The real estate sector includes the homes and apartments where people live, the stores where they shop, and the offices where they work. It’s also a major part of the economy.
The sector makes up 14.7% of the Gross Domestic Product (GDP) with an output of $4.1 billion in the U.S as of the second quarter of 2020. The real estate sector includes the purchase, sales, development, and management of property, both residential and commercial. These properties are the factories where products are made and stores where they’re sold and the homes where people live. For that reason, the real estate sector is important to every other sector of the economy.
Houses, apartment buildings, and other housing are considered residential real estate. Commercial real estate includes factories, warehouses, retail locations such as malls and shopping centers, office buildings, restaurants, hotels, and more. People who design, build, and manage those properties are all employed by the real estate sector.
The residential part of the real estate sector employs almost more than 830,000 construction workers and contributes roughly $3 trillion to the GDP of the United States. Commercial real estate, meanwhile, adds $1.1 trillion to economic output as of 2019. This part of the real estate industry also provides 9.2 million jobs.
For a lot of Americans, buying property, such as a house, is one of the biggest purchases they’ll ever make. A home can be a huge asset to the buyer and help them build wealth over their lifetime. But buying property isn’t the only way to go about investing in real estate. Investors can buy shares of real estate investment trusts, or REITs. REITs are companies that own residential or commercial properties.
How to invest in real estate by buying property
With the median price of a home in the U.S. at $226,800, most people can’t afford to purchase a home with cash on the spot. So if you’re considering investing in a property, you may need to take out a mortgage, or a loan to buy that property. As with most loans, you need to be approved by a lender before they give you a mortgage. The lender generally reviews a variety of factors when considering your application, such as your credit score, outside debts, income, the value of the home, and more.
Once you’re approved to take out a mortgage, you’re generally required to put a down payment on the house, which is usually equal to 20% of the ticket price. The lender then puts up the rest of the money for the house, and you pay back the loan over an agreed-upon term, such as 15 or 30 years, in monthly installments plus interest. A lender can determine your interest rate by which kind of mortgage you have and how the economy is performing. You can use a mortgage calculator to determine what you can afford.
You may take out one of a number of different types of loans, but the most common are either a fixed-rate or adjustable-rate mortgage. With a fixed-rate mortgage, you’ll pay the same interest rate on the loan for the entire term of the mortgage. With an adjustable-rate mortgage, your interest rate remains fixed at the rate you agreed upon at the beginning of the term for a certain period of time. After that period of time has passed, the rate moves according to the market, which might mean an increase in the interest rate.
The state of the economy can also affect mortgage rates generally. The Federal Reserve or the Fed, which is the central bank of the U.S., issues something called the federal funds rate. The federal funds rate is the interest rate at which banks can borrow money from each other. This rate can influence the rates for Treasury bills, which can then have an impact on interest rates for credit cards and mortgages.
Current mortgages rates are lower than ever before. The Fed decreased interest rates dramatically in March 2020, when the Covid-19 pandemic took hold, eventually leveling the rates to near 0%. Mortgage rates fell in response. At the end of October, 2020, the average 30-year fixed mortgage rate fell to a record low of 2.8%. Because of falling interest rates, home sales are on the rise, with sales 10.5% higher in September, 2020 than the year before.
Investing in real estate can also be a source of passive income, or money that is generated without much active, daily participation from you. You might buy a property or a second property and rent it out to someone which can help pay down your mortgage, and earn extra income. If you’re able to afford a down payment and get approved for a mortgage, renting out a property this way can help you build wealth.
Another way you can invest in the real estate market is to buy shares of real estate investment trusts (REITs). A REIT can own or operate a variety of commercial and residential properties, including office parks, apartment complexes, shopping centers, and more. Most REITs are focused on one specific industry, such as industrial or residential properties. In the U.S., there are 225 REITs registered with the Securities and Exchange Commission (SEC).
REITs use funds from investors to buy and manage these properties. The REIT takes revenue from sales and leases of property and can use that income to deliver dividends to investors.1 Equity REITs allow investors to gain ownership or equity in the real estate sector without actually having to buy a property.
Most REITs are equity mortgages but there are also mortgage REITs. Mortgage REITs invest in mortgages. So investors can earn money from those investments on the interest paid on those mortgages.
REITs are generally expected to deliver above-average returns to investors because they are required by law to return 90% of their income back to investors in the form of dividends.1 REIT dividends can sometimes be higher than dividends from other stocks. As is the case with all investments, you have to pay taxes on dividends earned. One good thing about REITs though is that because they’re trusts, they don’t have to pay additional taxes on dividends, meaning more money can be delivered to investors in dividends.1 Keep in mind that all investing, including investing in REITs, comes with risk.
If you want to invest in REITs, you can buy shares or fractional shares in a REIT with a brokerage account. You can also purchase shares in REIT exchange-traded funds (ETFs) which are baskets of investments that can contain REITs. One thing to be wary of is that some publicly traded REITs are non-exchange traded. These REITs are often not as liquid, meaning they have less cash on hand, as exchange-traded ones so it might not be as easy to sell shares. Because of this, any dividends earned from these shares might come from borrowed money, according to the SEC, potentially making shares in these REITs less valuable.1
With a Stash account, you can buy fractional shares in REITs and a REIT ETF. No matter what you invest in, it’s important to follow the Stash Way, which encourages investing regularly for the long-term in a diversified portfolio.