They think of the stock market when a lot of people think about investing. But to some people investing can be intimidating, a complex process with a learning curve. You might be looking for a way to diversify your investments if you are invested in the stock market. Or you may be looking for a way to generate passive revenue. Whichever of these camps you fall into, investment in real estate fits in with the bill. These are the best investment in real estate for the year 2020.
Many millennials forgot to make an investment in real estate because it seems like something that only older people do or only rich people do, but for any (legal) age and (almost) any budget there is an investment in real estate out there.
And real estate is a significant component of a healthy portfolio.
Investors still neglect real estate, even though it is a valuable tool for diversifying portfolios. Real estate offers a long-term slow, predictable rate of return, and can be a great way to build long-term wealth.
Another great thing about real estate investments is that in the case of REITs (Real Estate Investment Trusts) there are so many levels of involvement from completely hands-off to all-in for flipping houses.
Which of those best investment in real estate appeals to you?
Why Investing Real Estate is The Best
When you invest in real estate, you buy a stream of revenue. And investment in immovable properties has several advantages over some other investment opportunities.
It is important to find a way to divorce your time, at least a part of your income, from your income. There are only so many hours in the day and not all of them can be at work.
Diversifiedness is an integral part of any investment strategy. Diversification helps isolate your portfolio from stock market ups and downs, as well as from the US and world economies.
How much of your real estate portfolio will be in? There are different opinions, but a good thumb rule is 5 percent, but this percentage can be three or four times higher in “crisis periods.”
It is a material commodity.
Some types of investment in real estate offer a hedge against inflation as it is a physical asset that can be monetized through rent. Real estate is considered a “alternative asset” and is therefore capable of providing stability during market dips.
Where will I invest my money in real estate?
Partly thanks to the internet, we have a lot more real estate investment options than ever before. These are the best real estate investments for 2020, whether online or off.
If you’ve been an LMM listener or reader for some years, you’ll know how much we love rental property as a passive income form. We particularly love rental property which is turnkey.
A turnkey property is a completely refurbished house or apartment building which an investor can buy and rent out immediately. These same companies that also offer buyers property management services, reducing the amount of time and energy they need to put into the contract.
Turnkey rental property is a great investment for all the reasons that some other investment in real estate is great but it has some unique benefits.
Location: If you live in a city with high real estate prices such as New York or San Francisco, purchasing rental property may be out of reach, but businesses such as Roofstock enable investors to buy property at lower living costs.
Hands-Off: Obviously if you live thousands of miles away from your rental property, you won’t be the one who takes care of the property’s day-to-day running.
And even though your rental property is close to your house, you may just not want to be interested other than receiving rental income.
Turnkey rental property companies often provide A to Z service, from finding the right property to collecting rent to servicing expulsions.
Cost: Everyone can’t afford to buy a rental home. Ideally, you will need a downpayment of at least 25 per cent, but Roofstock has some homes for sale in the low to mid-five figures.
The cheapest home at the time of this writing was $36,000 and a downpayment of 25 per cent would be just $9,000.
You don’t have to own a second home, or even rent a spare bedroom to make money with Airbnb. We did a fantastic episode on using Airbnb to become part of the FIRE Movement.
One approach is called master leasing.
Another way to make money with Airbnb is to manage properties for owners who want to rent out through the site. That isn’t as hands-on as you may think.
A great deal of the work can be automated with software and services such as Guesty and Orbirental.
Cost: You’ll need to pay the rent on the apartment if you’re using master lease. Ideally you get enough reservations to cover the rent and make a profit but if the reservations don’t cover the rent, you ‘re on the hook.
Managing properties costs nothing to you. Whatever expenses you incur should be factored into what you charge the owner for the services you provide.
Mutual funds, REITs and ETFs
If you’re used to trading in the stock market, you’re used to doing so only with a few mouse clicks. You can just as well invest in real estate!
REITs are companies that own, operate, or manage real estate assets including residential property such as apartment buildings and commercial real estate such as shopping malls or office buildings.
Boston Properties is a real estate REIT that specializes in 5 major American cities with office buildings.
