You may not know it, but there are many ways to invest in real estate. Each of these ways have advantages and disadvantages. If you want to invest in real estate, it is important to know about these ways before doing a choice and investing in one of them. Or investing in several of them.
For now, I am not really invested in the real estate market. I just have a small position though my World ETF that has some real estate funds. But I may invest more in the future. For now, I need more stocks, but once I have got enough, I may shift a bit of my portfolio into real estate.
Let’s now see the different ways to invest in real estate. There are quite diverse. Each person wanting to invest in real estate should find a way that is adapted.
1. Physical Real Estate
The most obvious way to invest in real estate is by buying physical property. You then rent it and hope to make some extra income compared to the mortgage you are paying. And if you are lucky, you may also be able to sell the house later for a profit depending on the local real estate market.
The idea is simple. You buy a house or an apartment or even some land. You take a mortgage to finance the buy. Then, you find some renters and cash in the checks every month. And you make a profit over your mortgage payments. However, not everything may go as well as you think. Being a landlord is not for everybody. You may not find a renter. You may have a renter that does not pay you or one that trash the apartment. And you may have to do some work to maintain the property. You need to be ready for this.
If you are smart about it, I think that physical real estate is the one that can returns you the most money. But it is also the method that will need the most work from you. If you look on the internet, there many bloggers that retired using real estate investing. They live only on the rents from their various properties.
I did not talk about owning your own house here. I do not think that owning a house is a real estate investment. It may save you some money on the long run. But it will not generate a lot of money since you are living inside.
2. Managed Physical Real Estate
If you want to own your own real estate properties, but want to have less things to do you can also hire a property manager to do most of the work for you. It will be up to the manager to find renters for your properties. It will also be up to him to collect the rent. And also he will have to maintain the house.
Of course, this kind of service is not free. It is even expensive. From what I know, you will pay around 10% of your rental income to the property manager. It could be less but it could be even more. And even if the property manager is not able to find renters, you will still have to pay it.
Another advantage is that you can remotely manage your property like this. Imagine if you live several hours away from your rental property. In that case, it is much more practical to rely on a property manager to do the work for you. Even if it will cost you some money, you should still be able to make a profit with fewer worries than if you were doing everything yourself.
If I were to buy physical real estate property, I would hire a property manager to manage for me. I really do not want to go to the trouble of all these tasks.
But buying physical real estate is not the only way to invest in real estate. You can also use a Real Estate Investment Trust (REIT). An REIT is a fund of real estate. This funds owns many real estate properties. And some of the rental income (or capital gains from selling) are distributed to the shareholders in forms of dividends. In fact, in the United States, a REIT is required to distribute at least 90% of the income to shareholders. There are quite well-regulated. You can buy REIT shares on the stock market.
REIT are a great way to invest in real estate. They will be invested in many properties unless of a few. And you can choose REIT based on what they are investing in. For instance, there are REITs for retail, for business, for house or for a specific city, … They offer more diversification than owning your own physical property. And you can buy a few shares, no need to invest 50’000 CHF of cash. They have generally a very nice dividend yield, higher than stocks.
Of course, they have more fees and you will not get as much income as you could from your own physical real estate property. And as same as your own property, the prices of your shares can go up and down. And the dividend you get from the REIT can easily vary. You may invest when the yield is 6% but it can fall down to 2% within a short amount of time. There are lot of these REIT in each local stock market. If you want to invest through them, you should do your research to pick the one that is the most adapted to your investor profile. This is a lot of work and it needs to be done carefully.
4. REIT ETF
Such as there are Exchange Traded Funds (ETFS) for stocks, there are also ETF for real estate. These ETFs will invest in many REIT. This will offer more diversification than owning a single REIT.
And as there some passive ETFs, there are also passive REIT ETF that invest following an index and have very low fees. This is great if you want to minimize the investing fees. The biggest advantage is once again the yield of these stocks. It is generally much higher than stocks. But the yield of REIT ETF is not as high as you could get by picking your own REITs. That makes some nice passive income. However, you may also want to invest for appreciation of the fund.
With an REIT ETF, you will be more diversified and there should be less risk than when using a single REIT. It is much less work to choose the REIT you want to invest in. That is not to say that there is no risk. The real estate market can be quite volatile. And again, the yield can vary a lot.
Of course, there are also some real estate mutual funds. It is mostly the same as an REIT ETF except you cannot get it on the stock market.
5. Real Estate Crowdfunding
Finally, the last way to invest in real estate is through crowdfunding or crowd-investing. There are many online platforms that propose collaborative investing in real estate. They are offering several real estate projects and people will back it. If everything goes well, you will get some profit back.
The way you get your money will highly depends on the platform you chose. Some platform will pay a yield on the money. On some platforms, it will directly depend on the rent or the sale of the property that you backed.
There are many platforms like this in all the countries. Some allow you to invest with as little at 100 dollars, but some need large entry points such as 10’000 CHF. This is too much for many people who just want to get a foot inside the real estate market.
In the United States, the most famous platforms are Realtyshares and Fundrise. Unfortunately, you cannot invest in any of these if you are not from the U.S. Therefore, it is a no-go for the Swiss investor. In Switzerland, there are many smaller actors in this market. I never tried any of them. The one I have heard the most about is Crowdhouse. I do not know how good they really are but I have only heard good things about them. Of course, if you want to invest through them, do your research first. Try to find some reviews and compare different possibilities before you make your choice.
As you can see, there is no one way to invest in real estate. There are many ways to do it. You can buy a property and manage it yourself or hire a property manager to do some of the job. You could also invest in a REIT or an ETF of REIT. Finally, there is starting to be a lot of options for online crowd investing in real estate. They all have advantages and disadvantages. You have to choose the way that suits the most to your investor profile.
Personally, I do not want to get a physical property for renting. I would like more to invest through an REIT or an REIT ETF. The problem is that the choice for Switzerland is rather limited. And the current state of the Swiss real estate market is not great in my opinion for investing. The vacancy is quite high and prices are not moving much which is great for most people, but probably not for investors. However, mortgages are really low, so real estate can still be a good investment. I do not exclude investing through a crowdfunding real estate company in the coming years. I will probably already research my options next year. However, I will only invest once my net worth has grown more.
What about you ? How do you invest in real estate ?