02 May Money Matters: How to Invest in Real Estate
Looking to broaden your portfolio? Real estate can yield dividends and provide a hedge against a down economy.
By Sheryl Nance-Nash
When it comes to building your retirement portfolio, you don’t want your future resting solely on one investment vehicle. You may have a 401(k), but ideally, your investments will include a variety of ways for your money to grow. Portfolio diversity matters—if the stock market has a down year, other investments can cover shortfalls. One of those alternatives is real estate.
“Investing in property can be a robust addition to your retirement portfolio. It offers potential for capital appreciation, steady cash flow from rentals, and tax benefits,” says Ashley Tison, founder of , a consultancy focused on Opportunity Zones, communities deemed economically distressed by the IRS, which gives tax advantages to those who invest in them.
Real estate can offer a hedge against
inflation, and historically has been inversely correlated with conventional assets, giving you a smart strategy for diversifying your investments away from the stock market, Tison points out.
What’s key to success when investing in real estate? “It’s crucial to evaluate properties based on location, potential for long-term value increase, and rental demand,” says Tison. “Also important is cash flow. Set your sights on having a monthly rent that exceeds your mortgage and all costs. That’s the winning formula for real estate investing.”
Real estate investing strategies
There are multiple ways to invest in real estate, including purchasing single-family homes to rent out, a multifamily property (with five or more units), or commercial property used for offices or retail. “Each of these investment strategies is very complex and requires that you engage a good accountant, attorney, real estate broker, inspection company, and, most importantly, a good property management company,” says Teri Williams, president and COO of OneUnited .
For investors who consider themselves beginners, or who don’t have a lot of cash (or time), Seamus Nally, CEO of TurboTenant, a provider of services for landlords, recommends looking into alternative investing options, including real estate investment trusts (REITs). A REIT is a company that owns and operates income-producing real estate or real estate assets. Most REITs are registered with the SEC and trade like a stock.
You’ll want to do a deep dive on the various opportunities, and their pros and cons, to see what might work best for you.
Residential real estate
The country’s severe housing shortage is often in the headlines these days. Demand for rental properties is high, and in many communities, vacancy rates are very low. If you can manage the high price of housing and interest rates, this can be an ideal time to purchase single-family homes or a multifamily property to rent out, especially if you can get it at the right price. You may also be able to deduct mortgage payments, depreciation, utilities, and other maintenance costs from rental income, Williams says.
However, there are challenges to owning single-family or multifamily properties, so you’ll need plenty of cash in reserve. Property management entails selecting, screening, and managing tenants and addressing immediate issues that they identify. That’s in addition to maintaining the property. Be mindful of what’s eventually down the road—realities involving major expense, like roof repairs and replacing or repairing heating and cooling systems.
Having cash reserves is also important if you experience vacancies or tenants who are not paying rent as agreed. You’ll need sufficient funds to pay the mortgage and maintain the property in the interim.
The biggest mistake in real estate is paying too much for a property. “People tend to fall in love with property when your decision needs to be based on facts,” Williams says. “It’s also helpful to reach out to a real estate investor who can serve as a mentor and share their real estate investing experience.”
Your team should also include a real estate attorney, broker, inspection company, management company, accountant, and others knowledgeable about real estate.
Commercial real estate
Investment in commercial real estate includes options like office spaces, retail stores, and industrial properties. Galit Ventura-Rozen—cofounder of , which works with women business owners, and a commercial real estate broker—has sold more than $700 million in commercial property in Las Vegas. She suggests exploring income properties such as shopping centers or apartment buildings, with an eye to purchasing on your own or with others. Another idea is to buy a piece of land and build an income property, such as an office or industrial building, on it.
Be advised, though, that commercial real estate has a higher entry-level price and much more sophisticated leases and terms involving tenants, as well as more complex laws governing the properties.
Williams shares another reality: “Investing in commercial real estate property has become riskier today. The move to virtual work and to online shopping has increased office and retail vacancies. However, there may be niche opportunities in your community. Consult a commercial real estate broker.”
Real Estate Investment Trusts
Another way to get a start in real estate investing is with a REIT, which offers a way for individuals to invest in mega real estate. The REIT owns, and usually operates, office buildings, shopping malls, apartments, hotels, resorts, warehouses, self-storage facilities, and so on. A REIT buys and develops properties and then operates them as part of its investment portfolio, rather than reselling them. Investors earn a share of the income produced through commercial real estate ownership without having to actually buy and manage the property.
With REITs, you may get higher dividend yields than with some other investments offering income in retirement. You don’t have to jump through hoops to get started. You buy a REIT as easily as you would a stock or mutual fund. Another huge plus: unlike the resale of a rental property, you can sell a REIT quickly.
“You invest however much money you want to, and the rest is taken care of,” Nally says. “You don’t own the properties you are investing in and thus don’t have to deal with any of the logistics. This makes these investments far more accessible, and you can still reap the benefits of payouts that are—or at least should be—profitable, reliable, and consistent.”
Foreclosures
Who doesn’t like a bargain? Foreclosure sales can be an opportunity to purchase property at a discount. The appeal is the idea that, after renovation, renting or selling the property will prove profitable.
Keep in mind that by the time a lender forecloses, the borrower may not have paid their mortgage for more than six months, and possibly also not their insurance or property taxes. They may not have maintained the property. “Buying a foreclosure comes with risk,” Williams says.
Foreclosures are “as is” sales. What you see is what you get. The cost of fixing the property will be your responsibility. Furthermore, foreclosure sales are typically cash sales, with an upfront cash deposit required to even bid on the property, and if you are the successful bidder, the remaining funds are typically due within 30 days, adds Williams.
For the best outcome when dealing with a foreclosure purchase, Williams suggests you hire a real estate attorney and an appraisal company that can give you an estimate of the market value. “You also need to have the discipline to not exceed that value less the costs to fix the property during the bidding process,” she adds.
If you’re ready to pursue foreclosures, you can find opportunities by checking listings on real estate websites, legal newspapers, and public records. Networking with real estate agents specializing in foreclosures is also beneficial. “Build relationships with realtors and ensure that you are on property watch searches,” says , author of Onwards and Upwards: Discover the Reality of Building Real Estate Success. A foreclosure is placed on a property’s loans, not the property itself, so the property may be saddled with more than one lien. Artenosi emphasizes the importance of performing a title search to confirm that the lien being foreclosed is the most “senior,” so it extinguishes all other liens.
Understand that buying distressed properties is not for rookies. Most experts say you should have a few years of real estate investing under your belt before you venture down that path. DW
Sheryl Nance-Nash is a freelance writer in personal finance, business, travel, and lifestyle topics. Her work has appeared in Money, the New York Times, the Wall Street Journal, and Newsday, among others.
