Real estate is the world’s biggest asset class, estimated to be valued at over US$300 trillion and includes retail property, offices, industrial, hotels, residential, other commercial uses, and agricultural land.

As an asset class, real estate offers a unique mix of cash flow, stability, and diversification, and there are many ways to get started building your portfolio.

In this article:

• Video: Watch how to get started in real estate
• Explore different types of real estate investments
• How location drives the biggest returns
• The advantages of tokenized real estate

Video: Watch this before you start investing

In this video, you’ll learn the different types of real estate investments including:

• Buying and owning rental properties directly
• Real estate investment trusts
• Online platforms
• Why online platforms are best for beginners

The different ways to invest in real estate

There are many ways to invest in real estate including owning rental properties, investing in REITs, and through online platforms.

The key benefits of rental properties and online platforms is that you get to choose the asset, while in REITs - you normally need to take the good with the bad assets, and trust in the manager to deliver overall returns despite the many layers of fees.

#1. Buying and owning rental properties directly

You can become a landlord by buying and owning rental properties directly. This hands-on investment may not always be enjoyable, but can be manageable with a careful selection of properties and tenants.

As a landlord, you will primarily earn your income from collecting rent and long term appreciation of the properties. The amount you can charge and the capital growth of the asset often depends on the property’s location and the tenants it will attract.

There can be lots to manage - with rental-property owners responsible for taxes, mortgages, and insurance bills. If you don’t hire a property manager, you will be tasked with finding tenants, maintaining the property, and resolving any problems that arise.

Pros

• Excellent source of regular passive income with a property manager
• Numerous tax-deductible expenses on upgrades, repairs, and maintenance
• Direct and tangible ownership experience
• Flexibility to sell or use the property if you decide to

Cons

• Can be time-consuming when taking an active role
• Risk of bad tenants not maintaining the condition of the property
• Annual upkeep and long-term maintenance
• Long and costly process to sell

#2. Real estate investment trusts

A real estate investment trust (REIT) refers to a corporation that uses your money as an investor to buy, manage, and sell income-generating assets.

REITs have a fairly clear business model, through which they pay out about 90% of their taxable returns as dividends to stakeholders. Afterward, you pay income tax on those earnings.

The principal objection most REIT investors have is the low visibility on the underlying investments - which makes them a good option for investors that may lack any experience in real estate investing and want to diversify their real estate portfolio.

You can buy and sell REITs on major stock exchanges like you do with exchange-traded funds (ETFs) and stocks. This investment is highly liquid during market trading hours, as you don’t need a title transfer or broker to cash out.

With public market investing, it should be known that public REITs often see high correlation with the stock market as a whole, with public REIT prices often moving in the same direction as the stock market. Longer term, the value of public market REITs (versus private market REITs or investments) won't be much different - but without the constant trading, private investments can provide a smoother ride.

Pros

• Simple investment as you aren’t involved in the buying, selling, and managing of property
• Easy way to diversify your investment portfolio
• High liquidity when traded on public stock exchanges

Cons

• Low visibility into underlying investments and specific assets
• Multiple levels of management which impact returns
• Less control than with investing in rental properties directly

#3. Online platforms

The Jumpstart Our Business Startups Act was introduced in 2012 and saw big changes in the securities laws, and established new guidelines on how startups could raise capital through crowdfunding.

One of the most important changes was on Regulation D which gave rise to the real estate crowdfunding industry.

Today, there are many online real estate investing platforms that connect prospective investors with property operators. This cost-effective strategy lowers the barrier of entry into the real estate sector, and involves the pooling of funds by multiple investors into a real estate project.

The real estate project is normally with a real estate investment and asset management company (often referred to as a sponsor) that is looking for capital for their projects. They have a lot more resources than a sole investor, with acquisitions teams that are responsible for scouring the market and evaluating lots of opportunities to find the best opportunities.

Historically, taking part in a private real estate deal would require you to have the right connections with investment professionals, but real estate crowdfunding has opened up a new path for investors.

Pros

• Decreased barrier of entry into real estate investing
• Improved transparency of private real estate transactions and returns
• Allows you to invest alongside experienced management teams
• You get to evaluate the details of each project and choose exactly what you invest in

Cons

• Lack of predictability of investment opportunities
• Can be more risky as your investment success or failure may be attached to a single asset
• Strong reliance on crowdfunding company to vet and diligence the investment opportunity

A key factor in assessing individual platforms is the user experience - which includes things like the time frame for investments, diversity of properties that are available, the expected returns and quality of the real estate company behind the offering.

