Diversifying with real estate has long-term advantages.
Owning a mix of real estate versus stocks can add diversification to one's portfolio. Real estate doesn't correlate closely with the market, potentially helping insulate against risk during periods of volatility. How to invest in real estate depends on factors such as risk tolerance and individual objectives. Getting to know how a particular real estate investment works also matters. With that in mind, here are the eight best ways to buy real estate for the long term.
Single-family rentals are a popular choice for investors who want to generate income, build equity and maintain flexibility for the long term. Greg Rand, chief strategy officer at Charlotte, North Carolina-based Renters Warehouse, says single-family rentals are a liquid option, noting that an investor can acquire multiple single-family rentals, then sell one in the future when they need to tap their capital. Single-family rentals can also act as a hedge against economic swings. "If the economy is strong and homeownership increases, investors win on price appreciation," Rand says. "If the economy is weak and homeownership declines, they win on rental demand and increase in yield."
Qualified opportunity funds
Opportunity zones, designated economically distressed area, could be a prime place for buy-and-hold investing. These funds invest in low-income communities, with the goal of driving economic growth. Mihal Gartenberg, an agent at Warburg Realty, says the tax incentives associated with opportunity zones are an attractive feature. "Your capital gains tax is deferred to 2026 and you can save up to 15% on what you owe," she says. "The other benefit is that any money you make through the fund is completely forgiven from capital gains tax." Gartenberg says investors should plan for a 10-year holding period or longer and start planning now to cover any capital gains tax due in 2026.
Investors leaning toward commercial properties may consider multi-family housing in place of single-family rentals. "If you feel comfortable owning and operating real estate, the least risky tangible asset is a multi-family home," Gartenberg says. "The benefit to owning a multi-family home over leasing a single unit is that any vacancy is tempered by other tenants still paying their rent." That can minimize the odds of experiencing a cash flow blip when a tenant moves out. She says connecting with a broker can help investors determine the best places to buy rental property and screen tenants to find reliable renters.
Real estate crowdfunding can offer all the perks of direct ownership without having to buy real estate directly. "Investors enjoy the benefits of increased cash flow, tax benefits of depreciation and, when invested appropriately, can also benefit from asset appreciation," says Adam Hooper, CEO and co-founder of RealCrowd. Real estate crowdfunding typically features a low minimum investment, allowing investors to allocate the same amount of capital across many deals, he says. But the biggest drawback of equity crowdfunding is that liquidity is minimal. It's important for investors to understand the holding period for various equity deals and how that fits within their larger buy-and-hold plan.
Real estate investment trusts
Real estate investment trusts own and operate income-generating real estate, including hotels and resorts, storage facilities, data centers and health care facilities. These funds are required to pay out 90% of taxable earnings as dividends to investors. In terms of REITs, Adham Sbeih, CEO and principal of Socotra Capital, recommends mortgage REITs, known as mREITs, which invest in residential and commercial mortgages and mortgage-backed securities. "Buying into a mortgage REIT is a great long-term investment," he says. "It produces monthly income and exposes your portfolio to the real estate market." But these investments can be risky since mREITs are sensitive to interest rate movements and dividends have been unpredictable over the last few years.
"With a turnkey rental property, you invest in a fully performing rental property," says Ali Boone, founder of Hipster Investments. "It's freshly rehabbed with tenants placed and property management on standby to manage the property for you." Boone says turnkey properties are particularly advantageous for investors who don't live in a cash flow-friendly city or who are trying to chase returns by focusing on the best places to buy rental property. These investments can eliminate some of the stresses of managing property directly, but it's not completely hands-off. "Ultimately, a turnkey investor does still need to have their brain attached to what's happening in order to confirm all is going as planned," Boone says.
Triple net lease
Triple net lease properties are a type of commercial real estate investment in which the tenant or lessee is responsible for paying the property's ongoing expenses; this type of lease is often referred to as an NNN. It can include maintenance, mortgage payments, property taxes and building insurance. Avi Sinai, principal at HM Capital, says NNN properties are suitable long-term investments because lease income is often guaranteed; NNNs don't require active management and can generate solid returns. One of the key factors in minimizing risk when choosing a triple net lease property for buy-and-hold investing is location. "Find the best location possible," Sinai says. "So if your tenant leaves you can lease it again quickly."
Accessory dwelling units
An accessory dwelling unit, or ADU, is simply a smaller property that's attached or shares space with an existing residential property. Examples include basement apartments, garage apartments, carriage houses and guest houses. Investors can live in the primary home and rent out the second or rent out both properties for the long term. "Revenue from an ADU can contribute to mortgage payments and sometimes generate a healthy profit," says Jordan Barkin, a realtor at Harry Norman Realtors. While investors could purchase a single-family home and build an ADU to rent, Barkin says it's easier to purchase a home with an ADU already in place to avoid the work that comes with having a new structure zoned.
Real estate notes
Real estate notes are promissory notes that are secured by a lien attached to a specific property. Banks can sell mortgage notes to investors, who can then benefit from rental income the property produces. "Investing in real estate notes is a great way to passive invest in real estate, without the hassle of becoming a landlord," says Jesse Anokwuru, a loan officer at Houston-based Tidal Loans. Being the first lienholder on a property gives investors an insurance policy if the borrower defaults. "When you invest in notes privately, you set your own terms and rates with the borrower that fits your return criteria, receiving steady income over the life of the loan," Anokwuru says.
Best ways to buy and hold real estate.
-- Single-family rentals
-- Qualified opportunity funds
-- Multi-family housing
-- Equity crowdfunding
-- Real estate investment trusts
-- Turnkey properties
-- Triple net lease
-- Accessory dwelling units
-- Real estate notes
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