The Best Non-Stock Investments In Real Estate

The Best Non-Stock Investments In Real Estate

July 3, 2020

Produced by:
Elizabeth Welgemoed

Elizabeth is a Senior Content Marketing Manager with over 10 years of experience in the field. Having authored or edited 1,000+ online articles, she is a prolific content producer with a focus on the real estate vertical.

Recent economic turmoil has caused many investors to reconsider where they are investing their money. The stock market has repeatedly been affected by the resurgence of the virus in many states, and the Dow recently registered it’s worst one-day loss. Furthermore, buying stocks is always easiest. Part patience, part understanding the market, and part luck, many overeager investors try investing in stocks only to see little to no returns for their efforts. The competition is high, and the result is often a big gamble – not something that gives new investors the confidence needed to put in their own money.

Now might be the time to pursue alternative investments with less short-term volatility, and there is no asset class with as little volatility as real estate. Real estate has long been a successful wealth-building industry and in recent years property investing has become much more diverse with many options available to investors. 90% of the millionaires in the US are invested in real estate, and it’s because of the distinct benefits that can come from investing in real estate.  Real estate continues to be the world’s biggest asset class,

Many of the alternative investment options in this article have a lower correlation to the stock market. This means that your portfolio will have some protection against economic fluctuations. A big part of successful investing is preparing your investment portfolio for all market conditions, good and bad, and weather any storms that arise.

These are the best non-stock investment options in real estate, and why you should invest in them:

Table of Contents

Rental Property

The first alternative to stock investing is purchasing a rental propertyOwning a rental property has long been associated with stability and consistent income. A second home that can be rented out for passive income can hold a lot of financial benefits for the investor. A recent drop in homeownership has caused a spike in demand for rental properties, particularly amongst millennial and gen Z investors. By the end of 2019, there were 43 million housing units occupied by tenants. This number is projected to continue increasing as property ownership is on a downward trend. Apart from benefits like not having to maintain the property personally, many younger people choose to rent due to proximity to amenities and metro areas. As people at the start of their professional careers, it can be difficult to buy property, especially in certain states where the average property cost is higher than the national average.

The Best Non-Stock Investments In Real Estate

If you have the funds to buy one, a rental home can not only generate steady and consistent returns but also create an increase in equity. Having a consistent income contributes to personal wealth, and if you ever do decide to sell the property you can still earn profit from the sale. The other reason why this option is so popular with investors is because of the level of involvement required. Rental properties require a minimal time commitment from the landlord, who is free to pursue other investments or full-time employment. Rental income may be taxable, but there are several deductions that the landlord can make use of to decrease their total taxable amounts.  These deductions include accounting, depreciation, and loan interest.

Rental properties are a long-term investment, which means the investor will benefit from appreciation over time. It’s also one of the few investments that allow the investor a lot of flexibility.  As a landlord, you can set your own terms and rental fees, as long as it falls within the law. In summary, a rental property is a great way to ensure your long-term security, with the added benefit of having a second home in case you ever need one.

REIT

Real estate investment trusts are another non-stock investment that enables investors to earn passive income. The difference is that it’s with a lower barrier to entry. REITs are publicly-traded companies that invest in, operate, and finance real estate that generates some form of income. This real estate includes apartment buildings, condos, or other complexes, commercial properties like shopping centers or hotels. The majority of REITs function on a single business model – they lease spaces, collect rent on them and then that rent is paid out to shareholders via dividends. The trust keeps a portion to continue the process.

When investing in a REIT, you are investing in a pool of real estate assets along with other investors like yourself – it acts very similarly to a fund. The biggest benefit of a REIT is that the investor does not need a ton of capital to get started. Besides that, this option does not require the investor to manage the properties themself. Instead, any real estate is managed by the trust. Alongside this benefit, there is also the advantage of investing in a publicly-traded stock, but with the support of commercial real estate. This investment option has a demonstrated track record of providing higher levels of income. Paired with share price appreciation, protection from inflation, and more, making it a popular option with investors.

