free service like HomeLight to find a real estate agent in your area to help you find the best deal for you.

Pros Of Rental Property Investing

Once installed, you can enjoy passive monthly cash flow
You can take advantage of powerful tax benefits, including depreciation.
Capital Appreciation Potential – If purchased and managed wisely, rental properties typically increase in value over time, while home ownership typically decreases in value.
Rents increase with inflation, increasing monthly cash flow over time
Tenants pay your mortgage for you
You control your investments
You can use leverage (debt) to quickly build a portfolio of rental properties
As a direct form of real estate investment, rental properties are not directly linked to the stock market.
You can buy distressed property, do some or all of the work yourself and enjoy instant ownership
Unique tax benefits such as depreciation

Cons Of Rental Property Investing

You are a landlord dealing with tenants (or you need to find and pay a qualified property manager)
It is a long-term investment (expected to hold the property for at least ten years)
High transaction fees
It takes time, knowledge and active participation to be successful
Your funds are not liquid if you have a financial emergency
Closing on a property can take 30-45 days
Diversification of investments is more difficult to achieve due to the high cost of each property
Capital intensive. you need a lot of cash

2. Real Estate Investment Trusts (REITs)

REITs (real estate investment trusts) are a way to own commercial real estate without owning physical office buildings, retail spaces, apartments, or hotels. REITs are companies that own and operate properties to generate income. You buy shares that represent ownership in the individual real estate company that owns the property, and you share in the rental income and profits from the sale of the property.

Investing in REITs is a very passive way to add real estate to an investment portfolio. REITs are required by law to distribute 90% of their annual earnings, which can make them an excellent strategy for investors looking for regular rental income and appreciation potential. Just be aware that some investment fees can be quite high and reduce your profits.

Pros Of REITs

It is easy to buy and sell shares in stock exchanges, very liquid
Easy diversification in this type of asset
Lower minimum investment than investing in rental or flipping properties
Periodic dividend distributions that can be reinvested
Less risk than owning property
Impact of real estate without ownership

Cons Of REITs

While public REITs are easily bought and sold, private REITs that do not trade can be complex, illiquid, have limited transparency and charge high fees.
No Oversight – You depend on the integrity and competence of REIT management
Distributions are not guaranteed.

Get started investing in commercial real estate with Streitwise

3. Real Estate Exchange-traded Funds (ETFs)

Real estate exchange traded funds (ETFs) invest most of their assets in REIT equity securities and related derivatives. These securities are passively managed around an index of publicly traded real estate assets and often have low expense ratios.

Like REITs, this strategy is ideal for the passive investor who wants a convenient way to add real estate diversity to a portfolio without directly owning real estate.

Pros Of Real Estate ETFs

Shares are easy to buy and sell, traded on stock exchanges, high liquidity
Broad diversification across asset classes and property types is possible
Lower minimum investment than investing in rental or flipping properties
Periodic dividend distributions that can be reinvested
Lower costs than buying, selling and owning individual properties
Lower risk than owning property

Cons Of Real Estate ETFs

More susceptible to stock market volatility
No control over asset management
No property appreciation potential

Invest in REITs with Fundrise

4. Real Estate Mutual Funds

A simple and very popular way to add real estate investing to your portfolio is to buy shares of a mutual fund that invests in commercial real estate, giving you real estate exposure without the need to own, operate or finance the property.

This is perhaps the easiest and most passive strategy to invest in real estate. You can buy shares on major stock exchanges. And there's usually a very low minimum number of shares you have to buy.

Pros Of Real Estate Mutual Funds

Very liquid. it is easy to buy and sell shares in stock exchanges
Easier to calculate total investment costs
Wide diversification is possible
There are no problems with direct ownership of real estate
Very low minimum investment required
Low fees overall

Cons Of Real Estate Mutual Funds

More susceptible to stock market volatility (higher correlation with stocks)
No property appreciation potential
No control. you depend on the integrity and competence of asset managers

Invest passively in mutual funds using Ally Invest

5. Online Real Estate Investment Platforms

Crowdfunding companies provide online platforms where real estate developers in need of funds to finance projects can connect with individual investors looking for returns on real estate investments without getting their hands dirty. As part of the “crowd,” you can choose to participate in debt or equity investments.

There are many real estate crowdfunding platforms. There are many to choose from. And each has its place. Many require you to be an accredited investor to participate. But even if they don't require it, this is a better strategy for investors with enough real estate knowledge to do their due diligence on platforms, sponsors, properties, markets and opportunities.