Lastly, investing in online platforms can be a great way for new investors to get started - as platforms can offer customer service, education and often additional investment options for their customers.

Learn more: Investing in Multifamily Real Estate

Location, Location, Location

The location of a property is a key factor in real estate investing, and often the biggest driver of investment returns.

While this is not commonly a key factor that you can decide on in REITs, investing in your own properties or with experienced operators can help give you clarity on the underlying market and asset location.

As the building depreciates in value every year as materials wear and tear, the real capital appreciation comes from the location and demand of the property's rentability.  

Reports from real estate brokers and agents can allow you to understand market prices and trends, as well as identify factors that hamper investments in certain places. Often a key thing to filter for is supply constraints, places like California and New York where new buildings have nowhere to go but up.

You also get to identify demographic features and visualize the potential evolution of the places you wish to invest in.

Three-step approach when analyzing the property market

1. Assess the market volume

Start by studying the market volume in terms of transactions between buyers and sellers. Is it a sellers or buyers market, how much inventory exists, and what are the key factors driving them?

This will help you understand the key players involved and the market situation.

2. Understand the demand drives

Understanding what factors are driving demand for the local real estate will help you assess what the future demand might look like.

Is it local universities that are drawing in students, young families relocating out of the city or retirees looking for a more relaxed lifestyle? Different audiences have different wants and needs, budgets, and community factors that will influence the outlook.

3. Evaluate future potential of the market

Lastly, a third step could entail studying possible evolution of the factors that may influence the real estate market. This analysis is crucial to helping you make investment decisions in an area.

Before deciding on a location, you should be familiar:

• Employment and economic data
• Economic health of local employers (especially for smaller markets)
• Population and population growth trends
• Crime and safety data

When evaluating location, you need to take a long-term view as appreciation over time is essential for a profitable investment, assessing both the upside and the downside.

For instance, open land that is currently peaceful and next to residential property may evolve into a noisy manufacturing area. This drastic change can greatly diminish the value of surrounding properties.

Learn more: How to Evaluate an Online Real Estate Investment

Benefits of tokenized real estate

Tokenization is the process of breaking assets into numerous pieces so that many individuals can own part of it, and enabling fast and efficient transferability of the pieces in an investment community.

The tokens offer many advantages that enable real estate investing to be more accessible, low cost and enjoyable. Rather than shares in the trust, investors own tokens that represent shares in the LLC through digital assets - giving legal underlying ownership of the asset.

Tokenization relies on blockchain technology and involves the creation of digital tokens that represent the real estate interest. The token is flexible, as it can also represent:

• A legal entity owning an asset
• The interest on debt used to secure an asset
• An equity stake in an entity owning a property
• The right to earn dividends arising from the property’s use

The same SEC regulations apply and must be followed but the fact that all transactions are stored on a blockchain and payments can be processed over cryptocurrency rails makes it far superior.

How tokenization improves efficiency, speed and liquidity

There are several advantages by investing in tokenized real estate over physical property.

• Lower entry cost: Through fractionalization, the holder of security tokens can sell pieces of the tokenized property at a lower price than that of the physical property.
• Improved ROI: Also, the buying and selling of tokenized property take place through standardized smart contracts. The automatic implementation of these contracts significantly lowers the transaction cost and the amount of time required to finalize the deal. These factors contribute to an improved return on investment.
• Simplicity: Lastly, tokenization brings simplicity in transactions. You can easily convert or liquidate the profit your property generates into cash and the technology automatically keeps a record of every transaction. This feature reduces the complexity of tracking the different transaction details and token prices.

Are you ready to start investing in real estate?

Real estate investing is a proven method of building wealth - backed by real assets that generate cash flow, stability and diversification from other assets.

A lack of market knowledge and the high initial cost of investment can present a barrier to entry into this lucrative sector, but modernization has given rise to numerous real estate investment strategies to get started.

HoneyBricks provides a low friction and enjoyable experience to get started, investing alongside experienced real estate operators. Get started with as little as $100 and start growing your wealth.