Crowdfunding

Another option with a similarly low barrier to entry is real estate crowdfunding. This is a new method raising capital for real estate investments, allowing investors to gain access to a wide variety of properties in different locations. This alternative option is being bolstered by its compatibility with online transactions. It also offers deal flow with unparalleled access facilitated by the internet. There are three players in a real estate crowdfunding equation; the sponsor, the crowdfunding platform, and the investor. You, as the investor, contribute part of the capital needed for the deal and in return receive a share of any profits the deal may produce. You may also be entitled to a proportional payout from an eventual sale.

There are several distinct advantages to investing in real estate via crowdfunding. These advantages include low minimum investments, asset transparency, and not having to manage the properties personally. This is a great way to diversify your portfolio and allows you to invest in assets that you may not have access to otherwise. What’s better is that real estate crowdfunding allows you to leverage the expertise of other successful property investors and developers, making it a good option for investors with less experience of their own.

On average, crowdfunding real estate investors earn returns between 11 and 15%. Equity investments in real estate-based crowdfunding have higher averages, ranging between 16 and 19%. Unlike REITs, crowdfunding deals usually focus on a single property type.

Fix and Flip Business

The last alternative to non-stock investments on this list is starting your own real estate-based business, such as flipping houses. This option has the potential to provide the investor with the highest returns of all the above investment options. Fix and flip investors identify lower value properties in sought after neighborhoods, and then use their funds to purchase and renovate them. Their goal is to put the property back on the market as fast as possible and resell it for a significant amount of profit. Adding upgraded fixtures and features to kitchens, bathrooms, flooring, and closets will add value to the property for sellers. While this can lengthen the fix and flip process, reselling the property will be easier.

This option is less passive than the other options on the list and requires sweat equity from the investor to be successful. Beyond the potential to make a good profit, there are several distinct benefits to flipping houses. You get to be your own boss, make the big decisions, and see the actual fruits of your labor. Many investors who choose to flip houses make use of outside financing like loans, which means they need little startup capital.

At the end of 2019, house-flipping profits reached an average gross of  $62,700, or a return of 39.9%. In 2019, fix and flips made up 7.2 percent of all home sales, earning average gross profits of over $60,000. Of all the options in this article, flipping houses could be the most profitable by far but also requires the most work from the investor as a result. On a similar note, flipping houses requires a good understanding of budgeting and requires the investor to keep to a specific timeline. Otherwise, they risk forfeiting the property if they are unable to repay their loan.

Final Thoughts

While the stock market holds its own significant advantages, it’s never a bad idea to consider alternative options, especially when they are as full of potential as real estate. Whether you are exploring alternatives due to the recent economic downturn or have been looking for a way to diversify your income, it’s good to know the investor has choices available whether they want a high level of involvement or not. It’s essential that the investor consider how much they want to invest. They should also consider how active they are willing to be in that investment, and what their ultimate goal for their investment is. Investing in real estate holds more reliable results for investors that are wary of the risks that come with investing in the stock market. The American financier and politician Russell Sage once stated:” Real estate is an imperishable asset, ever-increasing in value. It is the most solid security that human ingenuity has devised. It is the basis of all security and about the only indestructible security.”

Real estate has long been a strong alternative investment option to the stock market, providing more stability even in the face of uncertainty. There is also no reason why the investor cannot have the best of both worlds. Diversifying your investment portfolios is recommended to ensure that you maximize your returns while minimizing losses. Both real estate and stocks can lead to financial gain, but each has its own caveats that the investor will need to contend with.

When you are considering what the right investment approach is best for you, be sure to do your research and cast your net wide to ensure that your investments are protected from risk. At the end of the day, any market can experience serious fluctuations, but people will always need homes. That gives real estate an extra strength against large downturns that other asset classes cannot provide.

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