When people think of owning real estate, they often think of the home they live in or the
home they hope to buy one day.
Investors see real estate differently.
They see it as another investment, like stocks or bonds, that can generate income or appreciate
in value over time.
There are many ways to invest in real estate.
In this video we'll compare three: property, REITs, and homebuilder stock.
We'll also consider the benefits and risks of each.
This can help you determine if real estate is an appropriate investment for your own
portfolio.
The most obvious way to invest in real estate, is..well..to buy real estate.
This means either buying a home, a group of homes, land, or even a farm with the intention
of producing some type of return.
There are two common ways to profit from owning real estate: renting and capital appreciation.
Renting a home to tenants is a way to produce monthly income.
Capital appreciation is when you buy a property for one price and eventually sell it for a
higher price.
In addition to the potential for steady income or capital appreciation, owning a piece of
property can serve as a hedge against inflation because real estate tends to hold its value
well over time.
Of course, this method of investing involves some risks.
For example, buying and owning real estate can be very capital intensive.
Title fees, closing costs, maintenance expenses, property taxes, and insurance premiums add
up, not to mention the initial property purchase price or ongoing mortgage cost.
This requires keeping a large cash reserve on hand.
Aside from expenses, fluctuations in the overall real estate market can cause the value of
the property to fall, sometimes dramatically.
You need to consider these risks whenever you buy real estate, whether it's the home
you'll live in or an investment property.
However, there are other ways to invest in real estate without actually owning property.
One is through a tradable security like a Real Estate Investment Trust or REIT.
A REIT is a company that buys and manages large, diversified portfolios of real estate
properties.
You buy shares of REITS like you buy stock in a company.
REIT shareholders are paid dividends from earnings generated through rents collected
on the REIT properties and through other investing activities.
REITs are known for paying high dividend yields.
This is because REITS are required to pay out 90% of taxable income in the form of dividends
to shareholders.
Because of this, income from REITs tends to be higher than most stock dividends and fairly
steady in its frequency.
Of course, the dividend amount may change as the REIT earns more or less income.
Remember that REITs are real estate investments, so market conditions that affect the real
estate market, especially interest rates, can impact the value of a REIT.
In addition, REIT dividends could be considered ordinary income and taxed at a higher rate
than capital gains.
It's always a good idea to check with a tax professional to see how REITs could impact
your own tax situation.
Now on to the last real estate investment we'll look at today publicly traded stock
in home and construction companies.
This is another convenient way to participate in the real estate market that can offer significant
growth potential.
However, as with REITs, homebuilder stocks fluctuate with the overall market and interest
rates, or in response to news or earnings reports.
To review, you've been introduced to three ways to invest in real estate: property, REITs,
and homebuilder stocks.
When determining if real estate is a good investment for you, there are a few more things
to consider.
As mentioned earlier, you should be aware of the current market environment for general
real estate, interest rates, and inflation, as well as potential tax implications for
your account.
In addition to these variables, you should also be aware of any other exposure your stock
or bond portfolio has.
Real estate is generally considered an alternative investment and may only be appropriate
for a small allocation for many investors.
If you're willing to accept the risks, real estate investing may be a good fit for you.