Different Types of Real Estate Investing

I was perusing through the socials today as I usually do to answer money questions—one of my favorite things to do.  My favorite Facebook groups are How to Money and ChooseFI.  If you are in the UK, Rebel Finance Group is also excellent!  Sometimes, questions about investing in real estate come up.  As a somewhat experienced (which just means I've made a lot of mistakes) real estate investor I try to answer these questions the best I can. The investing they want depends on my answer, but I thought I would educate folks on the different types of real estate investing as I see them and vote for the two I love.

Your Passive Managed Index Fund

This morning, I asked Gemini (Google’s AI Large Language Model) how much VTSAX (Total US Stock Market Fund) is in the real estate sector.  It is about 3.00% as of today (Feb 12, 2024).  But that number is a little misleading because most public businesses also own some form of commercial and sometimes rental real estate.  You can see this by studying companies' balance sheets.  So, if you are on the Simple Path to Wealth, know that you are already investing in real estate and other assets because the businesses you invest in are in different sectors.  Also, as JL Collins says, the Total US Stock Market funds are self-cleansing, which means that today, tech funds drive the majority of the Total US Stock Market, in the past it was manufacturing companies, and in the future who knows but it doesn't matter because they fall in and out of the index.

REITs

Real Estate Investment Trusts (REITs) are a collection of real estate packaged and sold in 3 typical ways (there are more and always nuance). Publicly traded REITs, private reit (eREITs), and real estate syndications (not technically a REIT but in the same vein. I prefer publicly traded REITS because of the liquidity and ability to buy and sell them on the stock exchange like an ETF or single stock.  Privately help REITs like in places like Fundrise where you give your money to a privately held company and they have portfolios of real estate in different funds. I've personally invested in Fundrise in the past and I wouldn't do it again. It just happened by sheer luck that I pulled my money out of Fundrise before 2020 when Fundrise didn’t allow investors to access their funds.  They probably did them a favor in the long run, but I still used that money to pay off notes on my single-family homes as investments. Privately held REITs and investing in real estate syndications usually have terms with buying and selling periods once a quarter. Normally they can suspend your ability to sell or buy if the market is particularly volatile. For this reason, I don't invest in them. Not saying you can't make money but for me, it's like being lukewarm. You don't get the benefits of passive income, tax advantages, and outsized returns you can get with tangible assets OR the liquidity of owning a publicly traded REIT.

Buying notes or loaning money to those who invest or work in real estate.  

I don’t do this one, although I know many people who do and make money doing it. This could be a way an individual could make a return on their money. I like to think of Shark Tank when talking about investing in real estate this way. You are more investing in an individual who. you believe can make money and pay your back plus interest in their real estate dealings. As a real estate investor, I have always looked for private money. So I love people in this space but it takes a special person to do this and it's risky and definitely not simple.

Buy a Tangible Asset

This is my favorite way to invest in real estate.  If you want to invest in real estate passively, you should buy a Total US Stock Market Fund or a REIT, but if you're going to invest in real estate actively, buy a rental property.  There are many ways to purchase tangible real estate and different types of real estate.  The different types of real estate could be, for example, single-family homes, multi-family units, apartments, commercial, and land.  Each one has its ups and downs.  I invest in single-family homes not necessarily because they are better than the others but because I understand them the most.  The biggest thing I can tell you about buying a tangible asset is that it isn’t passive, especially at first.  The risk is also front-loaded.

The reason why buying a tangible asset is so great is because we are incentivized to do so. It can provide great passive income today, and tax advantages, and you can get outsized returns if you buy right and/or put sweat equity into a property.

The first asset you buy has the most risk, mainly because you don’t know what you are doing.  You can mitigate this risk by getting educated or having a mentor, but even that has a law of diminishing returns.  If you buy a $50k mentorship program in real estate, then that’s silly (ask me how I know).  Just buy a house with $50k as the down payment, and you will learn infinitely more than if you paid for that course.  I wouldn’t go in blind, either.  There are many free resources or at least more cost-effective ways to learn about real estate.   Biggerpockets.com is an excellent way.  Or go to your local REIA.  I live in Oklahoma, but if you happen to live in Augusta, GA, or the surrounding areas, I know some folks who taught me to invest smartly. Their group is InvestSmart.

In Conclusion 

Real estate can be an excellent investment and has helped me build wealth.  I only invest in single-family homes and then get broad exposure through index funds that follow the Total US Stock Market. Before investing in real estate I would encourage you to do your homework and get educated at biggerpockets.com or your local REIA. Please for the love of Pete don't buy an expensive real estate course from some guru even if they are well known and have 50 million books. You can get what you need from those two resources.

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Updated 2/20/24