The most important step for those starting out investing in real estate is just to get started. The tailwind most long term investors have investing in the markets is the power of compounding, but it takes time for compounding to work, and the time in the market is just as important as the long term returns.
In our series on the best way to invest in real estate, we explore numerous real estate strategies investors can adopt to get started. But the right choice is highly dependent on the individual risk tolerance and investment horizon.
Everyone needs to start somewhere and this article is designed for those that are starting and are asking how best to invest 1000 dollars in real estate.
The biggest advantage individuals have over institutional investors is greater flexibility in investing (say investing via private real estate funds). When we are starting small, we can use that flexibility to our advantage.
Real Estate Investment Trust Exchange Traded Funds -A Simple Real Estate Investment
We would invest in a REIT ETF as the simplest way to invest in real estate if we were given 1000 dollars. REIT ETFs are a type of exchange traded fund which aims to replicate a REIT index that includes hundreds of real estate investment trusts.
On one level, a real estate investment trust owns a real estate portfolio that can be either diversified across markets or asset classes such as the office, mixed-use or residential sector.
Investing 1000 dollars in a REIT ETF is on another level altogether to provide the investor with immediate exposure to the real estate sector in general.
These are the main reasons we like this approach as the starting point for real estate investors.
- ETFs are traded whenever markets are open. This means that investors have immediate liquidity in their investment. The biggest downside of real estate investing is the time it takes to enter and exit the investment, and having immediate liquidity can be very attractive
- You can add to your investment overtime. Having 1000 dollars to invest is just the start. As you gradually increase your savings or earnings overtime, REIT ETFs allow you to add to the investment until you have sufficient capital to upgrade to how to invest $50k in real estate!
- REIT ETFs are extremely cost efficient. Costs overtime can meaningfully erode investment returns. REIT ETFs are a proven low cost investment option for investing in real estate. The fees on the ETFs are minimal in most instances as it simply tracks the market index. The expense ratio for the Vanguard REIT ETF as an example is only 0.12%. Similarly, Schwab US REIT which owns just US REITs, charges only 0.07%.
- Risk can be managed easier through a diversified REIT ETF portfolio. Real estate risks share a strong similarity to investing in stocks or bonds. But there is also an additional layer of risks specific to owning real estate. A diversified portfolio mitigates the investors’ exposure to specific assets or real estate market risk as the portfolio comprises hundreds of REITs.
- REIT ETFs pay income from day 1. Since a REIT ETF is a collection of REITs that pays dividends quarterly or semi-annually. The REIT ETF passes the income through to the investors in the ETF. Using the example of the most popular REIT ETF, Vanguard REIT ETF. The dividend it pays is every month. This means investors will have income almost immediately rather than taking on leasing or credit risk typically associated with owning a rental property.
- You don’t need to pick the REITs. REIT ETFs provide a direct market exposure where the primary risk is the general market risk. Due to its diversified structure, the threshold of owning the position is much lower than owning a REIT where the investor should do additional research on the underlying portfolio.
It can be unrealistic to buy a property with such a small amount of money. Those you can buy with 1000 dollars are either located in a downtrodden area that you shouldn’t be investing in the first place or a highly speculative or risky approach that does not have a realistic path to long-term capital growth income.
In sum going the REIT ETF route is a good start for those that just 1000 dollars to invest in real estate. It can form the cornerstone of the investment portfolio until the investor has enough capital to start to own property directly.