Investing in real estate has long been recognized as a rewarding strategy that offers both passive income and long-term appreciation. It presents an excellent opportunity to diversify your investment portfolio beyond the traditional options of stocks, bonds, and mutual funds. While purchasing a home may be your initial foray into real estate, there are several other avenues to consider, such as rental properties, house flipping, real estate investment trusts (REITs), online real estate platforms, and real estate investment groups (REIGs). In this article, we will explore six proven strategies to diversify your investment portfolio with real estate in 2024.
1. Buy a Rental Property
One classic and popular way to invest in real estate is by purchasing a rental property and leasing it out to tenants. This approach allows you to take advantage of various tax deductions associated with the property, including maintenance costs, repairs, insurance premiums, utilities, administrative fees, mortgage interest, and depreciation. However, it’s important to note that being a landlord can be time-consuming, and there are high startup costs involved. Dealing with late payments, property damage, and difficult tenants can also be a challenge. Nevertheless, with the right property, you can generate positive cash flow and benefit from long-term appreciation. Additionally, utilizing a 1031 exchange can help you defer capital gains taxes if you decide to sell the property and reinvest in a similar property.
2. House Hacking: Rent Out a Room
House hacking is an excellent way to dip your toes into real estate investing. This strategy involves renting out a portion of the home you live in, such as a single room, basement, attic, or an accessory dwelling unit (ADU). The initial costs can be minimal, depending on the condition of the space you are renting out. The extra income generated from renting out a room can help offset your monthly housing expenses while simultaneously allowing you to pay down your mortgage and build equity. For those looking for a more advanced house hacking opportunity, investing in a multifamily property allows you to live in one unit and rent out the rest. Whether you choose to rent out a room or half of a duplex, you can find long-term tenants or explore short-term rental options through platforms like Airbnb, where permitted by local regulations.
3. Online Real Estate Investing Platforms
Online real estate investing platforms, also known as crowdfunding websites, have emerged as a new and innovative way to invest in real estate. These platforms connect developers with interested investors who pool their capital to fund real estate projects. With investments starting as low as $500, investors can acquire debt or equity in a project and receive monthly or quarterly distributions if the project performs well. While these investments offer higher potential returns compared to publicly traded REITs, they also carry more risk and are generally less liquid. It’s important to note that some platforms may only be open to accredited investors, while others offer opportunities for both accredited and non-accredited investors. Typically, investors pay an annual management fee, which can range from approximately 0.25% to 2.50% depending on the platform.
4. House Flipping
House flipping involves purchasing a property at a discounted price, renovating or upgrading it, and selling it for a profit. This strategy can potentially yield quicker returns compared to long-term property management. However, it requires a keen eye for identifying a property’s potential and having a vision for its transformation. Successful house flippers possess sufficient capital, reliable teams of contractors, and accurate cost-estimating skills to ensure a profitable outcome. Effective project organization skills are also essential to minimize holding costs, such as mortgage payments, utilities, property taxes, homeowners’ association (HOA) fees, and insurance. If you’re hesitant about the upfront costs of updating or upgrading your own home, consider exploring the Refresh and Refurbish Program, which can enhance your home’s value without any out-of-pocket expenses.
5. Invest in Real Estate Investment Trusts (REITs)
Investing in a real estate investment trust (REIT) can be an attractive option for those seeking exposure to real estate without the responsibilities and complexities of managing individual properties. A REIT is a company that owns and operates income-generating properties, including apartment buildings, offices, warehouses, medical facilities, hotels, and retail centers. Similar to mutual funds, a REIT pools the capital of multiple investors and creates a diversified portfolio of real estate assets. Investors purchase shares of the REIT and earn a proportionate share of the income generated by the properties. One significant advantage of REITs is their high liquidity, as most are publicly traded on stock exchanges. Dividends earned from REIT investments are derived from leasing space and collecting rent on the underlying real estate holdings. By law, REITs must distribute at least 90% of their taxable income to shareholders as dividends each year.
6. Real Estate Investment Groups (REIGs)
Real estate investment groups (REIGs) are clubs or associations of private investors who pool their money and expertise to collectively invest in income-generating properties. REIGs are an attractive option for individuals who want to own rental properties without the sole responsibility of managing them. By leveraging the combined buying power and experience of the group, members can invest in various types of properties such as apartment blocks, condominiums, and commercial buildings. Participating in REIGs provides an opportunity to learn from experienced real estate investors while participating in deals that can expand your investment portfolio. However, it’s important to carefully consider membership fees, as they may impact overall profits. Additionally, partnering with an inexperienced or unskilled group could potentially result in a less successful investment. Thorough research and due diligence are crucial when selecting a REIG to ensure alignment with your investment goals and risk tolerance.
Investing in Real Estate: Potential Benefits and Drawbacks
Real estate investments offer several advantages, including stable cash flow, long-term appreciation, portfolio diversification, tax breaks, and the ability to leverage funds. However, it’s essential to consider potential drawbacks, such as lack of liquidity, high start-up costs, and the fact that real estate investing can be a long-term commitment that requires patience and persistence. Remember that there are multiple ways to invest in real estate, and it’s not necessary to limit yourself to one specific type of investment. Rental properties may be ideal for those seeking hands-on control and tax advantages, while REITs provide a more hands-off approach with greater liquidity. Combining rental properties with REIT investments can offer the best of both worlds. Ultimately, the decision to invest in real estate depends on your specific goals, risk tolerance, and time horizon. Working with a financial advisor and conducting thorough research will help you find the investment strategy that aligns with your individual needs.
