Investing 101: Real estate, index funds provide growth opportunities

Investors look for various opportunities they hope will help them grow their wealth.

Some invest in the stock market directly by buying stocks and bonds, while others choose a more passive form of investing like index funds.

Certain investors prefer to back enterprising entrepreneurs, and some people determine that real estate is the avenue to pursue.

There are several different ways to invest in real estate, including buying a home. Investing in real estate can be lucrative, although the return on such investments can be affected by high interest rates.

When interest rates fall, investors often come out of the woodwork. Investors considering real estate have many options to choose from.

Become a landlord

NerdWallet says buying a property with the intention of renting it out is one of the most common ways to invest in real estate. However, this could be one of the more labor-intensive real estate investment options, as it requires property owners to field calls from renters and always be available to tackle issues that inevitably arise.

Plus, if renters are not properly vetted, landlords may end up with less-than-ideal tenants.

While there are management services that can offset some of the work, farming out tasks comes with expenses that can cut into profits.

Still, when a successful renter-landlord dynamic is established, this option can provide significant long-term income.

Flipping properties

Buying a property and “flipping it,” which means renovating and putting it up for sale shortly after, is another real estate investment venture.

Flipping requires a lot of work and perhaps even some extraordinary skills.

First, it involves finding up-and-coming neighborhoods and then renovating within a reasonable budget so that you can sell the home at a premium. Remodeling costs can run high, and the time involved in flipping may be longer than investors anticipated.

Buying your own home

Building equity in a home creates a nest egg that homeowners can tap into at a later time, particularly when they choose to sell. Bankrate says banks treat owner-occupied properties more favorably, giving borrowers lower mortgage rates and requiring lower down payments.

Purchase REITs

REITs are real estate investment trusts that enable investors to invest in real estate without actually touching physical real estate properties, advises NerdWallet.

REITs are like the mutual funds of the real estate realm, and include companies that own commercial real estate. REITs can pay out high dividends, making them popular retirement investments. Dividends can be reinvested to grow your money further.

Housing not your thing?

Investing in a more traditional route, like stocks and bonds, is a skill that some people develop over time.

When just starting out, novice investors might not be comfortable choosing individual stocks.

In these instances, options like index funds merit consideration.

Investopedia advises that an index fund is a type of mutual or exchange-traded fund (ETF) that tracks the performance of a market index like the S&P 500 or the Russell 2000.

The index fund holds the same stocks or bonds as the index, or a representative sample of them. Some index funds track specific stock sectors, company sizes or additional qualifying parameters.

Index funds do not change very often, and will only do so when the makeup of the index they are tracking changes.

Index funds are popular investment vehicles for many reasons.

Here’s a look at why it can be advantageous to invest in index funds.

• Lower costs: Because index funds do not have fund managers who actively buy and sell assets regularly, they typically have lower fees in the form of expense ratios, which are the costs of running the fund.

• Passive investing: Index funds are a long-term strategy that utilizes passive investing so that an investor doesn’t have to pick securities or time their choices to the market.

• Diversification: Index funds enable investors to enjoy broad market exposure across various sectors and asset classes according to the benchmark indices they follow.

• Reduced bias or error: According to Fidelity, professional investment managers may make mistakes during stressful market conditions. Index funds don’t require a manager to make decisions beyond tracking the index.

• Reduced taxes: People who invest in actively managed funds that sell frequently tend to owe more taxes than investors in funds that sell less often. Index funds tend to not sell often.

Although there are many perks to index funds, there are some determinants, as well. Some funds put a lower limit on how much an investor needs to invest. And while index funds are low-cost, they aren’t always no-cost. A fund’s expense ratio needs to be examined to ensure that the smallest cut of returns goes to the fund manager.

Investors choosing index funds may earn a lower return than if they had chosen their own best-performing stocks.

Index funds include both high- and low-performing stocks and bonds.

Whatever you’re investing in, do your research and if needed, seek out professionals to answer your questions before spending any of your hard-earned money.

— Metro Editorial Services