If you can access credit, or otherwise have money to invest, consider real estate and purchase a single-family rental property. However, you must do thorough research to choose the best places to invest in real estate in 2021. All real estate is local so you much understand the local factors that can affect your investment in the future.

Phil is a hedge fund manager and author of 3 New York Times best-selling investment books, Invested, Rule #1, and Payback Time. He was taught how to invest using Rule #1 strategy when he was a Grand Canyon river guide in the 80's, after a tour group member shared his formula for successful investing.
Jul 17, 2021 Real estate can be a risky business, so don’t invest any money you can’t afford to lose. Commercial property investors, for instance, should have around $50,000 ready to go. Commercial property investors, for instance, should have around $50,000 ready to go.

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The recent volatility in the financial markets probably has you wondering if there are other ways to invest without so much turbulence.

Stocks are an excellent long-term investment, but there’s no doubt they can also be incredibly unpredictable.

One way to broaden your investment base is by holding at least some of your equity portfolio in real estate. The returns are comparable with stocks, and often more consistent.

That brings up the obvious question of how to invest in real estate. Surprisingly, there are several ways it can be done, some without even getting your hands dirty.

Why Invest in Real Estate?

Most investment advisors recommend the typical investor hold most of their portfolio in equities. While those are generally considered to be stocks, real estate also qualifies as an equity investment. After all, just as is the case with stocks, real estate represents ownership in the underlying investments.

But real estate does something else that’s important in any portfolio – it diversifies your allocations. Rather than having 100% of your equity portfolio invested in stocks, you can add real estate to the mix, giving you long-term capital appreciation from a different direction.

That point alone is worth a deeper discussion. Strictly speaking, stocks are financial assets. That is, they’re tied to the financial markets. When there’s turbulence in the financial markets, stocks go down with the rest of the pack.

By contrast, real estate tends to be a more slow-moving investment. Its cycles are longer, which means it may continue to perform well even when stocks and other financial assets are not. This will give you an opportunity to continue earning positive returns on your equity portfolio, even when the financial markets aren’t cooperating.

Advantages of Investing in Real Estate

Real estate has two big advantages over stocks: leverage and depreciation.

With a small amount of capital, often 20% or less, you can control a much larger investment. For example, with a $50,000 capital contribution, you can own a $250,000 property.

A 5% annual capital appreciation rate – which will be $12,500 on a $250,000 investment – will translate into a 25% return on your $50,000 of invested capital.

Such returns are possible because you can leverage 80% or more of a real estate investment. By contrast, real estate leverage on stocks is limited to a 50% margin.

Real estate’s other advantage is depreciation. Depreciation is what’s known in accounting circles as a “paper expense.” While it’s deductible for tax purposes, it doesn’t result in an out-of-pocket cost. For that reason, your actual income from real estate will be reduced for tax purposes but without a corresponding reduction in your real net income.

With all the advantages of investing in real estate can bring to your portfolio, let’s look at the best ways to participate.

Ways to Invest in Real Estate

Here are 5 great ways to invest in real estate:

Owning Your Own Home

There’s some debate as to whether owning your own home is mostly about having a place to live, or is it more about having an investment. Probably the best answer is both. And that’s a big part of the homeownership advantage. Your home can provide shelter and a sense of permanence while building equity and investment value over the long term.

In fact, the family homestead offers two ways to earn long-term returns:

Capital appreciation, from the slow, but steady (and sometimes not so slow) rise in the value of the property. At an average annual rate of 3%, the value of a home can double in less than 25 years. At 5%, it will only take 15 years. And at 7%, it’ll double in just ten years.
The paydown of your mortgage balance. Even if you think a 30-year mortgage will go on for what seems like forever, your outstanding mortgage balance is still gradually declining each and every year. And at the end of 30 years, it’s completely gone, and you’ll have 100% equity in your home.

This is also another example of the leverage advantage enjoyed by real estate. You can buy an owner-occupied home with a down payment of as little as 5% – and sometimes even less, all the way down to zero. If your home is appreciating at 5% per year, that will be like earning a 100% return on your equity each year.

Over the long term, the returns are obvious.

But let’s say you purchase a $300,000 home with a 5% down payment – $15,000. After 30 years, the house will be fully paid for, and at 5% appreciation, it will quadruple in value.

Your $15,000 initial investment in the home will grow to an investment worth $1.2 million.

How to Screw Up a Perfectly Solid Long-term Real Estate Investment

I have to throw in an important caveat here. The above example will only work if you’re committed to paying off your mortgage. But if you’re in the habit of taking home equity lines of credit and refinancing your home to get cash out every few years, your debt will grow over the years. That will offset the equity buildup that would otherwise take place.

The hoped-for windfall at the end of 30 years will be greatly reduced, or even eliminated if you get carried away with stripping out the equity.

Real Estate Investment Trusts (REITs)

REITs are like mutual funds that hold commercial real estate. A single trust can hold dozens or even hundreds of properties. Investments can include office buildings, retail shopping centers, large apartment complexes, warehouse space, and many other different types of income-generating properties.

One of the major advantages with REITs is that they can provide both steady income and long-term capital appreciation. Rents collected on the properties in excess of operating expenses are returned to investors in the form of dividends. In fact, REITs are required by law to distribute at least 90% of their profits to investors in the form of dividends. And since at least some of that income is reduced by depreciation expense, it will at least partially escape taxation.

Capital appreciation distributions are possible when properties held in the trust are sold at higher prices. Given that most properties are sold in more than one year, investors will get the benefit of lower long-term capital gains tax rates.

REITs have an excellent long-term investment performance. They out-earned stocks over a recent 38-year time frame, returning 12.87% versus 11.64% for stocks from 1978 to 2016. The difference may “only” be about 1.23%, but that can make a substantial difference over 20 or 30 years.

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Real Estate Crowdfunding Platforms

Real estate crowdfunding is a relatively recent investment trend, having come about primarily in the past ten years. It’s part of the peer-to-peer (P2P) investment model that’s becoming more popular with each passing year. Real estate sponsors come to the platforms to offer their real estate deals, while investors fund them through investments.

Perhaps the most unique feature of real estate crowdfunding platforms is that they provide you an opportunity to invest in a single specific property or to select from several. As an investor, you can hold fractional shares

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