Here’s how — from purchasing rental property to investing in REITs and more
Owning and buying real estate is both a rewarding and a profitable investment practice. Unlike stock and bond holders, prospective property owners can use leverage to purchase a property by paying up front a portion of the overall cost, then paying off the balance, plus interest, over time.
Although a conventional mortgage typically requires a down payment of 20 percent to 25 percent, in some cases a down payment of 5 percent is all it takes to buy an entire house. This right to manage the asset at the moment of signing papers embolds both real estate flippers and tenants, who in turn will take out second mortgages on their homes to make down payments on additional assets.
Here are many ways investors can make money on immovable property.
- Aspiring property owners can buy a property using leverage, pay a portion of the overall cost up front and then pay off the remainder over time.
- One of the key ways investors can make money from real estate is to become a rental property landlord.
- Individuals who are flippers can also gain money by buying up undervalued real estate, restoring it and selling it.
- Investment real estate companies are a more hands-off method of making money in real estate.
- Real estate investment trusts (REITs) are simply stocks paid for by dividends.
5 Simple Ways of Investing in Real Estate
1. Be a Landlord
Ideal for: DIY and renovation skills people, who have the ability to handle tenants.
What it takes to get started: Significant resources needed to fund costs of upfront maintenance and cover vacant months.
Pros: Rental properties can provide regular income through leverage while maximizing the available capital. In addition, many related expenses are tax-deductible, and any loss may offset gains in other investments. Properties improve in perfect conditions during their mortgages, leaving landlords with a more valuable asset than they had begun with.
Cons: The rental properties appear to be riddled with endless problems unless you employ a property management service. The rowdy tenants can harm property in worst-case scenarios. In addition, a landlord must either tolerate vacancies or charge lower rent in some rental market conditions in order to cover the expenses before things turn around. On the flip side, once the mortgage is fully paid out, most of the rent becomes all profit.
According to U.S. Census Bureau data, selling prices of new homes (a rough measure of real estate values) rose steadily in value from 1940 to 2006, before falling during the financial crisis. Subsequently, selling rates resumed their climb, even surpassing pre-crisis levels. What will be the long-term impact of the coronavirus pandemic on real estate values remains to be seen. It is more probable to go downwards than upwards.
2. Real Estate Investment Groups (REIGs)
Ideal for: People who want to own land without managing it.
What’s needed to get started: A capital buffer and financing access.
Pros: This is a far more hands-off approach to immovable property that also generates revenue and interest.
Cons: There is a vacancy risk for REIGs (Real Estate Investment Groups), whether it is distributed around the community or whether it is unique to the owner. Although ideally these classes are safe ways of investing in real estate, they are vulnerable to the same fees that plague the mutual fund industry. Moreover, these groups are sometimes private investments in which unscrupulous management teams bilk money out of investors. Hence, rigorous due diligence is essential to securing the best opportunities.
How REIGs work: Investment real estate companies are like small mutual funds invested in rental properties. A business buys or builds a series of apartment blocks or condos in a traditional real estate investment scheme, then allows investors to purchase them through the business, thereby joining the group. A single investor may own one or more units of self-contained living space but the investment group operating company collectively manages all units, manages maintenance, advertising vacancies, and interviews tenants. The company takes a percentage of the monthly rent in exchange for performing those management tasks.
A standard investment group lease for real estate is in the name of the investor, and all units pool a portion of the rent to guard against occasional vacancies. To that end, even if your unit is empty, you’ll receive some income. As long as the vacancy rate does not rise too high for the pooled units, there should be enough to cover the costs.
3. House Flipping (a.k.a. Real Estate Trading)
Ideal for: People with considerable wisdom in real estate valuation and marketing, and expertise in renovation.
What it takes to get started: Capital and the capacity to fix or supervise as required.
Pros: Flipping allows a shorter period of time during which money and energy are tied up in an estate. But significant returns can occur, even in shorter timescales, depending on market conditions.
Cons: Investing in real estate requires a deeper understanding of the market, combined with luck. Hot markets can cool unexpectedly, leaving traders with short-term losses or long-term headaches.
How Flipping Works: This is the wild side of investment in real estate. Just as day traders are an entity different to buy-and-hold investors, real estate traders are separate from buy-and-rent landlords. Case in point: Real estate traders often try to sell the undervalued assets they buy in less than six months for a profit.
Pure property flippers do not invest in property development. Hence the investment must already have the intrinsic value needed to turn a profit without any alterations, or they will eliminate the property from contention.
Flippers who are unable to unload a property quickly may be in trouble because they typically don’t keep enough uncommitted cash on hand to pay a property’s mortgage over the long term. This can result in ongoing losses from snowballing.
There’s another form of flipper that makes money by buying reasonably priced properties and adding value through their renovation. This can be a longer-term investment, where investors can only afford one or two properties at a time to take over.
4. Real Estate Investment Trusts (REITs)
Ideal for: Investors who want real estate portfolio exposure without a traditional real estate transaction.
What it takes to get started: Capital investment.
Pros: REITs are basically dividend-paying securities whose main portfolios include commercial real-estate assets with long-term, cash-producing leases.
Cons: REITs are simply stocks, and the leverage associated with conventional rental properties does not apply.
How REITs work: A REIT is created when a company (or trust) uses money from investors to purchase and manage revenue assets. REITs are purchased and sold on major exchanges like any other stock. In order to retain its REIT status, a company must pay out 90 percent of its taxable income in the form of dividends. Through doing so, REITs avoid paying corporate income tax, while a normal business will be taxed on its earnings and would have to determine whether or not to allocate its after-tax profits as dividends.
Like traditional dividend-paid stocks, REITs are a good investment for stock market investors who want daily income. Compared to the aforementioned forms of real estate investment, REITs allow non-residential property developers, such as malls or office buildings, to be purchased directly by individual owners, which is usually not feasible. Specifically, REITs are extremely competitive in that they are traded on market. You won’t need a realtor and a transfer of title to help you cash out your investment. In fact, REITs are a more formalized version of an investment group for real estate.
Ultimately, when looking at REITs, investors can differentiate between owning-building equity REITs and mortgage REITs that provide real estate funding and dabble in mortgage-backed securities (MBA). Both give real estate exposure, but there is a different aspect to the exposure. The equity REIT is more common in that it reflects ownership of immovable land, while mortgage REITs rely on revenue from real estate mortgage financing.
REITs are going down, in the aftermath of the pandemic. What’s going to happen afterwards remains to be seen.
5. Online Real Estate Investment Platforms
Ideal for: Investors wishing to join others in investing in a bigger online residential or commercial offer.
What it takes to get started: Capital investment.
Pros: Online platforms link investors with real estate developers who are looking to fund projects. In some cases, for little cash, you can diversify your investments.
Cons: How online sites for investing in real estate work. In the past, to engage in such real estate transactions, you had to be an approved investor but that’s no longer the case with those forms of transactions.
The Bottom Line
Whether property owners use their assets to produce rental income or bid their time before the ideal sale opportunity occurs, it is feasible to build up a robust investment plan by paying up front a fairly small portion of the overall value of a property. Just as with any project, whether the overall market is up or down, there is benefit and opportunity inside real estate.