Northwestern Mutual: 3 Ways to Invest in Rental Properties

Northwestern Mutual: While most investors start with stocks and bonds, there are any number of ways to invest money. As an investor's skill and comfort level grows, they may find themselves branching out into additional types of asset classes. One popular investment: real estate. Here are three ways everyday investors can include real estate in their investment strategies.

Get a business partner

A business partner, or multiple business partners, can be ideal for investors who cannot afford an investment property on their own. It may also make sense for investors who fear that putting too much cash into a single investment might cause an imbalance their portfolio, especially if the money used to buy a property represents a substantial share of their investable cash.

The process of buying a property with a business partner isn't much more complex than purchasing one alone. However, investors who purchase property with a business partner will need to take the additional step of clarifying roles, responsibilities, and financial decision-making in the partnership. What happens if one partner wants to sell their share of the property? How will the property be managed? Does the business need to be incorporated? If the property needs major renovations, how will those decisions be made? Investors buying real estate with partners will need to clarify those details, preferably in writing, before jumping into the market.

Buy a property alone

Unlike investors who purchase a rental property as part of a partnership, solo real estate investors have complete control over their business. This can work well for investors who have enough money to easily afford a property on their own, feel comfortable handling all financial and logistical aspects of their investment, and would like to have the final say in decisions about investment property.

Before buying on their own, investors should take an honest look at their skills. An investment property isn't as passive as some would have you believe, and investors shouldn't go into the process thinking that owning a rental property will be a hands-off venture. Owning and renting out a property might require skills as diverse as repairs, maintenance, tenant relations, organization, marketing, money management, and tax preparation.

Invest in REITs or other real estate funds

Even investors who don't have the cash on hand to purchase a property outright can still take advantage of the real estate market by investing in REITs. REIT stands for Real Estate Investment Trust, a type of investment that buys and manages rental properties and pays dividends to shareholders based on the rental properties' returns. REITs require much less cash up front than purchasing a property, and REIT investors don't have to deal with the hassle of tenants or maintenance.

It's also possible to buy real estate mutual funds and real estate ETFs, which are a collection of many different REITs, if you're looking to diversify even more. 

Before adding these funds to their portfolios, buying a property alone, or investing with a business partner, potential real estate investors might find it helpful to talk to a financial advisor to see if they fit into their overall investment strategy.

Source: Northwestern Mutual

Specific sector investing such as real estate can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments.