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As you delve further into the world of real estate investing, it becomes increasingly apparent how crucial diversification is. Balancing your portfolio with alternative types of real estate investments beyond traditional rental properties or flipping houses offers a slew of benefits. Let's take a deep dive into the pinnacles of real estate diversification by identifying the top 5 forms of alternative investments.
Diversifying Real Estate Investment: An Overview
Diversification in any investment realm is a strategy that helps mitigate risk while maximizing returns. For real estate investors, this could mean venturing beyond traditional real estate investments like buy-to-let properties or house flipping. Instead, this diversification may lead you into the path of Real Estate Investment Trusts (REITs), commercial real estate, raw land investing, crowdfunding, and more. Diversification provides a layer of protection against market liquidity and presents an opportunity for a steady stream of passive income.
Top 5 Alternative Types of Real Estate Investment
1. Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) allow investors to delve into large-scale, income-producing real estate. Buying shares in a REIT affords you the chance to reap returns from a vast real estate portfolio without having to purchase, manage, or finance the properties yourself. This passive income generator is a perfect example of how to invest in real estate without the hurdles of property management. Moreover, REITs offer impressive market liquidity, a facet typically absent in other types of real estate investments.
2. Commercial Real Estate
From office buildings to retail outlets, investing in commercial real estate can be a profitable way to diversify your real estate investments. Such enterprises usually command higher rents compared to residential rental properties. Furthermore, commercial real estate leases often extend over multiple years, providing stable rental income. While there is a higher entry threshold price-wise, the return potential makes it a rewarding investment path.
In addition, commercial real estate often benefits from more favorable lease terms, where tenants take on some of the operational costs, such as maintenance or insurance, under triple-net leases. This reduces the burden on property owners, enhancing profit margins. Another advantage is that demand for commercial spaces tends to be less volatile than residential markets, driven by the steady need for office, retail, and industrial spaces, making it a relatively stable long-term investment.
3. Raw Land Investing
Land is a finite resource, which makes raw land investing an enticing prospect for diversification. This form of investment involves buying undeveloped land with the intention of selling it for profit later. You could also upgrade its value by developing it into a residential or commercial space.
For instance, an Accessory Dwelling Unit (ADU), can be a stellar way to enhance raw land value. But what is an ADU? ADUs can range from separate extra units on a property with traditional ammenties and span all the way to include just a rental space or in-law suite. Read more on ADUs in our comprehensive guide.
4. Crowdfunding
Crowdfunding has revolutionized real estate investing, allowing you to invest in noteworthy projects without the hefty capital requirements usually associated with real estate. Crowdfunding platforms pool together funds from several investors to fund a real estate project, offering an easy entry into real estate investments. It allows you to diversify across different properties, lessening the risk compared to owning a single property, and building a steady passive income.
One of the key advantages of crowdfunding is the ability to participate in large real estate projects with minimal upfront capital. By pooling resources with other investors, you can gain access to lucrative commercial or residential developments while spreading out individual risk. This makes it an appealing option for those looking to diversify their portfolios.
5. Real Estate Mutual Funds
Want to get into real estate but uninterested in the grind associated with traditional real estate investing? Then real estate mutual funds might be for you. These funds pool assets from multiple investors to invest in securities offered by real estate companies, including REITs.
While both real estate mutual funds and REITs allow investors to gain exposure to real estate without direct property ownership, they differ in structure and management. REITs are companies that own and operate income-generating real estate, and they typically offer more direct exposure to physical real estate assets. Investors in REITs earn returns primarily through dividends, which are paid out from rental income or property sales.
On the other hand, real estate mutual funds invest in a variety of real estate-related securities, which often include REITs but can also encompass real estate-related stocks and bonds. This broader focus provides more diversification within the fund. Additionally, mutual funds are managed by professional fund managers who actively select assets based on market performance, whereas REITs tend to follow a more passive, income-oriented approach.
Though real estate mutual funds could be subject to market volatility, they offer the benefit of professional management and high diversification.
In conclusion, venturing into alternative real estate investments allows for a diversified and robust portfolio. Whether it be REITs, commercial real estate, raw land, crowdfunding or real estate mutual funds, these investments provide unique opportunities and benefits that can help shape your financial landscape. So why wait? Start exploring these avenues today!