From purchasing rental property to investing in REITs and much more, here’s how. Purchasing and managing real estate is a rewarding and profitable investment option. Unlike investors in stocks and bonds, potential real estate investors can use leverage to purchase a property by paying a fraction of the whole cost now and then repaying the remainder, plus interest, with time.
While a conventional mortgage typically demands a 20% to 25% initial purchase price, in rare circumstances as little as 5% is required to acquire an entire house. This ability to retain control of the asset immediately upon signing empowers both real estate investors and landlords, who may then take out mortgages on existing primary residences to fund down payments on new properties. The following are five critical ways investors might profit from real estate.
1. Rental Properties
Ownership of rental properties can be an excellent opportunity for those with do-it-yourself (DIY) and remodelling abilities, as well as the patience to manage tenants. This technique, however, does require significant funds to cover up-front maintenance expenditures and unoccupied months.
According to the United States Census Bureau, new home sales prices (a rough estimate of real estate values) grew in value steadily from 1940 to 2006, before dropping during the economic meltdown. Following that, sales prices continued their upward trend, even exceeding pre-crisis levels. It is unknown what influence the coronavirus outbreak will have on real estate values in the long run.
2. Real Estate Investment Groups
Real estate investment groups (REIGs) are perfect for those seeking to acquire rental property without the headaches associated with managing it. Investing in REIGs necessitates a capital buffer and finance.
REIGs are similar to small mutual funds, however, they invest exclusively in rental properties. In a typical property investment group, a firm acquires or constructs a collection of apartment buildings or condominiums and then permits investors to purchase them directly from the company, thus becoming members of the group.
While an individual investor may own one or more sections of self-contained living quarters, the investment group’s management firm handles all of the units collectively, including cleaning, advertising vacancies, and assessing tenants. The company receives a part of the monthly rent in exchange for performing these management services.
A typical real estate investment group agreement is in the investor’s name, and all units share a percentage of the rent to protect against vacancy. As a result, you’ll earn money even if your unit is vacant. As long as the pooled units’ vacancy rate does not climb too high, there will be enough revenue to pay costs.
3. Flipping Houses
House flipping is best suited for individuals with extensive experience in real estate evaluation, management, and renovations. House flipping demands funds and the capability to do or supervise necessary repairs.
This is real estate investing’s fabled “wild side.” As day traders are separate from buy-and-hold businessmen, flippers are unique from landlords who buy and rent. As an illustration, real estate flippers frequently aim to financially sell the inexpensive houses they acquire within six months.
Pure house flippers frequently do not invest in property improvement. As a result, the business must already possess the intrinsic value necessary to generate a profit without modification, or they will rule the property out of the discussion.
Flippers who are unable to quickly sell a home may get into problems since they often do not retain enough dormant cash on hand to cover the long-term mortgage payment on a property. This can result in escalating losses.
Another type of flipper earns money by purchasing fairly priced homes and boosting value through renovations. This might be a longer-term investment plan, particularly for individuals who can only afford one or two houses at a time.
4. Real estate investment trust
A real estate investment trust (REIT) is the ideal option for investors seeking portfolio exposure to real estate without engaging in conventional real estate transactions.
A real estate investment trust (REIT) is formed when a business (or trust) uses investor funds to acquire and manage income properties. REITs, like other stocks, are traded on major exchanges.
To maintain its REIT status, a firm must distribute 90% of its taxed earnings in the form of dividends. By doing so, REITs avoid having to pay corporate income tax, whereas a conventional business would be charged on its revenues and then determine whether or not to distribute after-tax gains as dividends.
As with other dividend-paying equities, REITs are an excellent option for stock market investors seeking consistent income. In comparison to the above types of real estate investments, REITs allow investors to participate in nonresidential real estate assets, such as shopping malls or office complexes, that are normally inaccessible to individual investors.
More importantly, REITs are extremely liquid due to their exchange-traded status. In other words, you will not require the assistance of a realtor or a title transaction to cash out your investments. REITs are a more formal version of a real estate investment group in operation.
Finally, investors should differentiate between equity REITs who do own buildings and mortgage REITs that finance real estate and invest in mortgage-backed assets (MBS). Both provide experience with real estate, but the exposure is somewhat different. An equity REIT is much more traditional in that it symbolizes real estate ownership, whereas mortgage REITs concentrate on the revenue generated through real estate mortgage financing.
5. On-line real estate
Real estate investing networks are for those interested in pooling their resources to engage in a larger commercial or residential transaction. The investment is made using online real estate platforms, which are also referred to as real estate crowdfunding. It still involves capital investment, although much less than what is necessary to acquire homes outright.
Online platforms unite investors seeking to finance real estate developments with builders. In some instances, you may diversify your investments on a shoestring budget.
Conclusion
Whether property investors use their assets to produce rental income or to wait for the ideal selling moment, it is possible to construct a powerful investment program by spending a relatively small percentage of the total property’s value upfront. And, as with any venture, real estate offers profit and potential regardless of whether the entire market is rising or falling.
