Real estate and other alternative investments such as precious metals, commodities and private equity are one way investors can hedge against stock market volatility.
Here are some ways to make money from real estate assets.
How to Make Money in Real Estate
1. Add Real Estate Investments to a Portfolio
One of the key reasons investors turn to acquiring real estate investments is because these assets typically have a low correlation to the market and also offer protection against inflation. Diversifying the assets in a portfolio also leads to lower risk.
Having a portion of your portfolio in real estate is a good tactic for enhancing diversification, said Daren Blonski, managing principal of Sonoma Wealth Advisors of California.
Investing directly in real estate can be expensive and extremely risky, but people can turn to real estate funds, ETFs or even real estate investment trusts (REITs) instead.
“Real estate investments can help consumers create an alternative pocket of income in their portfolio,” said Rick Swope, senior director of investor education at E-Trade Financial, an Arlington, Virginia-based brokerage company. “These investments give everyday investors access to the real estate market at lower barriers to entry.”
Both real estate funds and REITs invest in apartments, data centers, cell phone towers, shopping centers and office buildings. The combination of investors' assets allows the funds and REITs to purchase a percentage of these various real estate assets.
2. Diversify With Real Estate Funds
A real estate fund is a mutual fund that buys shares in the securities offered by public real estate companies while a REIT trades like a stock.
“When selecting from ETFs or mutual funds it's important to look at a few key aspects of the fund,” Blonski said. “First, you should look at how many assets are in the fund. It's important to select large, broadly-traded funds. Second, look at the history of the fund, in general performance and manager consistency. Third, you should look at the expense ratios of the funds.”
3. REITs Offer Dividends and More Income
Real estate investments offer dividends and are attractive to investors who are seeking additional income-generating opportunities in their portfolio.
“REITs are required to distribute at least 90% of their taxable income, so investors tend to gravitate toward them because they provide a steady cash flow,” Swope said.
Investing in individual REITs provides income that investors are seeking, but they are riskier and could invest in only one type of real estate such as shopping malls or shopping centers such as Weingarten Realty (WRI). Investors need to be prepared to conduct a “high level of due diligence and you face single-security risk,” he said.
4. Real Estate ETFs Provide Diversification
Real estate mutual funds and ETFs such as Invesco Real Estate Fund (REINX) Vanguard Real Estate ETF (VNQ) own a larger number of assets and can add diversification, while still generating income.
“Funds often invest in REITs so investors reap similar benefits,” Swope said.
Deciding between an ETF and mutual fund depends on your goals and amount of risk you want to take on. ETFs are passively managed and aim to mirror a specified real estate benchmark and are more liquid since they are traded on exchanges similar to stocks.
“REITs and mutual funds tend to be less liquid so investors should consider these as dividend or growth investments rather than short-term trading products,” he said.
While real estate sector funds offer growth and income opportunities for investors, keep in mind that any dividends paid are taxed as ordinary income, Swope said.
One ETF to consider is the JPMorgan BetaBuilders MSCI US REIT ETF (BBRE) - Get JPMorgan BetaBuilders MSCI U.S. REIT ETF Report that invests in the U.S. REIT market and invests in assets in the MSCI US REIT Index, a market-cap weighted index, Blonski said.
The fund has 151 holdings of publicly traded U.S. equity real estate trusts and offers a broad diversification in the U.S. real estate markets with a low expense ratio of 0.11%. The fund was launched June 15, 2018 and its return since inception is 7.97%.
5. Real Estate Crowdfunding Is an Option
Another option is for investors to allocate money in commercial real estate crowdfunding companies. While some companies like Fundrise have a minimum initial investment of $500, other companies require investors to be accredited and invest at least $250,000.
The returns from commercial real estate often outperform benchmark indexes. The average 20-year returns in the commercial real estate outperform the S&P 500 Index at 9.5% while residential and diversified real estate investments do average 10.6%, said Michael Underhill, chief investment officer of Capital Innovations in Pewaukee, Wisconsin.
“For all their familiarity as office skyscrapers, apartment complexes and shopping malls, commercial properties have never been a core component of most investors’ asset allocations,” he said. “Over the past 20 years the returns for this asset class, almost 10%, are just a bit below those of stocks, but its volatility is much closer to that of bonds.”
6. Buying Physical Real Estate
Buying a second home to rent out to tourists can also generate additional income. Make sure you budget for property taxes, HOA fees and maintenance costs for lawn care or snow removal. Updating a house or a condo can also eat into some of your profits.
Before you buy a second home, do some research on the most popular neighborhoods for renters, especially if you are appealing to short-term renters who are in town for a sporting event, concert or conference. Proximity to the airport, restaurants, bars and other venues are likely to be priorities. You can either take care of vetting the renters yourself, use a management company or a third party company like AirBnB.
Another option is to lease out the home to long-term renters. Some factors to consider when choosing a property are school districts, transportation options such as buses, trains and subways and proximity to grocery stores and other businesses. Be prepared to be a handy man or have one that is available often for any emergencies or last-minute repairs.
7. Purchase a Vacation Rental
Consider buying a home in a vacation area such as near a beach, lake or mountains. Conduct due diligence on when most tourists will want to rent your home and if there are any rules on the minimum length of the rentals. Determine how you will generate income in the off-season such as renting the home for short periods of time for conferences and business travelers.