5 Simple Ways to Invest in Real Estate | Managing Your Money Series

5 Simple Ways to Invest in Real Estate

Here's how—from owning rental property to REITs and more.

Buying and owning real estate is an investment strategy that may be both enjoyable and successful. Unlike stock and bond investors, potential real estate owners may use leverage to acquire a property by paying a percentage of the whole cost ahead, then paying off the remainder, plus interest, over time.

Here are five important ways investors may earn money on real estate.

KEY TAKEAWAYS

Aspiring real estate owners may acquire a property by leveraging leverage, paying a percentage of the entire cost now, and paying off the remainder over time.

One of the key ways in which investors may generate money in real estate is to become the landlord of a rental property.

People who are flippers, buying up discounted real estate, fixing it up, and selling it, may also generate revenue.

Real estate investment groups are a more hands-off approach to generate money in real estate.

Real estate investment trusts (REITs) are effectively dividend-paying equities.

5 Simple Ways To Invest In Real Estate

1. Rental Properties

Owning rental properties may be a terrific option for persons who have do-it-yourself (DIY) remodeling abilities and the patience to manage renters. However, this technique does need large resources to pay initial maintenance expenditures and to replace unoccupied months.

Pros

• Provides consistent income and assets may appreciate
• Maximizes capital via leveraging
• Many tax-deductible associated expenditures

Cons

• Managing renters may be tiresome
• Potentially harm property from tenants
• Reduced income from possible vacancies

The long-term implications of the coronavirus epidemic on real estate prices yet to be seen.

2. Real Estate Investment Groups (REIGs)

Real estate investment groups (REIGs) are suitable for persons who wish to own rental real estate without the difficulties of administering it. Investing in REIGs needs a financial buffer and access to finance.

REIGs are basically tiny mutual funds that invest in rental properties.

In a typical real estate investment group, a firm buys or creates a series of apartment complexes or condominiums, then invites investors to purchase them via the company, therefore joining the group.

A single investor may buy one or many units of self-contained living space, but the firm controlling the investment group collectively maintains all of the units, handling maintenance, advertising vacancies, and interviewing tenants. In return for executing these management activities, the corporation receives a part of the monthly fee.

A normal real estate investment group lease is in the investor’s name, and all of the units pool a part of the rent to hedge against occasional vacancies. To this aim, you'll earn some money even if your unit is vacant. As long as the vacancy rate for the pooled apartments doesn’t surge too high, there should be enough to pay expenditures.

Pros

• More hands-off than owning rentals
• Provides income and appreciation

Cons

• Vacancy hazards
• Fees comparable to those associated with mutual funds
• Susceptible to unethical bosses

3. House Flipping

House flipping is for those with substantial expertise in real estate appraisal, marketing, and remodeling. House flipping involves funds and the capacity to undertake, or supervise, repairs as required.

This is the proverbial "wild side" of real estate investment. Just as day trading is different from buy-and-hold investors, real estate flippers are separate from buy-and-rent landlords. Case in point—real estate flippers generally attempt to financially sell the discounted houses they acquire in less than six months.

Pure property flippers frequently don't invest in renovating homes. Therefore, the investment must already have the inherent worth required to earn a profit without any adjustments, or they'll exclude the property from contention.

Flippers who are unable to promptly offload a property may find themselves in difficulties since they often don’t retain enough uncommitted cash on hand to pay the mortgage on a property over the long run. This may lead to repeated, snowballing losses.

There is another sort of flipper that earns money by purchasing moderately priced houses and adds value by remodeling them. This may be a longer-term investment, when investors can only afford to take on one or two homes at a time.

Pros

• Ties up capital for a shorter time period
• Can give speedy returns

Cons

• Requires a deeper market knowledge
• Hot markets cooling suddenly

4. Real Estate Investment Trusts (REITs)

A real estate investment trust (REIT) is excellent for investors who desire portfolio exposure to real estate without a typical real estate transaction.

A REIT is founded when a company (or trust) utilises investors’ money to buy and run income assets. REITs are purchased and traded on the main markets, like any other stock.

A firm must deliver 90% of its taxable income in the form of dividends in order to keep its REIT classification. By doing this, REITs avoid paying corporate income tax, while a conventional firm would be taxed on its earnings and then have to determine whether or not to distribute its after-tax gains as dividends.

Like normal dividend-paying equities, REITs are a smart option for stock market investors who seek monthly income. In contrast to the aforementioned kinds of real estate investment, REITs give investors entrée into nonresidential properties, such as malls or office buildings, that are often not practical for individual investors to acquire directly.

More significantly, REITs are very liquid since they are exchange-traded trusts. In other words, you won’t need a real estate agent and a title transfer to assist you cash out your investment. In reality, REITs are a more institutionalized version of a real estate investment organization.

Finally, while looking at REITs, investors should differentiate between equity REITs that own buildings and mortgage REITs that offer financing for real estate and dabble in mortgage-backed securities (MBS). Both give exposure to real estate, but the nature of the exposure is different. An equity REIT is more conventional in that it symbolizes ownership in real estate, while the mortgage REITs concentrate on the revenue from real estate mortgage financing.

Pros

• Essentially dividend-paying stocks
• Core assets tend to be long-term, cash-producing leases

Cons

• Leverage associated with typical renting real estate does not apply

5. Online Real Estate Platforms

Real estate investment platforms are for people who wish to join others in investing in a greater commercial or residential venture. The investment is done using online real estate platforms, which are also known as real estate crowdfunding. This still needs spending funds, but less than what's necessary to own homes altogether.

Online platforms link investors who are eager to fund projects with real estate developers. In certain circumstances, you may diversify your assets with not much money.

Pros

• Can invest in single projects or 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 separate asset class that many experts say should be a component of a well-diversified portfolio. This is because real estate does not normally closely connect with equities, bonds, or commodities. Real estate investments may also create income via rentals or mortgage payments in addition to the possibility for capital gains.

What Is Direct vs. Indirect Real Estate Investing?

Direct real estate investments include actually owning and managing buildings. Indirect real estate includes investment in pooled entities that own and manage properties, such as REITs or real estate crowdfunding.

Is Real Estate Crowdfunding Risky?

Compared to other kinds of real estate investment, crowdfunding might be considerably riskier. This is typically because crowdfunding for real estate is relatively new. Moreover, some of the projects accessible may surface on crowdfunding platforms because they were unable to acquire money from more conventional channels. Finally, many real estate crowdfunding sites require investors' money to be locked up for a period of many years, making it fairly illiquid.

In Conclusion

Whether real estate investors utilize their properties to produce rental income or to bide their time until the right selling opportunity occurs, it's feasible to build up a comprehensive investment programme while spending a very modest percentage of a property's entire worth upfront. And like with any investment, there is profit and opportunity inside real estate, whether the broader market is up or down.

Happy Investing! 😉