Mutual funds and ETFs specialize in real estate, too. One such fund is the TIAA-CREF Securities Real Estate Fund. The Vanguard Real Estate ETF is a real estate ETF.
Cost: Many REIT mutual funds and ETFs have no minimum commitment to invest like the options TIAA-CREF and Vanguard mentioned above.
Commercial real estate can be one of the most lucrative types of investment in real estate that you can make but the investment bar is high, often only open to accredited investors.
Yet crowdfunding real estate investment firms like Fundrise and Realtymogul have opened up to the rest of us some of the best real estate investments. Here’s how real estate crowdfunding works:
A real estate developer sees an potential for investment. The developers raise capital from small, everyday investors like us in return for an equity interest in the company, rather than using their own capital or borrowing from a bank.
That’s kind of like Kickstarter! Be warned though that real estate crowdfunding investments are not as liquid as certain other forms of real estate investments.
Fundrise does however have greater liquidity than other sites. Fundrise allows you to withdraw cash four times a year, without charge.
Costs: You can start investing just $500 with Fundrise. Realtymogul has at least $5,000 of that.
If you really want to buy a home but don’t have a sufficiently large downpayment or would like to own some rental property, but worry you won’t be able to make two mortgage payments, buying a multi-family home might just be the answer.
You can rent out the others and live in one unit.
Living in a building and renting out the other unit is eligible for primary residence financing requiring a lower down payment, and the mortgage has a lower interest rate than investment property loans have.
However, you are expected to stay in the building for a number of years, but it is typically only one or two years.
Cost: It depends on the cost of the unit, but you just have to make a downpayment of 15 percent for a two-unit building, the minimum is 20 percent for three or four units.
Ideally, half of your mortgage is paid by your tenants, and enough to produce some extra income.
What is the average rate of return on investment in real estate?
We can’t give you an exact answer. Too many individual factors are involved, how much you paid for your rental property, how much you get in rent, how many Airbnb customers you have, etc.
But we can have some information for you about the best real estate investments that we have outlined.
Andrew and Laura own three properties for sale, two of which were purchased through Roofstock. Here are the late 2019 total numbers:
The Net Profit
- Cash balance (after mortgage and operating fees) $24,257.02 ($808.57 a month)
- Appraisal: $91,982
- $8,846.61 built on equity
- Expenses not expected $11,002.35
- Net gain $144,085.81
The Airbnb home-sharing site is among the best money-makers in the so-called gig economy.
According to research by low-interest lender Earnest, Airbnb hosts make about $924 a month on average.
That income can of course vary dramatically depending on where you are based, how often you rent out your place, the quality of your home and the services you provide.
The guest we interviewed for our episode Zero to Fire Using Airbnb tells us she was renting the property twice the market rate.
She master leased it and claimed that running property would make $500 to $1,000 a month.
If you have the right automation in place, you’ll only need to actively work for 8 to 10 hours a week.
Mutual funds, REITs and ETFs
The annual return on the U.S., as calculated by the MSCI U.S. REIT index, REITs are about 12.99 per cent. Compare that with the S&P 500 Index, a broad performance measure for the U.S. stock market averages about 10 percent return.
Boston Assets connected above show quarterly returns and in the last ten years they have been floating between 4% and 5%.
The TIAA-CREF mutual fund we connected above had returns of 10.98%, 8.74%, 6.98% and 11.99% respectively over one, three, five and ten years.
The Vanguard fund we linked above had a return of 13.3%, 13.1%, 45.7% and 329.5% over the same period.
Andrew and Laura are investing with Fundrise and we have a lot of knowledge about the crowdfunding site for real estate. The most recent information is below.
The data I would find on the return rate for multi-family home investments is good, but it does not differentiate between owner-occupied and off-site owners.
The latest data, from 2017 shows:
The multi-family asset class generated an average annual return of 9.75 percent between 1992 and 2017, which is a higher average annual return than any other type of commercial real estate.
Will you have to invest in real estate?
Yeah on balance. Getting some real estate in your portfolio is a wise investment decision and there is something for everybody, because there are so many options, many of them simple and inexpensive.
But don’t get too excited, note the thumb rule: 5 per cent of your portfolio should be land. If things are unpredictable you can bump it up by four or even five times.