So, you want to start dabbling in the real estate market. Both lucrative and satisfying, this investment strategy may benefit those who aren’t interested in stocks and bonds. That’s because unlike stocks and bonds, you may use leverage to buy a property. What this means is that you’ll be able to use borrowed capital as a funding source for your business. By paying a portion of the total cost up-front you can later pay off the balance and interest over time.
In some cases, you may put a 5% down payment on a property, unlike the 20% or 25% down payments required for a traditional mortgage.
With those two factors in mind, it’s no wonder that so many people wish to dabble in this type of investment. Once you understand the basics behind different strategies, you’ll be well on your way to success- and tons of money!
So, let’s look at 4 ways to invest in real estate to get you started right away!
1. Become a Landlord
Becoming a landlord is ideal for those with enough patience to manage tenants. It also requires some DIY and renovation skills, especially for a more hands-on approach. For those reasons, you are also required to have good social skills since most tenants see this as a major plus.
In order to get started, you’ll need at least enough capital to finance maintenance costs. Furthermore, you have to be able to cover vacant months, as it’s not always guaranteed that you’ll be able to rent your property continuously.
You’ll need to consider the downside of becoming a landlord. Some tenants might cause damage to your property, but that’s oftentimes the least of your worries. You’ll also have to consider the fluctuation of certain rental market climates as in some cases you’ll have to endure long vacancy periods. In some cases, rent has to be lowered in order to make up for these changes- after all, expenses must still be covered.
On the other hand, rental properties can provide a regular stream of income. Once you finish paying off your mortgage, the rent will become profit. Your property will very likely appreciate over the course of your mortgage, so your asset will become more valuable over time. Furthermore, you’ll be maximizing available capital through leverage, as mentioned earlier.
The good news is that most associated expenses will become tax-deductible!
Sales prices for new homes have increased between 1940 and 2006, prior to the financial crisis. Since then, they resumed their ascent, though it’s difficult to predict what long term effects of the coronavirus pandemic will have on real estate values, so it’s best to consider your options carefully if you’ve been planning on becoming a landlord during these times.
2. Real Estate Investment Groups (REIGs)
Don’t like the hands-on approach to real estate investments by becoming a landlord? Then this option might be better suited for you. Through REIGs you’ll be able to own rental real estate without the hassle of running it. Naturally, you’ll need quite a bit of money to get started as well as access to financing.
Here’s how they work. Let’s assume a company has bought or built a number of condos. They then offer these condos up to investors- that’s where you come in. By purchasing one or more units you’ll be joining the group. However, it’s the company that’ll handle the management aspect of the condos from advertising vacancies to handling maintenance to interviewing tenants. These things come at a cost, though, so the company will take a percentage of the monthly rent.
What about long term vacancies? Well, you’ll be guarded in this event as a portion of the rent will pool towards a fund for this express purpose. So you’ll still receive some income even if your property is empty, though if the vacancy rate is too high you and other investors might be coming upon troubling times.
But joining a real estate investment group should not be a decision taken lightly. Sadly, many companies that manage such properties have been known to bilk investors out of their money. Furthermore, you have to watch out for the same fees that haunt the mutual fund industry! And, as mentioned earlier, the fear of vacancies is widespread, even for REGIs.
3. House Flipping
House flipping is not ideal for first-timers. You’ll need experience in marketing, renovation, and real estate valuation. Additionally, you’ll need to handle or oversee repairs as needed on top of substantial capital.
Real estate trading (house flipping) is known to provide significant returns over short time frames depending on the current market conditions. However, this cannot be achieved without deeper market knowledge. Some might even say you’ll need a good amount of luck, but we say it’s all about your timing!
One huge downside of house flipping is the fact that, if the market cools unexpectedly, you’ll be left with a property on your hands for a significant amount of time and if you’re financially unprepared for this, it could be disastrous.
Your task will be to buy undervalued properties and sell them in less than six months. Ideally, you’ll want properties that you don’t truly need to invest in though alterations, meaning that the property must already have intrinsic value. Of course, this isn’t often the case, otherwise, the property wouldn’t be undervalued in the first place. To put it simply, you’ll be looking for a diamond in the rough while hoping that other house flippers haven’t beaten you to the punch.
Other flippers might purchase reasonably priced properties in order to renovate them. In that case, you’ll need to consider this a long-term investment. Realistically, you’ll only be able to take on a few properties (one or two) at a time in order to not lose focus.
Investors who work like this aren’t known to keep a lot of cash on hand. As mentioned earlier if you’re stuck with a property it may snowball into losses for a longer period of time.
4. Real Estate Investment Trusts (REITs)
Want to take part in real estate investment trusts? You’ll need investment capital. This is the right approach for those who want portfolio exposure to real estate without the traditional real estate transaction. Basically, if becoming a landlord was the starting point and REIGs were next in line, then REITs are the next logical step.
When a trust or corporation uses investor’s money to purchase and operate income properties, a REIT is created. They are sold and bought like any other stock, and a corporation must payout 90% of its taxable profits in the form of dividends in order to maintain a REIT status. This leads to the fact that REITs can avoid paying corporate income taxes;
Take malls or office buildings, for example. Individual investors are very unlikely to get their hands on these assets, which is where REITs come in handy.
Another distinction to keep in mind is that REITs come in two forms, basically. As mentioned above, some own buildings. Others, however, deal with mortgages. Thus they provide financing to real estate and also play a role in mortgage-backed securities. The latter is known as a ‘less traditional’ since it does not represent ownership of real estate.
A huge advantage to take into account is the fact that REITs are highly liquid. Because they are exchange-traded you won’t need a realtor, nor a title of transfer in order to cash out your investment.
On the flip side, REITs are essentially stocks. This means that leverage associated with traditional rental real estate does not apply.
5. Online Real Estate Investment Platforms
It was only a matter of time before people used the ingenuity and connective assets of the internet in order to dabble in real estate investments. If you want to invest in a bigger commercial or residential deal online, then by using this approach you will be connected with other like-minded investors.
There are plenty of online platforms that will connect you with the right real estate developers in order to finance projects that are of interest to you. The fact that you can diversify your assets is also a major pro.
Previously, one needed to become an accredited investor in order to participate in real estate investments. These online platforms allow everyone and anyone to try their hand, which might be off-putting for some people. Consider this carefully if you wish to join.
To Sum It All Up
Here’s what you need to keep in mind. You may buy a property using leverage by paying a portion of the cost up-front. Then, you may pay the rest of the balance over time.
A good starting point for a hands-on investor is becoming a landlord. Profits will be seen after mortgages are paid off.
Flippers buy undervalued property, then bring up their value by fixing, maintaining, and generally sprucing them up! There is a fear that not selling properties quickly enough can generate massive losses.
REIGs and REITs are ways in which you can invest in the real estate market without necessarily spending a lot of time on and around a certain property. Online you can find connections between other investors such as yourself and developers.
All in all, you must keep in mind that as with any investment there is profit and potential, sure, but you also have to be wary of risks.