Last year’s housing market was one for the record books, with the gains partly driven by tightening inventories and exceedingly low mortgage rates. In some pockets of the country, housing prices rose well over 10 percent on average.
But, it’s not only the big coastal cities that are seeing huge growth. A survey from our experts revealed that many cities with the most growth were inland, including: Buffalo, New York (34.6%), Atlanta, Georgia (24.54%), and Cincinnati, Ohio (20.6%).
With this in mind, you may be wondering if you should throw your hat in the ring and invest in real estate — or, if you’re too late. You may also be wondering if you should invest in real estate in a traditional sense — as in, becoming a landlord.
Now, here’s the good news. Not only is now still a good time to invest in real estate since more growth is likely on its way, but there are also more ways than ever to invest in housing without dealing with tenants or the other minutiae of landlord work.
#1: Invest in real estate ETFs
An exchange-traded fund, also known as an ETF, is a collection of stocks or bonds in a single fund. ETFs are similar to index funds and mutual funds in the fact they come with the same broad diversification and low costs over all.
If you’re angling to invest in real estate but also want to diversify, investing in a real-estate themed ETF can be a smart move. Vanguard’s VNQ, for example, is a real estate ETF that invests in stocks issued by real estate investment trusts (REITs) that purchase office buildings, hotels, and other types of property. IYR is another real estate ETF that works similarly since it offers targeted access to domestic real estate stocks and REITs.
There are plenty of other ETFs that offer exposure to real estate, too, so make sure to do your research and consider the possibilities.
#2: Invest in real estate mutual funds
Just like you can invest in real estate ETFs, you can also invest in real estate mutual funds. A colleague of mine, Taylor Schulte of Define Financial in San Diego, says he swears by a real estate mutual fund known as DFREX. Why? Because its low costs and track record help him feel confident about future returns. In addition to low costs, Schulte says the strategy of DFREX is backed by decades of academic research from Nobel Prize winning economists.
TIREX is another real estate mutual fund to consider with $1.9 billion in assets, broad diversification among real estate holdings, and low fees.
#3: Invest in REITs
Consumers invest in REITs for the same reason they invest in real estate ETFs and mutual funds; they want to invest in real estate without holding physical property. REITs let you do exactly that while also diversifying your holdings based on the type of real estate class each REIT invests in.
Our financial advisor told us that he personally invests in REITs for the diversification and for the “non-correlation” with other types of equities. He says he likes the long-term data despite the typical mood swings and ups and downs of the real estate market.
“It also gives me exposure to real estate without having to be a landlord,” he says. Ball also says a lot of his clients agree with that position and invest in REITs as part of their portfolio as a result.
With that being said, I typically suggest clients stay away from non-traded REITs and buy only publicly-traded REITs instead. The U.S. Securities and Exchange Commission (SEC) recently came out to warn against non-traded REITs, noting their lack of liquidity, high fees, and lack of value transparency create undue risk.
#4: Invest in a real estate focused company
There are many companies that own and manage real estate without operating as a REIT. The difference is, you’ll have to dig to find them and they may pay a lower dividend than a REIT.
Companies that are real estate-focused can include hotels, resort operators, timeshare companies, and commercial real estate developers, for example. Make sure to conduct due diligence before you buy stock in individual companies, but this option can be a good one if you want exposure to a specific type of real estate investment and have time to research historical data, company history, and other details.
#5: Invest in home construction
If you look at real estate market growth over the last decade or longer, it’s easy to see that much of it is the result of limited housing inventory. For this reason, many predict that construction of new homes will continue to boom over the next few decades or more.
In that sense, it’s easy to see why investing in the construction side of the industry could also be smart. An entire industry of homebuilders will need to develop new neighborhoods and rehabilitate old ones, after all, so now may be a good time to buy in.
Large homebuilders to watch include LGI Homes (LGIH), Lennar (LEN), D.R. Horton (DHI), and Pulte Homes (PHM), but there are plenty of others to discover on your own.
#6: Hire a property manager
While you don’t have to buy physical property to invest in real estate, there’s at least one strategy that can help you have your cake and eat it, too. Many investors who want exposure to rental real estate they can see and touch go ahead and buy rentals but then hire a property manager to do all the heavy lifting.
Lee Huffman, a travel and lifestyle writer , once told me he owns rental property in North Carolina but actually lives in California. While he tried to manage his properties from a distance at first, he ultimately chose to work with a property manager to save his sanity and his profits.
While he forks over 8-10% of gross rent to his manager, it was still “one of the best decisions he’s ever made” as a real estate investor, he says. “They take care of the rental property basics – minor repairs, vetting prospective tenants, collecting rents – so that I can focus on my career, family, and locating the next profitable rental property investment,” notes Huffman.
In that sense, he gets the benefits of being a landlord without all the hard work. “One of the most important roles that a property manager plays is that they act as a buffer between the tenant and me,” says Huffman. “I don’t receive random calls, texts, or emails from tenants at all hours of the day or night.”
The key to making sure this strategy works is ensuring you only invest in properties with enough cash flow to pay for a property manager and still score a sizeable rate of return.
#7: Invest in real estate notes
Real estate notes are a type of investment you can buy if you’re interested in investing in real estate but don’t necessarily want to deal with a brick-and-mortar building. When you’re investing in real estate notes through a bank, you’re typically buying debt at prices that are well below what a retail investor would pay.
I’ve invested in real estate notes in the past via an individual investor I know who purchases and renovates property. So far, my experiences have only been positive. However, I would conduct due diligence to ensure you know what you’re getting into whether you invest into real estate notes with a bank or a real estate investor who is actively pursuing new properties.
#8: Hard money loans
If you don’t like any of the other ideas on this list but have cash to lend, you can also consider giving a hard money loan. My friend Jim Wang says he is currently investing in real estate with this strategy since he wants exposure but doesn’t want to deal with being a landlord. He also says the ROI (return on investment) for his time wouldn’t be as great as other opportunities since his time is valuable.
Hard money loans are basically a direct loan to a real estate investor, he says. Wang offers real estate loans to an investor he knows in person, and he receives a 12% return on his money as a result. Wang says he feels comfortable with the set-up since the investor is someone he knows, but he isn’t sure he would be comfortable with a stranger.
Either way, hard money loans directly to real estate investors are another strategy to consider if you want to invest in real estate but don’t want to deal with a property and the headaches that come with it.
#9: Invest in real estate online
Last but not least, don’t forget about all the new companies that have cropped up to help investors get involved in real estate without getting their hands dirty. Websites like Fundrise and Realty Mogul let you invest into commercial or residential real estate investments and receive cash flow distributions in return.
Investing with either company is similar to investing in REITs in that your money is pooled with cash from other investors who take advantage of the platform. The cash you invest may be used to purchase residential property, commercial real estate, apartment buildings, and more. Ultimately, you get the benefit of dividends and distributions and long-term appreciation of the properties you “own.”
While neither company has been around for too long, they are both performing well so far. Fundrise returned an average of 11.4% on invested dollars in 2017 net of fees and 9.11% in 2018 after all, and you don’t have to be an accredited investor to open an account.