One of the best ways to diversify your portfolio, apart from stocks, bonds, mutual funds, and other financial instruments, is through real estate. The real estate market offers tremendous opportunities for people to invest, and varying degrees of investment risk, based on your comfort level. Here are four real estate investment strategies to consider this year, from least challenging to expert level.
One of the lowest risk methods to enter the lucrative real estate investment market is to leverage property you already have from a vacation home to an unused bedroom in your home or apartment. And one of the best ways to do this is with Airbnb. Airbnb is a great crowdsourcing website that sets up prospective short-term renters with people who literally have rooms to spare. You can rent your space on the site for a date, duration, and price of your choosing; the site handles the financial end of the transaction and ensures you get paid (for a fee). This is a great, low-risk introduction to real estate investing, and an innovative way to use your own existing real estate to earn a relatively dependable passive income stream.
Real Estate Investment Trusts and Funds
Another, relatively low-risk method to invest in real estate is through real estate investment trusts, or REITs, or real estate-based mutual funds. REITs are groups of pooled investors, numbering 100 or more, whose funds are used to purchase manage and earn profits from real estate investments. Additionally, there are numerous mutual funds consisting primarily of real estate holdings, which offer another opportunity for investors. Investing in real estate through REITs and mutual funds allow you to diversify your portfolio, without the additional burdens associated with managing property. However, like any investment, they carry a substantial risk due to market uncertainty, so ensure you do your research before committing to a REIT or real estate mutual fund.
Buy it and Hold it
A third strategy which offers tremendous opportunities, along with additional responsibility and significant risk levels, is buying and holding onto real property. The idea underlying buy and hold is to generate a passive income stream from the property, through renting or leasing it to a tenant, while simultaneously the property appreciates in value. A passive income stream can substantially increase the cash you have available each month – to save, spend, or invest – while requiring relatively little action on your part. However, this strategy has its own inherent risks as well. If you have a mortgage on the property and fail to land a tenant, you will lose money each month covering the mortgage. Maintaining the property for the tenants, or even dealing with the tenants themselves, can often be challenging, too. Finally, annual property taxes will cut into your passive income stream each year as well. Nonetheless, this remains an extremely popular real estate strategy for millions of American investors.
Flipping properties – buying them at a (presumably) discounted price, putting some work into them, and then selling them at a profit in a relatively quick turnaround – is practically a cliché in the U.S. these days, with multiple television shows devoted to the practice. This is also the most challenging and risky of the strategies discussed here. In order to be successful with flipping properties, you need a host of skills. First, you require an understanding of the real estate market in question, to determine whether or not you are buying a property at a deep discount. Next, you must be familiar with home repair, so you can estimate the costs required to bring the property into prime selling condition. Finally, you have to be adept at contracting and subcontracting, so you can get the best prices possible for the work required to repair the property. Flipping is not for everyone, and you should definitely not consider doing it until you have mastered the aforementioned skills. Still, if you have the wherewithal, flipping represents an excellent way to earn a return on your investment in a short period of time.