Pros Of Online Real Estate Investment Platforms

passive investment
High return potential
Opportunities to invest in residential or commercial projects
Quarterly payments are provided on most platforms
Some crowdfunding platforms offer very low minimum investments
Low correlation with stocks
It is easy to invest in residential or commercial real estate using crowdfunding platforms
And many offer the opportunity to participate in capital appreciation (as well as regular dividends).

Cons Of Online Real Estate Investment Platforms

Investments are not liquid. And often there is no secondary market
Investments offered through real estate crowdfunding platforms are generally more speculative than other real estate investment strategies.
Many platforms require you to be an accredited investor
Many investments have high minimums
Investors may have to pay platform fees
Crowdfunded real estate is a fairly new and unproven industry with many startups (some platforms likely to go out of business)
You must have the knowledge and skills to perform due diligence

Get verified commercial real estate deals with Crowdstreet

6. Real Estate Investment Partnership

A real estate limited partnership (RELP) is an entity comprised of individual investors who pool their money to invest in real estate assets.

RELPs are managed by a general partner, which is usually a corporation, an experienced property manager or a real estate development company. The general partner is responsible for the purchase, lease and development of the property. And take responsibility. Most investors provide funds as limited partners and are only liable for the amount they invest. In essence, limited partners simply provide financing in exchange for a return on investment.

This strategy is for passive investors who want to buy and hold income-producing real estate to add to their investment portfolio without directly owning the property.

Pros Of Real Estate Partnerships

As a limited partner, you share in both the income from the stock and the long-term
appreciation when the property is sold.
Lower minimum investment than a rental property or investment
Low correlation with stocks
Higher earning potential

Cons Of Real Estate Partnerships

Not liquid
Due diligence is very important
It can be hard to find because these are private deals that are not traded on stock exchanges.
Higher minimum investment than exchange-traded funds (ETFs) or mutual funds (usually)

7. Real Estate Investment Groups

As an investor or member of a real estate investment group, you acquire ownership of one or more units in an apartment building owned by a large company that buys and manages large apartment complexes. Real estate investment groups typically buy properties and sell units to investors, while also assuming management and maintenance responsibility.

This strategy is best for investors who want the benefits of owning rental units, including monthly income, tax benefits and potential appreciation, without the responsibility of property management. The company handles maintenance, advertising, tenant placement, rent collection and management for a percentage of the rent.

Pros Of Real Estate Investment Groups

There are no difficulties in being a host
Occupancy cost protection as all landlords pool a portion of the rent to pay the mortgage if their unit is vacant
Lower minimums than outright real estate ownership

Cons Of Real Estate Investment Groups

Potentially high fees
A high level of due diligence is required
No control over investment decisions

8. House Flipping (a.k.a. Real Estate Trading)

Flipping has recently been popularized by reality TV shows. But it's been a real estate investment strategy for decades. This is when a seasoned real estate investor buys a dilapidated or outdated property at a discounted price and upgrades the property to sell at a higher price a few months later.

This is not a strategy for real estate investing beginners because it is very easy to lose money buying houses. But it's a great way to make a short-term profit if you're an experienced real estate investor with access to deals and a well-chosen team of tradesmen, such as contractors, plumbers and electricians. And you need an investor-friendly agent.

Pros Of House Flipping

It is possible to make big profits in a short period of time
highly localized
The exciting sense of achievement of active participation
No correlation with the stock market
Maintains a high level of control over investment results

Cons Of House Flipping

A high level of knowledge, skill and competent assistance is required to be successful
Transaction time can take months to close a purchase and resale
High transaction costs
Capital intensive – You need cash to get the best deals and cash for renovations
High risk potential from multiple perspectives (market change risk, cost underestimation, unexpected issues)

It's Easier Than Ever to Invest in Real Estate

Adding real estate to your investment portfolio is a sound financial decision. According to a Morgan Stanley study, real estate has made more people millionaires than any other type of investment. Barriers that once prevented small investors from participating in large real estate deals have largely been removed thanks to technological advances and lax government regulation.

Investing in real estate has never been easier. I have been investing in real estate since 2015 using some of these strategies and have more than doubled the value of my portfolio in less than five years. Be sure to check in when you choose a real estate investment strategy that fits your experience and comfort level.