There are many investment avenues where you can invest and get good returns. Stocks, mutual funds, investment bonds are some of the options for retail investors to invest money. Real estate is also a popular and conventional sector where you can invest your money and may get good returns if remain invested for long time. Real estate gives returns by two ways. One is rental income and other is appreciation in the price of the property, which is also called capital gain. But the problem is that the real estate sector requires very high amount of money to invest. Due to this retail investors having less amount to invest often step back. But is there any way by which you can invest in this sector even with very less amount to invest? The good news is that now a day, there are few options available through which you can invest in real estate online with even very small amount of money. In this post we will know about some to such options. REIT is one of them.
ETFs and Mutual Funds
This is the simplest way of investing indirectly in real estate sector with small amount of money. You can purchase ETFs and mutual funds of companies investing in the real estate properties.
Advantage
The advantage of this method is that you can diversify your portfolio and have exposure of real estate sector even if you have very less amount to invest. These are very liquid and you can sell them at any time.
Disadvantage
The disadvantage of these funds is that they charge expense ratio fees to operate and manage funds. Moreover, if these funds are being actively managed then there is a risk of incompetency of the fund manager and the fund may not perform well in long run.
Real Estate Investment Trust (REIT)
This is best way to have a real estate exposure without investing traditionally in real estate.
REIT is created by a corporation or trust which uses money of many investors (mostly small) to buy and operate property. The income earned by these properties is distributed among the investors. REITs are purchased and sold on major exchanges, like other stocks.
Advantages
Like stocks pay dividend, REIT also pays regular income to the investors in the form of dividends. One of the advantages of REITs is that small investors can afford investing in non- residential properties like shopping malls, office spaces, etc. also through these instruments.
Other advantage of REIT is that they are highly liquid. You don’t need a real estate agent to sell them as they can be traded in exchanges similar to stocks.
Disadvantages
The disadvantage of REITs is that you may have to pay income tax on the dividend gained from REITs.
REITs are of two types. One is equity REIT and the other is Mortgage REIT. Equity REITs own buildings while mortgage REITs focus on the income from real estate mortgage financing.
Online Real Estate Platform
Online real estate platforms provide small investors an online platform to small investors to join and invest for a bigger commercial or residential property. The investment is made via online real estate platforms called real estate crowdfunding.
Advantages
The advantage of crowdfunding platform is that they allow investors to diversify their portfolio and have exposure of real estate sector, without purchasing direct property.
Although, there is some minimum investment specified in these platforms, in some cases it may be low also, for e.g., if you are investing in ground floor property of any apartment, minimum investment required would be low.
These platforms offer high rate of returns to attract investors.
Disadvantages
Some crowdfunding platforms invest directly in the real estate properties, while others lend money to real estate investors. Usually, there is limitation in investing through these platforms. Most crowdfunding platforms only accept funds from accredited investors. If you have a net worth and turnover below some specified amount, you may not be allowed to invest through platforms.
This method of investment still requires substantial amount of money to invest, although less then what is required to purchase properties outright.
Crowdfunding websites may charge you hefty amount in the name of management fees, as compared to what is being charged by REITs, mutual funds of ETFs.
These funds are not as liquid as REITs, mutual funds or ETFs. These platforms may require you to leave your money for some specified period which may range from one to five years or more.
Compared to other forms of real estate investing, crowdfunding may be risky as it is a new form of investment. The projects appearing on the crowdfunding sites may not be getting funds from somewhere else. Many crowdfunding platforms require investors’ money to be locked up for a several years, making it somewhat illiquid.
Conclusion
Investment is real estate sector is attractive and has potential to provide you good returns, however it has some disadvantages also. There are some risks associated with real estate investments, like wrong title, litigations, issues with tenants in case of rental properties, etc. Real estate investments are illiquid and require heavy amount of money if invested directly in them. There are many expenses associated with purchasing properties, like registry fee, advocate charges, real estate agent charges, etc. The capital gain obtained by selling the real estate property may attract high income tax. Due to the above factors, investments in real estate sector may not be as lucrative as it looks from outside. Fortunately, there are many options available now a day, through which you can invest indirectly in the real estate sector without actual having the title in you name.
Investing in mutual funds/ ETFs which invest their funds in real estate sector, REITs and online real estate platforms are such methods through which you can diversify your portfolio in the real estate sector. The best part of these methods is that they provide you the benefits of real estate investment without exposing you to the risks associated with this sector.
Also read: Infrastructure Bonds and their Benefits