How Much to Invest in Real Estate

There’s a wide range of ways to invest in real estate, from taking out a mortgage to

building a property empire that spans the country. The best way to add real estate

to your portfolio depends on your unique goals, and the type of property you’re

considering.

Many new investors focus on residential properties. That’s understandable — houses

are everywhere, found from the smallest towns to the largest urban areas. And

buying a single-family home, with its traditional mortgage, is relatively affordable,

especially for first-time buyers thanks to government support for the mortgage

market generally and programs that help aspiring homeowners buy a house with

But the reality is that residential rental properties are a small part of the larger real

estate investment market. Many investors who successfully turn real estate into a

source of passive income do so through commercial properties, which include

everything that isn’t a single-family home or duplex. Commercial real estate is more

specialized, and requires more time to research and manage. But for those who have

the patience and capital to do it, commercial investments can offer lucrative returns.

The key to success in any type of real estate investing is to have a solid plan. This

means knowing how much you’re willing to put into a project, understanding your

costs — including property taxes and homeowner’s insurance, as well as the time

you’ll spend managing the property. Too often, newcomers to real estate investment

are shocked by the amount of work it takes to keep up a property and make it

profitable.

Effective real estate investors also know their markets inside and out. They look at

demographics, the availability of jobs and other factors that affect demand for

housing, as well as broader economic trends, to recognize when a market is

approaching a peak or a bust.

This knowledge should inform their approach to the real estate market, whether it’s

buying a rental property at the bottom of a cycle, or renovating a property in an upand-

coming neighborhood to sell when prices rise. They should also keep an eye on

construction to spot when new supply is overtaking demand and lead to a temporary

oversupply that depresses prices for a while until demand catches up again.

If you’re not ready to commit the time and money required for direct property

ownership, there are options that can offer exposure to the real estate market

without the headaches of landlording a physical property. One popular option is a

REIT, which invests in real estate companies that own and operate properties. You

can find REITs through your brokerage account and buy them like any other stock.

Another option is to invest in a crowdfunding platform that connects you directly

with real estate projects.

Regardless of how you choose to invest in real estate, be sure to consult your

financial advisor to ensure that the addition will advance your long-term goals. As a

general rule of thumb, you should only devote 5% to 10% of your portfolio to

alternative assets, such as real estate, so that you still have enough room for more

traditional investments that can provide growth and diversification.

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