According to the standard investing advice, no single asset should comprise more than 50% of your portfolio. As a result, it helps to have access to as many assets as possible. Real estate investing is one of the many tools available to a person looking to diversify their investment portfolio.
In fact, a large majority of potential investors already have a significant portion of their assets in a real estate property; a house or a mortgage. However, there are plenty of other ways in which a person can invest in a hard asset such as a real estate investment.
According to Don Campbell, a senior analyst at the Real Estate Network, a good piece of real estate is like a blue-chip stock; it won’t make you rich overnight, but it will perform well. So, if you are looking to diversify your portfolio, and you don’t have very many hard assets, real estate investing might be something that is a good fit for you.
Listed below are four types of real estate investments available to potential real estate investors.
1. Basic Rental Properties
This type of investing involves the investor buying a property and renting it out to a tenant. As the owner of the property, you will be responsible for paying the mortgage, taxes, and all associated maintenance fees. In an ideal situation, the rent that you would be charging would cover all of these costs or even allow you to make a profit. However, the more common strategy is to charge enough rent to cover most of these expenses and wait until the mortgage has been paid off, at which point all rent will become profit minus the maintenance fees. According to the U.S. Census Burau, real estate value has, historically, been increasing in value consistently since 1940s (despite any temporary dips).
2. Real Estate Trading (Flipping)
Real estate traders, or flipper, are akin to day traders. Real estate traders buy properties with the intention of selling them in a very short amount of time, usually within 3-4 months. The idea is to buy a real estate property that is significantly undervalued or in an area where the market is very “hot.” There are generally two types of real estate traders: those that do not plan on doing any renovations and those that intend to improve a property’s value through renovations. Regardless of the type, both real estate traders face the risk of being unable to unload a property quickly and being stuck with a mortgage that they didn’t plan on. Real estate trading can be a risky option with its own unique advantages and disadvantages.
3. Real Estate Investment Groups
These types of real estate investments are similar to mutual fund investments. This is a good option for those that want to be an owner of a real estate property but do not wish to deal with the hassles associated with being a landlord. A company will buy or build a set of rental properties and will then allow investors to buy these buildings through their company. You can buy a single or multiple rental buildings but the rental company will handle all of the maintenance, advertising, and placing of tenants into rental units. This type of investment can be a safe, hassle-free choice for an investor but one does have to careful about any potential fees and percentages.
4. Real Estate Limited Property (RELP)
This option is similar to the “Real Estate Investment Groups” option above with the exception being that RELPs are usually created only for a certain number of years. A RELP is an entity formed with the intention of purchasing and holding a portfolio of properties. Usually, an experienced property manager or developer firm serves as a general partner and outside investors provide finances for the real estate project. In exchange for financial backing, the outside investors obtain a share of the ownership as limited partners.
Real estate investing in an excellent way to diversify your investing portfolio. It is an excellent option for many investors and, due it’s flexibility and variety, can fulfill many roles. Real estate investing firms can help you choose a real estate investment option that best suits your investing needs.