From buying the few shares in real estate
investment trusts or making big-money deals for commercial real estate properties, there
are numerous ways to invest in real estate. In this video, we’re going to explore some
of the more popular options so that you can discover which one best fits you. If you have
a small amount of money to invest, you may want to look at real estate investment trusts,
real estate related stocks, mutual funds and ETFs, and mortgage notes and other debt deals.
Let’s take a closer look at each one to better understand how investors can benefit.
Real estate investment trusts, or REITs, allow investors to pool their money
together to invest in a portfolio of properties. Since these companies are set up as trusts,
there are certain rules related to what kind of assets they can own and how they return capital
to shareholders through dividends. REITs have a few important advantages, including a low-cost
starting point they’re great for investors looking for capital appreciation and dividend
growth, and they’re ideally held in tax-advantaged investment accounts. Most REITs also specialize
in a particular type of property, such as residential mortgages, healthcare facilities,
or infrastructure. Buying publicly traded REITs is the same as buying stocks. You can
buy them through a typical brokerage account or through tax-advantaged accounts such as
IRAs, 529s, and health savings plans. There are also private and non-publicly traded REITs.
Buying these kinds of REITs isn’t as simple as hitting the buy button at an online brokerage,
but they can be held in tax-advantaged accounts like self-directed IRAs.
Real estate related stocks, mutual funds, and ETFs are one of the lesser-discussed real
estate investing options. Three things investors should know about these investments
is that they have a low-cost entry point, they’re primarily for capital appreciation and growth,
but some will offer dividends, and, like REITs, they’re ideally held in tax-advantaged investment
accounts. There are a wide gamut of real estate stocks to invest in, including home builders,
real estate agencies, government-supported mortgage buyers, home improvement suppliers,
construction companies, and many more. You can also invest in a portfolio of these stocks
through mutual funds and ETFs. While a vast majority of real estate ETFs will hold REITs,
there are some real estate adjacent options. One such example is the SPDR S&P homebuilders
ETF that holds 34 different companies, spanning home improvement, retail, building products,
household appliances, home builders, and home furnishings. You can purchase real estate
related stocks through a brokerage account or through the other various tax-advantaged
accounts such as 401(k)s, traditional and Roth IRAs, and 529 college savings plans.
The third option for people with a small amount to invest are mortgage notes. For this option,
an investor buys the notes tied to a mortgage and collects the payments. Buying mortgage
notes may not sound too appealing when you see low mortgage rates, but the upside is
that most of the time, you can buy mortgage notes for less than the outstanding loan value.
Buying mortgage notes at a discount to their par value means a higher rate of return than
the interest rate tied to the mortgage itself. Mortgage notes have a few key advantages.
They have multiple investment outcomes, you have the ability to buy at a discount to the
loan’s value, and they can also be held in tax-advantaged retirement accounts. Investing
in mortgage notes can span a wider range of outcomes and risks. It can be as simple as
buying a performing loan and collecting the interest and principal payments until it’s
paid off. Or, you can invest in non-performing loans at a typically steep discount to renegotiate
payment terms, or potentially take possession of a property. Acquiring mortgage notes is
by no means as simple as going to your brokerage and asking for mortgage notes, but there are
websites that act as clearing houses where you can acquire them. You can own mortgage
notes in a tax-advantaged retirement account such as a self-directed IRA or solo 401(k).
The ability to hold less conventional investment assets is one of the most appealing aspects
of these particular types of investment accounts. Most of what we discussed so far are passive
real estate investment strategies. This means you don’t take an active role in managing
the investment. In our next video, we’ll discuss strategies that take more time and money.