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How to Invest in Real Estate and Mitigate Risks for Maximum Return

Written by Posted On Tuesday, 12 February 2019 07:23

Investing in real estate is a proven way to build wealth. There's a variety of ways to invest effectively. However, each form of investing has its own risk profile. If you want to take your investing to the next level, you need to try to find the attractive investment opportunities that allow for maximum return while taking little risk. 

You may also like: How to Invest Money: 13 Investment Tips to Get Started

Ways to Invest in Real Estate

Thanks to a number of different technological advancements, investing in real estate is easy and can be done from anywhere in the world. Plus, you don't need to significant sums of money to invest. You can start with as little as $100 and invest commission-free.

I'll show you exactly how to invest in real estate through a variety of mediums, including:

  1. 1. Direct Real Estate Investing

  2. Direct real estate investing is simple. You go out with your own (or investors) money and invest in a property. This would include both residential and commercial real estate investing. You have risk from an operating perspective and capital perspective. If you are investing in real estate on an equity basis, you are lowest in the capital stack of the property. This means you get paid out last in the event of a default. If you are investing directly, you'll need to evaluate if you need a home warranty or not. Some investors like that level of protection and some think that it doesn't provide enough value. 
  3. 2. Real Estate Crowdfunding

  4. Thanks to crowdfunding and the JOBS Act, you can invest on a crowdfunded basis directly into real estate. This has been a great way for retail investors to invest in commercial real estate. Typically, commercial real estate has been tough for retail investors due to the sheer size of capital needed. Firms like Fundrise, Crowdstreet, RealtyMogul have made this possible. 
  5. 3. Fund Investments in Real Estate

  6. With fund investments, you invest in a pool of capital. Funds are typically larger in size than crowdfunding and are best suited for institutional or accredited investors. Funds are a great way to get just a pool of diversified private real estate investments at varying levels of risk/return. 
  7. 4. Investing in Real Estate Investment Trusts

  8. Investing in REITs can be a great way to earn yield as they are required to pay 90% of their cash flow in the form of dividends. REITs can be both in a private fund structure or a public company. The most common way for an investor to invest in REITs is through the stock market. Anyone can get started invest by signing up for one of the many apps that give you free stocks just for signing up. You can use my stock calculator to determine how you want to invest and how much profit you should earn before you get started. 

Forms of Real Estate Risk and Diversification

There are plenty of other risks of investing in real estate that you should consider before getting started. I will highlight some of the core real estate risks to help you understand how to mitigate your risks while investing:

1. Market Risk

In my opinion, market risk is one that often gets overlooked during the home investing process. You need to make an evaluation of the jobs, outlook for growth, new home construction and income levels for your market investments. You simply can't assume that each market will maintain the same level of risk or opportunity. Each market is different. In fact, there's risks within each neighborhood of a given market! Do you homework on the region you are investing. 

2. Tenant Risk

Tenant risk is extremely important if you are investing a large sum of capital in one property. One month of not having a rentor can ruin a whole year's worth of economics! You need to make an evaluation of each tenant and choose the most appropriate party. For residential real estate, I like choosing tenants that have high credit scores, low debt and favorable incomes. You want to ensure they can actually afford your property. 

With tenant risk, I like to diversify my holdings by investing in hotels. Hotels obviously have significant market risk, but limited tenant risk. 

Conclusion

By investing in real estate, you can increase your current income and build equity in a real asset. It doesn't get more straightforward than that. I suggest taking the direct investing route to start. Then, use other income to pour into other forms of investing like I outlined above. This will help you diversify away from your current property. You don't want to get into a situation where you need money now and are struggling to pay the bills. You can invest in other ways like using robo-advisors, but stocks don't provide the private market wealth building that you need. 

Millionaire Mob is a former investment banker that hung up his suit and 'deal sleds' to focus on ways to travel the world, build great relationships and learn. I am looking to help others learn passive income techniques, invest in dividend growth stocks with our calculator, earn travel rewards and achieve financial freedom. I increased my net worth from -$60,000 (yes, negative) to over $500,00 in 5 years.

 

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Kyle K

Millionaire Mob is an early retirement blog where people come together to find the best travel deals and financial advice. We specialize in dividend growth investing, passive income and travel hacking. What are you waiting for? Let's achieve financial freedom and travel the world together.

https://millionairemob.com/
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