4 Simple Ways to Invest in Real Estate
Updated: Jan 29, 2019
Buying real estate can be more than just finding a place to call home. Unlike investing in stocks, investing in real estate gives you one tool that is not as easily available to stock market investors: leverage. For example, a traditional mortgage generally requires a 20% to 25% down payment. However, depending on where you live, there are many types of mortgages that require as little as 5% down. This means that you can control the whole property and the equity it holds by only paying a fraction of the total value up front.
So let's introduce you to some of the basic ways you can invest in real estate:
1. So You Want to Be a Landlord
Basically, you buy a property and rent it out to a tenant. The owner is now a landlord, responsible for paying the mortgage, taxes and costs of maintaining the property. Ideally, the landlord charges enough rent to cover all of the aforementioned costs with enough left over to produce a monthly profit right from the start.
Ideal For: People with an aptitude for dealing with tenants
What It Takes to Get Started: A healthy amount of capital to ensure access to financing and cover up-front maintenance costs and vacant months
Rental properties can become new sources of regular income if the investment is successful.
Many of your expenses are tax deductible, and any losses can offset gains in other investments.
The property can appreciate over the course of the mortgage, leaving the landlord with a more valuable asset.
Rental properties tend to be hands-on investments unless you use a property management company.
You can end up with a bad tenant who damages the property or, worse still, end up having no tenant at all.
2. Real Estate Investment Groups
Real estate investment groups are similar to a small mutual fund for rental properties. In a typical real estate investment group, a company will buy or build a set of apartment blocks or condos, then allow investors to buy them through the company, thus joining the group.
Ideal For: People who want to hold rental real estate without the headache of running it
What It Takes to Get Started: A capital cushion and access to financing
This is a much more hands-off approach to real estate that still provides income and appreciation.
There is also a vacancy risk with real estate investment groups, whether it is spread across the group or owner specific.
Management overhead can eat into returns.
Of course, the quality of an investment group depends entirely on the company offering it. To avoid unpleasant surprises, it is critical to do your research on the company and conduct a thorough review of the details in the investment offering.
3. Real Estate Trading (Better Known as Flipping)
Real estate traders buy properties with the intention of holding them for a short period of time, often no more than three to four months, after which they hope to sell them for a profit. A second class of property flipper also exists. These investors make their money by buying reasonably priced properties and adding value by renovating them.
Ideal For: People with significant experience in real estate valuation and marketing
What It Takes to Get Started: Capital and the ability to do or oversee repairs as needed
Real estate trading has a shorter time period during which capital and effort are tied up in a property.
Depending on market conditions, there can be significant returns even on this shorter time frame.
Real estate trading requires a deeper market knowledge and a bit of luck.
Hot markets can cool unexpectedly, leaving short-term traders with a loss or a long-term headache.
4. Real Estate Investment Trusts (REITs)
A REIT is created when a corporation (or trust) uses investors’ money to purchase and operate income properties. REITs are bought and sold on the major exchanges, just like any other stock. More important, REITs are highly liquid because they are exchange traded. In other words, you won’t need a realtor and a title transfer to help you cash out your investment.
Ideal For: Investors who want portfolio exposure to real estate without having to go through a traditional real estate transaction
What It Takes to Get Started: Investment capital
REITs are essentially dividend-paying stocks whose core business is commercial real estate – an area where long-term, cash flowing leases are the norm.
REITs are essentially stocks, so the leverage available to traditional rental real estate investors is absent
We all tend to put a lot of thought and planning into a home purchase. A real estate investment requires that same diligence without promising the same emotional payoff of living in your dream home. Not that getting a nice financial payoff from being smart about real estate isn't also an emotional high.
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