The first thing that possibly comes to mind when you think about real estate investment is your house. Of course, when it comes to choosing investments, real estate investors have lots of other options and they are not all physical properties.
- One of the key ways in which investors can make money in real estate is by becoming a rental property landlord.
- Flippers buy, fix and sell undervalued real estate for a profit.
- Investment trusts in real estate (REITs) have access to real estate without owning, running or financing assets.
Over the past 50 years or so Real Estate has become a popular investment vehicle. Here’s a look at some of individual investor ‘s leading options, along with the reasons to invest.
If you invest in rental properties, you become a landlord — so you have to consider whether you’re going to be comfortable with that role. As the landlord, you’ll be responsible for stuff like paying mortgage, property taxes , and insurance, holding the house, finding tenants, and dealing with any issues.
Being a landlord is a hands-on investment, unless you hire a property manager to handle the details. Depending on your situation, caring for the property and the tenants can be a 24/7 job — and not always pleasant to do. However, if you carefully select your properties and tenants, you may lower the risk of big problems.
One way landlords make money is through rent collection. How much rent you can charge depends on the location of the property. Still, it can be hard to determine the best rent, because if you charge too much you will chase away tenants, and if you charge too little you will leave money on the table. A typical tactic is to charge enough rent to cover costs before the mortgage is paid, at which point the rent becomes income for the majority.
The other primary way landlords are making money is by appreciation. You may be able to sell your property at a profit (when the time comes) or borrow against the equity to make your next investment if your property appreciates in value. While immovable property tends to appreciate, there is no guarantee.
Real estate has long been regarded, and for good reason, as a sound investment. Historical housing data had made it appear as if prices could continue to climb indefinitely before 2007. With few exceptions, between 1963 and 2007—the start of the Great Recession — the average selling price of homes in the United States increased each year.
A map from the St. Louis Federal Reserve Bank shows average selling prices between 1963 and 2019 (the latest available data).1 The areas shaded in light grey represent recessions in the United States.
Of course, the most significant downturn in the real estate market had coincided with the Great Recession before the COVID-19 pandemic. We have yet to see the effects of the coronavirus crisis. Amid closures, social distancing, and alarming levels of unemployment, home prices are expected to decline considerably. While that doesn’t necessarily mean home prices will follow suit, the way people buy and sell real estate will change at a minimum — at least in the short term.
Just like the day traders who are leagues away from buy-and – hold investors, real estate flippers are a completely different breed from buy-and-rent landlords. Flippers purchase properties with a view to owning them for a brief period of time — often no more than three or four months — and selling them quickly for a profit.
Those are two main approaches to flipping a property:
- Repairing, and updating. With this strategy, you buy a property with some improvements and upgrades which you think will increase in value. Ideally, you complete the work as soon as possible and then sell it at a price that exceeds your total investment (including the renovations).
- Hold on and sell back. That kind of flipping does work differently. Instead of buying and repairing a house, you buy it in a increasingly growing market, keep it for a few months and then sell it at a profit.
With either type of flipping, you run the risk of not being able to unload the property at a price that turns out to be a profit. This can pose a challenge as flippers usually do not have enough cash ready to pay long-term mortgages on properties. Even, if it’s done the right way, flipping can be a profitable way to invest in real estate.
A real estate investment trust (REIT) is created when a company (or trust) is formed to buy, manage and sell income-generating properties with the money of investors. REITs, including securities and exchange-traded funds (ETFs), are acquired and sold on major exchanges.
The entity must pay shareholders 90 per cent of its taxable profits in the form of dividends in order to qualify as a REIT. By doing so, REITs stop paying corporate income tax, while normal companies would be taxed on their earnings, eating in the dividends that they could allocate to their shareholders.
Like traditional dividend-paying stocks, REITs are ideal for investors seeking daily income, even though they also provide the potential for appreciation. REITs invest in a variety of properties, such as malls (about one quarter of all REITs are specialized in these), health care facilities, mortgages, and office buildings. REITs have the advantage of being highly liquid, compared to other types of real estate investments.
Investment Immobilien Classes
Real estate investment groups (REIGs) are kind of like small mutual rental property funds. If you are interested in owning a rental property but don’t want the hassle of becoming a landlord, a real estate investment company might be the answer.
A company buys or constructs a set of buildings, often apartments, and then allows investors to buy them through the company, joining the group. A single investor can possess one or more units of self-contained living room. But the company that operates the investment group manages all the units, and is responsible for maintenance, advertising, and tenants finding. The company takes a percentage of the monthly rent, in exchange for this management.
