Real estate is a very lucrative asset classes and should be a component of every well-diversified investment portfolio. Real estate investments offer capital gains and investment income while having a low correlation with the traditional asset classes stocks and bonds. That makes real estate an excellent alternative asset class for portfolio diversification, but also aids in boosting your portfolio returns.
Nonetheless, many small investors stay clear of real estate as an investment because of the need to take out a mortgage on an investment property and then having to deal with tenants and property maintenance.
Nowadays, however, if you want to invest in real estate but you don't want to have to get that mortgage calculator out, the good news is that there are several other ways in which you can invest in real estate without the need to buy physical property.
Real Estate Related Stocks
You can receive exposure to real estate by holding real estate related stocks in your investment portfolio. Real estate related stocks are stocks of large companies that engage in real estate related business. Examples would be homebuilder stocks, housing materials stocks, construction company stocks and housing-related retail stocks.
You can purchase real estate related stocks on the stock exchange to gain a certain degree of exposure to the sector. Having said that, real estate stocks correlate more with the overall stock market than say REITs or direct real estate investments through crowdfunding. Hence, they are less of a diversifier for your investment portfolio.
REITs are another great way to gain exposure to the real estate sector. REITs (real estate investments trusts) are companies that own investment properties. They are listed on the stock exchange and shares in REITS can be bought and sold just like stocks. REITs traditionally hold a range of real estate including apartments, offices, shopping malls, warehouses, etc.
REITs are similar to mutual funds in the sense that they pool investments together, generate capital gains and investment income, and allow investors to invest in a diversified portfolio of assets. US REITS have performed exceptionally well this year and will very likely outperform the S&P500 in 2016.
Real Estate Funds
Real estate funds are mutual funds that invest in REITs, real estate related stocks and in properties directly. They are an excellent way for investors to hold a diversified portfolio of real estate investments without the need for a large amount of capital to get started.
The difference between REITs and real estate mutual funds is that real estate funds invest in REITs, real estate related stocks and in property directly, while REITs will only hold direct property investments. Hence, you receive more diversification with Real Estate Funds.
Real Estate Crowdfunding
Real estate crowdfunding is a new innovative way to invest in real estate that has emerged in recent years. Crowdfunding refers to funding large projects using small contributions by a large number of individuals, usually through the use of online platforms.
In the U.S., there are several real estate crowdfunding platforms, such as Fundrise and RealtyShares for example, which offer small investors to gain exposure to real estate investments using the concept of crowdfunding. Investments can start with as little as $5,000 at the two above-mentioned real estate crowd investing platforms. Real estate crowdfunding is an excellent way to invest in large commercial properties to which you would normally not gain access to as a small investor.
Nowadays, there are enough possibilities to gain investment exposure to the real estate sector without having to purchase costly physical properties. REITS, real estate stocks and funds and real estate crowdfunding make it possible.