Investing in real estate can be very beneficial, but it requires a large amount of capital to build a portfolio. For people who don’t have a lot of disposable income, there are other options in order to get started in the real estate investment business.
A REIT is a real estate investment trust. This is a company that owns and manages income-producing real estate and provides cash flow to investors. If you invest in a REIT and choose dividend reinvestment, your portfolio will continue to grow until you have the freedom to purchase properties yourself, or just keep investing.
Diversification is a challenge when investing in real estate because, unlike the stock market, it’s difficult to gather a wide variety of investments. With stocks, many companies trade shares at low prices, so it’s not hard to create a diversified portfolio. In real estate, however, a single asset can cost six-figures.
One option for people looking to diversity are real estate-focused mutual funds, index funds or exchange-traded funds (ETFs). Two examples of these are RE/MAX Holdings Inc. (RMAX) and the commercial real estate operator CBRE Group (CBG). Other companies, such as hotels, resorts and shopping malls are good choices. The stocks of these companies typically pay a much lower dividend than a REIT, but these types of companies have the freedom to expand and reinvest their profits. The Prudential Global Real Estate Fund (PURAX) is a highly rated mutual fund, and a very popular REIT ETF is Vanguard (VNQ). This fund trades like a stock but also allows for exposure to a variety of REITs. It’s important to keep in mind that, just like investing in the stock market, it’s always vital to do plenty of research before making investment decisions.
Home construction is another potential industry that is ripe for investing. When job growth is strong, people want to buy new homes. If you research any growing metropolitan area, you will find an entire industry of homebuilders who are developing new neighborhoods. Leading money managers have already caught on to this idea, according to a list of top-buying mutual funds. Some building sector and related stocks include: homebuilders NVR (NVR), Toll Bros. (TOL), KB Home (KBH), Graco (GGG), Louisiana-Pacific (LPX) and Allegheny Technologies (ATI).
Just like with all other investments, it’s important to do your due diligence. Find out about the quality of the real estate in the neighborhood where building is taking place. Study trends in that area and establish whether high- or low-end homes are the company’s main focus.