Many people think investing in real estate takes a massive amount of investment or assets but that simply is not true. You can start investing in real estate with very small amounts of capital. Now, knowing who is reading this you are likely already invested in cryptocurrency and believe that to be the future of finance. But you should be careful before dismissing classic investment opportunities. There is a reason they're a classic! Real Estate actually exhibits some of the same traits that make many cryptocurrencies desirable.
Real Estate is LIMITED. Just like Bitcoin there is a finite supply that results in it generally increasing in value over time. It is the nature of our society that hoarding limited valuable commodities grows wealth. It's not merely valuable for being limited though, most of the value will come from it's ability to produce income. If you own a building you own a place for business to occur which is an opportunity to make more money, it's as simple as that.
However access to the wealth-generating aspect of real estate is not universal. One issue many will have is that they are limited to the where they live when it comes to large investments in real estate. Here is a graph of the value of homes in a place similar to where I live.
If you live somewhere that the average sale price graph for the last 50 years looks similar to this you should probably purchase real estate if possible for you. If you're like me and you don't have the capital to enter the world of real estate you may feel left out of one of the greatest wealth-generators in human history. You may also feel left out if you happen to reside in a part of the world where the value of real estate has been stagnant or a poor performer. Like Detroit, Michigan for example.
Real Estate prices in Detroit have been headed upwards of late but as you can see for years it was an objectively bad investment. So how can you gain the benefits with little capital, or while not living in an ideal location?
The answer is: investing in companies that hold useful real estate worldwide. These companies are called Real Estate Investment Trusts (REITs). There are many of these companies and some are better than others. But the general idea is that they purchase valuable real estate with residential, commercial, or industrial purpose and then earn steady returns over the years by leasing it to people or business.
But is it safe? With the coronavirus wreaking havoc many people and businesses haven't been able to pay their rent. Leaving real estate holding companies out in the cold. A reliable company has plenty of funds stashed away to weather short term storms like this and these are the ones you should be seeking out. They will weather the storm, and on the other side most of these businesses will be obligated to make back-payments to catch up on the money they owe.
But how exactly do these REITs make you money? You buy stock in an REIT and you own a piece of the company that holds the various pieces of real estate. They then earn you money via two methods. Firstly, the value of their properties is likely to increase over time due to scarcity. This will result in the value of your shares of the company increasing over time.
Secondly, and most signficantly, they pay you as a part owner, a large percentage of their profits. By law REITs are obligated to pay the shareholders 90% of all the money they earn, these payments are called dividends. They make these profits reliably every month as rent is one of the last things to go unpaid by a person or business owner even in times of extreme crisis. The reason I view REITs as a great method of "the little guy getting into the game," is because anyone can buy into them worldwide! And it requires very little money upfront. You can get shares of some of the highest quality REITs for as little as $15.
Let's pick an example to give you an idea of what we are talking about. Brookfield Property Partners (BPY) is a subsidiary of Brookfield Asset Management. They own many high quality assets. Currently a single share of BPY would run you $10.36 USD. If you were to buy a single share you would receive a payment of $1.39 every three months. At current prices you would be earning %12 on your money every year! These returns are insanely good value, you'll be hard pressed to find a return like that in a year via many other methods. But why is the percentage so high? That can't be sustainable!
The simple answer is that it's NOT sustainable. Brookfield Property Partners generally trades at a much higher value per share and that's why currently the payments SEEM unsually high. But the dividend payments are identical no matter what share price you purchase at. Due to the Coronavirus situation many REITs that are very reliable and own high quality assets are trading at unreasonably low levels. It's not like their real estate has suddenly become less valuable, these are temporary circumstances! If you buy them now you lock in these extremely good rates on your money for years to come!
But be careful, these companies provide reports every few months that detail their real estate holdings, occupancy rates, and how profitable they are. It's important you personally read up on the companies! I recommend Brookfield Property Partners. They are backed by the massive Brookfield Asset Management company which will never let them fail. A bit of a flashback but to give an example of the scale of BPY's support system. For the fiscal year 2018, Brookfield Asset Management reported earnings of US$3.584 billion, with an annual revenue of US$56.771 billion. An increase of 39.2% over the previous fiscal cycle. And below you can see a breakdown of assets held by BPY.
A varying selection of high quality assets. REITs are, like cryptocurrency, a great equalizer. They give those who weren't born in the right place or family a chance of lifting themselves up. Opportunities that have been kept from them for years, decades, or generations. If you are one of these people I suggest you consider exploring them!
Edit: I wrote this article 6 days ago and unfortunately forgot to post it! My bad! BPY has done great in the last few days but it's not too late if you're interested in the stock. All the same principles still apply, and it is a solid long term investment.