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| Here's how - from buying rental properties to REITs and more |
Buying and owning real estate is a satisfying and profitable investment strategy. Unlike stock and bond investors potential real estate owners can use leverage to buy a property by paying a portion of the total cost and then paying off the balance and interest over time.
While traditional mortgages typically require a 20% to 25% down payment in some cases a 5% down payment can be used to purchase an entire property. This ability to control assets at the time of signing documents emboldens real estate speculators and landlords alike who in turn can take second place Mortgage their home for a down payment on additional properties. Here are the five main ways investors can make money in real estate.
KEY TAKEAWAYS
- Aspiring real estate owners can buy a property by using leverage paying a portion of their total cost up front and repaying the balance over time.
- One of the main ways investors make money in real estate is by becoming the landlord of a rental property.
- Those who buy undervalued real estate and restore it and sell it can also earn an income.
- Real estate investment groups are a more hands-off way to make money in real estate.
- Real estate investment trusts (REITs) are basically dividend-paying stocks.
1. Rental Properties
Owning a rental property can be a great opportunity for individuals with do-it-yourself (DIY) renovation skills and the patience to manage tenants. However this strategy does require significant capital to cover up-front maintenance costs and cover vacant months.
✅Pros
- Provides regular income and property can appreciate in value
- Maximizes capital through leverage
- Many tax-deductible associated expenses
❎Cons
- Managing tenants can be tedious
- Potentially damage property from tenants
- Reduced income from potential vacancies
According to the U.S Census Bureau sales prices for new homes a rough indicator of real estate values continued to rise from the 1960s to 2007 before falling during the financial crisis. 1 Sales prices subsequently resumed rising even exceeding pre-crisis levels. 23 The long-term impact of the coronavirus pandemic on real estate values remains to be seen.
Source: U.S Census Bureau Building Survey
❗warning:
Mortgage discrimination is illegal. There are steps you can take if you believe you have been discriminated against because of your race religion marital status use of public assistance nationality disability or age. One of the steps is to file a report with the Consumer Financial Protection Bureau Bureau or the U.S Department of Housing and Urban Development (HUD).
2. Real Estate Investment Groups (REIGs)
Real Estate Investment Groups (REIGs) are great for those who want to own rental real estate without having to run it. Investing in REIGs requires capital buffers and access to financing.
REIGs are like small mutual funds that invest in rental properties. 5 In a typical real estate investment group a company buys or builds an apartment building or condo and then allows investors to join the group by purchasing them through the company.
A single investor can own one or more individual living space units but the company running the investment group collectively manages all the units that handle maintaining advertised vacancies and interviewing tenants. In exchange for performing these management tasks the company undertakes Percentage of monthly rent.
A standard real estate investment group lease is in the name of the investor with all units pooling a portion of the rent to prevent occasional vacancies. For this you will earn some income even if your unit is empty. As long as the vacancy rate of the merged unit is not A spike too high should be enough to cover the cost.
✅Pros
- More hands-off than owning rentals
- Provides income and appreciation
❎Cons
- Vacancy risks
- Fees are similar to those associated with mutual funds
- Susceptible to unscrupulous managers
3. House Flipping
Home Flip is for those with extensive experience in real estate appraisal marketing and renovations. Home flipping requires funding and the ability to make or supervise repairs as needed.
This is the proverbial wild side of real estate investing. Just as day traders are different from buy-and-hold investors real estate speculators are different from buy-and-rent landlords. Case in point - Real estate speculators often want to sell their undervalued property at a lower price and profit from it more than six months.
Pure real estate agents usually do not invest in improving properties. Therefore the investments must already have the intrinsic value needed to be profitable without any changes or they will eliminate the contention for the property.
Flippers who can't offload their properties quickly can find themselves in trouble because they often don't have enough uncommitted cash on hand to pay off the property's mortgage over the long term. This can lead to continued snowballing losses.
There is another flipper that makes money by buying affordable properties and adding value through renovations. This can be a long-term investment and investors can only buy one or two properties at a time.
✅Pros
Bind capital in less time
Can offer quick returns
❎Cons
Requires a deeper market knowledge
Hot markets cooling unexpectedly
4. Real Estate Investment Trusts (REITs)
Real estate investment trusts (REITs) are best for investors looking to invest in real estate without traditional real estate transactions.
A REIT is created when a company (or trust) uses investor money to buy and operate income property. REITs are traded on major exchanges like any other stock. 6
A company must pay out 90% of its taxable profits in the form of dividends to maintain its REIT status. By doing so the REIT can avoid paying corporate income tax while the average corporation will be taxed on its profits and must then decide whether to distribute its after-tax profits as dividends7
Like stocks that pay regular dividends REITs are a solid investment for stock market investors hungry for regular income. In contrast to the above types of real estate investments REITs give investors access to non-residential investments such as shopping malls or office buildings which are typically Direct purchase by individual investors is not feasible.
What's more REITs are highly liquid because they are exchange-traded trusts. In other words you don't need a real estate agent and title transfer to help you cash in on your investment. In practice a REIT is a more formal version of a real estate investment group.
Finally when looking at REITs investors should distinguish between equity REITs that own buildings and mortgage REITs that finance real estate and dabble in mortgage-backed securities (MBS). Both provide real estate exposure but the nature of the exposure is different. Equity REITs More traditionally it represents ownership of real estate while mortgage REITs focus on income from real estate mortgage financing.
✅Pros
- Essentially dividend-paying stocks
- Core assets tend to be long-term leases that generate cash
❎Cons
- Leverages associated with traditional rental real estate do not apply
5. Online Real Estate Platforms
The real estate investment platform is for those looking to invest in larger commercial or residential transactions with others. Investments are made through online real estate platforms also known as real estate crowdfunding. This still requires investment capital albeit less than today Requires direct purchase of property.
The online platform connects investors looking to finance projects with real estate developers. In some cases you can diversify your investments with very little money.
✅Pros
Can invest in a single project or a portfolio of projects
Geographic diversification
❎Cons
Tend to be illiquid with lockup periods
Management fees
Why should I add real estate to my portfolio?
Real estate is a unique asset class that many experts believe should be part of a diversified portfolio. That's because real estate typically isn't closely tied to stocks bonds or commodities. Also real estate investing can generate income from rent or mortgages Potential for capital gains.
What are direct and indirect real estate investments?
Direct real estate investment involves actually owning and managing the property. Indirect real estate involves investing in collective assets that own and manage assets such as REITs or real estate crowdfunding.
Is Real Estate Crowdfunding Risky?
Crowdfunding is riskier than other forms of real estate investing. This is usually because real estate crowdfunding is relatively new. Also some of the available projects may appear on crowdfunding sites because they are not available from more traditional method. Finally many real estate crowdfunding platforms require investors' funds to be locked up for several years making them less liquid. According to research by Investopedia the annualized returns for the top platforms are still between 2% and 20%.
The Bottom Line
Whether real estate investors are using their properties to generate rental income or waiting for the perfect sales opportunity to arise it is possible to build a sound investment plan by paying a relatively small portion of the property's total value up front. and any Whether the overall market is up or down real estate investing has profits and potential.
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