Investment groups are available in many versions. In the regular edition, the lease is in the name of the landlord and a part of the rent is shared by all units to protect against occasional vacancies. This means that even though your unit is empty, you will earn enough to pay the mortgage.
The quality of an investment group is wholly dependent on the company offering it. In theory, it’s a safe way to get into investment in real estate, but groups can charge the kind of high fees that haunt the mutual fund sector. Research is, as with all investments, crucial.
Real Estate Partnerships Limited
A limited partnership (RELP) in real estate is similar to an investment group in real estate. It is an entity formed to purchase and hold a portfolio of real estate, or sometimes only one property. RELPs do exist for a finite number of years, however.
An experienced real estate manager or development firm acts as the general partner. In exchange for a share of ownership as limited partners, outside investors are then sought to provide financing for the real estate project. The partners may receive periodic distributions from the revenue generated by the properties of the RELP, but the real payoff comes when the properties are sold — with luck, at a considerable profit — and the RELP dissolves down the road.
Mutual Real Estate Funds
Mutual real estate funds invest primarily in REITs and operating real estate companies. They provide a relatively small amount of capital to gain diversified exposure to immovable property. They offer investors a much broader selection of assets, depending on their strategy and diversification goals, than can be achieved by buying individual REITs.
Those funds are pretty liquid, like REITs. Another significant benefit to retail investors is the fund’s analytical and research information. This may include details about the acquired assets and the perspective of the management on the viability and performance of specific real estate investments and as an asset class. More speculative investors may invest in a mutual fund immovable unit, tactically overweighting certain types of property or regions to optimize return.
Why Invest In Immobilities?
Real estate can boost an investor’s portfolio’s risk-and-return profile, offering competitive risk-adjusted returns. The real estate market is generally one of low volatility, particularly when compared with equities and bonds.
Real estate is also lucrative as compared to more conventional revenue sources. Usually this asset class trades at a premium yield to the U.S. Treasuries and is particularly attractive in a low Treasury Rate environment.
Protection and Diversification
Another advantage of investing in real estate is their potential for diversification. Real estate has a weak, and in some cases negative, correlation with other major asset classes — meaning real estate is always up while stocks are down. This means that adding real estate to a portfolio will reduce its uncertainty and produce a higher return per unit of risk. The more direct the investment in real estate, the better the hedge: Less direct, publicly traded vehicles, like REITs, will reflect the performance of the overall stock market.
Since it is backed by brick and mortar, direct real estate often brings less tension between principal agents, or the degree to which the investor’s interest depends on managers and debtors’ credibility and competence. Even the more indirect investment forms carry some protection. Of example, REITs require the payment of a minimum percentage of earnings (90 per cent) as dividends.
Immobilities’ capacity for inflation-hedging stems from the positive relationship between growth in gross domestic product ( GDP) and demand for real estate. As economies expand, real-estate demand drives higher rents, and this in turn translates into higher capital values. Consequently, real estate helps to retain capital’s buying power, bypassing some of the inflationary pressure on tenants and adding some of the inflationary pressure in the form of capital appreciation.
The Power of Gain
Investing in real estate, with the exception of REITs, offers an investor one resource which is not available to stock market investors: leverage. When you want to purchase a stock, by the time you put the purchase order, you have to pay the full value of the stock – unless you purchase on the margin. And even then, thanks to that magical method of financing, the mortgage, the percentage you can borrow is still far less than with real estate.
Many traditional mortgages require a down payment of 20 per cent. Depending on where you live, however, you can consider a mortgage needing as little as 5%. This means you can manage the whole property and the equity that it retains by paying just a fraction of the overall value. Of course, the size of your mortgage affects the amount of ownership you actually have in the property, but the minute the papers are signed you control it.
This is what is emboldening both real estate flippers and landlords. On their homes they will take out a second mortgage and place down payments on two or three other properties. Either renting these out so that renters pay the mortgage, or waiting for an opportunity to sell for a profit, they manage these properties, while paying only a small portion of the overall value.
The Low Line
Real estate can be a good investment, and one with the ability to produce a steady income and create wealth. Nevertheless, one downside to real estate investment is illiquidity: the relative uncertainty to turning an asset into cash and cash into an asset.
A real estate transaction can take months to close, unlike a stock or bond transaction that can be completed in seconds. But with the aid of a broker, it can be a few weeks’ work simply to locate the right counterparty. REITs and pooled real estate funds obviously provide greater liquidity and market pricing. But they come at the expense of higher volatility and lower advantages of diversification, since they have a much greater connection to the overall stock market than direct real estate investment.
Keep your expectations realistic as with any investment, and be sure to do your homework and research before making any decisions.
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