Real estate investing
Owning real estate, like a rental property, has become a popular investment in the last decades. You can buy properties and sell or rent them. But to finance that can be expensive and there are a lot of other ways to invest in real estate, like shares, funds or platforms.
What is real estate investing?
Perhaps the most well-known type of making profit of real estate is purchasing your own property and selling or renting it.
This is certainly a popular option. For example, you can buy a house and renovate it, increasing its value and selling it at a higher price. High net worth individuals may buy a second house and rent it out for students or tourists, for instance. This way you create a constant cash flow from monthly rent as well.
The most well-known type of investing in real estate is purchasing properties and renting them.
But aside from owning actual properties, there are lots of other ways to invest in real estate. For example, you can invest in projects through crowdfunding or a real estate fund. In many cases, you can start with spending smaller amounts. Investment projects can range from housing to utility construction and commercial buildings. You can even invest in property through shares on the stock exchange.
Real estate investment platforms in Europe
To invest in real estate companies, shares or funds, you will need an account with an online broker. Below, you will find a selection of the biggest real estate trading platforms active in Europe.
Brickstarter was founded in 2017 and specializes in vacation rental properties. You can invest on the platform with a minimum amount of 50 euros. With funds from different investors the platform renovates and manages property, eventually renting and reselling it for profits.
EstateGuru is a real estate investment platform from Estonia that was founded in 2014. You can invest in short-term real estate loans across Europe. Investors can fund projects starting from 50 euros.
Letsinvest is a crowd-investing platform from Lithuania. You can start investing from 100 euros in commercial and residential developments. The average annual return is 9,41 percent. You can directly invest, buying into the equity of rental business or invest into bonds.
Risks and returns
Real estate can provide good returns, as it is a less volatile market compared to other types of investment like equity and bonds. And because the property acts as collateral, the risks are low. Real estate projects often need large sums of money, though. This is counteracted when investing in real estate through crowdfunding or stock shares, since you can invest smaller amounts in different projects accordingly.
Real estate can be a wise addition to an investment portfolio.
In addition, investments in the real estate market can be a wise addition to an investment portfolio. Why? Because when other stocks are down, real estate still can bring a stable rental income. This means your portfolio has a lower volatility and a higher reward per unit of risk when you add rental properties into the mix.
Lastly, returns from a real estate investment can be illiquid. The transaction of property, unlike other investments, can take months. However, this is more often the case with physical property or directly investing in a project than with real estate funds, for example.
Investing in real estate funds
If you want to start investing a smaller amount spread across different projects, a real estate fund might be for you. Funds invest in property with money from investors like yourself, and pay out part of the profits.
With a real estate fund you do not have to handpick projects yourself, like with crowdfunding. Instead, the fund does this work for you. This saves you a lot of time. The risk is also automatically spread across different real estate investments. Additionally, you can start investing with small amounts, while still making good returns. The returns from a real estate fund are also more liquid than when directly investing in property projects.
Real estate on the stock exchange
You can invest in real estate on the stock market through a real estate investment trust (REIT).
This is a public company that uses money from investors to buy, own and sell different types of income-producing properties, from offices to apartment buildings and malls. These real estate investment trusts are kind of like funds, but they have to meet several requirements before qualifying as a REIT. There are also special REITs for different categories of real estate such as retail and offices.
REITs make a profit by renting buildings and collecting monthly payment, which is then paid to investors in the form of dividends. To qualify as a REIT, a company must give out at least 90 percent of their taxable income to investors. This way REITs avoid paying income tax, making the payout higher than with other stocks. However, as an investor you have to pay regular income tax over these dividends, which can be quite high.
If a REIT is established and is well-managed, it can be an interesting investment opportunity.
Aside from high dividends, the returns from investing in REITs are more liquid than other real estate investments. You can compare REITs to investing in stocks, with payouts that can provide a consistent stream of income. If a REIT is established and has good management, this can be an interesting investment opportunity.
Real estate crowdfunding
Crowdfunding is one of the easiest ways to start investing in properties. Commercial real estate crowdfunding or property crowdfunding is increasingly popular. The European market for property crowdfunding was approximately sized at 7 billion euros in 2021. And it is expected to grow around 30 percent annually between 2020 and 2028. This category of crowdfunding even has its own specialized platforms.
You can invest in all different types of projects, like project developers looking for funding, individuals wanting to buy a second house or housing associations looking to redo their rental apartments. Crowdfunding is more flexible than financing through the bank, but still has a few requirements before you can start. Usually you have to offer the platform a look into your company figures.
The benefit of crowdfunding is that you can handpick projects yourself. In addition, you can start investing in big real estate projects with only small amounts, making investing more accessible to the public. It is also easier to spread the risk across different projects on these platforms.
Becoming a landlord
Do you want to keep your real estate investment closer to home? Of course you can choose to invest in your own property and rent it out. This can be interesting because of monthly income via rent payments. Renting property does not only offer financial security; the consistent income can also be a way of paying off your second mortgage.
Renting out investment properties has the benefit of being partly protected from inflation.
You can buy property and rent it out yourself, but sometimes you can buy a building that is already offered for rent. Rented buildings have the added benefit of a lower purchase price. Lastly, renting has the benefit of being partly protected from inflation. Although the asset can change in value, the rent can be corrected if there is annual indexation.
Keep in mind that buying and financing commercial property, such as malls or office buildings, is often not possible for an individual investor, as they are highly expensive. Also, if you want to rent properties, you will become a landlord. That means you are responsible for dealing with any problems, unless you hire a property manager.
Buying and reselling property
The alternative to renting is reselling the purchased asset at a higher price. Here the benefit lies in the increased value, either by renovations or rising market prices. When renovating real estate, you want to sell the house at a price that is worth more than your investment.
Both types of investing operate in the short term, usually in a matter of months. But whether you renovate or wait in order to resell, there is always a risk of not making a profit. Also keep in mind that it demands more of your time and effort than, for example, real estate funds. However, buying and reselling can potentially offer very high returns.