As you look for investment opportunities, there are numerous options available. Stocks, bonds, exchange-traded funds, and mutual funds are all good options for investors with varying levels of experience. However, forex or cryptocurrency may be too volatile for inexperienced investors. The option you choose should depend on how involved you want to be in your investment, how much money you have available for investment, and your risk tolerance.
Investing in real estate can be both satisfying and lucrative. “Unlike the stock market, real estate investors can use their own leverage to purchase a property by paying a portion of the total cost upfront while paying off the rest over time,” said Chris Hadley, founder of Empowered Equity Commercial Investment.
What makes a good real estate investment, though? A good investment has a high chance of success or return on your investment. If your investment involves a high level of risk, that risk should be balanced by a high potential reward. Even if you choose investments with a high probability of success, there is no guarantee. You should not invest in real estate or any other investment if you cannot afford to lose that money. This guide from RWInvest can provide further clarity into the ins and outs of building a property portfolio.
Although a traditional mortgage usually requires a 20% to 25% down payment, a 5% down payment is sometimes all that’s required to purchase an entire property. This ability to control the asset immediately after signing papers empowers real estate flippers and landlords who can, in turn, take out second mortgages on their homes to make down payments on additional properties.
Here are four key ways investors can earn money from real estate investments.
1. REIGs: Real Estate Investment Groups
Real estate investment groups (REIGs) offer an appealing option for those looking to own rental properties without the added responsibility of managing them. However, it is important to note that investing in REIGs requires a certain level of financial stability and access to financing.
REIGs function similarly to mutual funds and focus on investing in rental properties. Typically, a company purchases or constructs a group of apartment complexes or condominiums and then offers ownership of these properties to investors, allowing them to join the group.
While an investor may own one or multiple self-contained living spaces within the group, the company collectively manages all of the units, taking care of maintenance, advertising vacancies, and tenant interviews. In exchange for these management duties, the company receives a percentage of the monthly rent.
The standard lease agreement in a real estate investment group is in the investor’s name. All units within the group contribute a portion of their rent to cover any potential vacancies. This pooled approach ensures that investors still receive some income even if their unit is empty. As long as the vacancy rate does not spike too high across the pooled units, the revenue should be sufficient to cover expenses.
2. Flipping Houses
“House flipping requires a lot of knowledge in terms of both the market and home improvement,” Hadley said. “You need to know how to evaluate a property’s potential, recognize and estimate the work needed, and market to potential buyers.”
This approach to real estate investment is distinct from buy-and-hold strategies used by rental property investors and is often viewed as the more daring side of real estate investing. House flippers typically aim to profit from undervalued properties they purchase, with the goal of selling them for a profit in less than six months.
Pure property flippers typically avoid investing in property improvements, instead relying on intrinsic value to generate a profit. If a property cannot be sold within the desired timeframe, flippers can face financial difficulties as they may not have the liquid assets necessary to cover ongoing mortgage payments.
Another type of flipper seeks to generate profit by purchasing reasonably priced properties and improving their value through renovations. This approach can take a longer-term investment approach, with investors typically only able to handle one or two properties at a time.
3. Rental Properties
Investing in rental properties can be a lucrative opportunity for individuals with DIY renovation skills and the necessary patience to manage tenants. However, this investment strategy demands substantial upfront capital to finance maintenance costs and cover vacancies during lean months.
U.S. Census Bureau data indicates that the sales prices of new homes (a rough indicator for real estate values) have shown consistent growth from the 1960s to 2007, albeit with a dip during the financial crisis. Subsequently, sales prices have continued to rise, even surpassing pre-crisis levels. As for the long-term impact of the coronavirus pandemic on real estate values, only time will tell.
4. REITs: Real Estate Investment Trusts
A real estate investment trust (REIT) provides investors with exposure to the real estate market without engaging in traditional real estate transactions. It is a corporation or trust that utilizes investor funds to acquire and operate income properties. REITs can be bought and sold on major stock exchanges just like any other stock.
To maintain their REIT status, corporations must distribute 90% of their taxable profits in the form of dividends, thereby avoiding corporate income tax. This makes REITs a sound investment for stock market investors seeking regular income.
REITs provide investors access to nonresidential investments, such as office buildings or malls, which may be out of reach for individual investors. They are highly liquid because they are exchange-traded trusts, meaning investors can easily sell their shares without needing a real estate agent or title transfer.
It’s important for investors to differentiate between equity REITs that own buildings and mortgage REITs that offer financing for real estate and engage in mortgage-backed securities. Equity REITs represent traditional ownership in real estate, whereas mortgage REITs focus on income from real estate mortgage financing.
Final Thoughts
“Real estate investment can be a lucrative, rewarding venture,” Hadley stated. “However, you have to prepare properly so that you have the necessary knowledge, capital, and patience.”
There are various types of real estate investments, each with its own unique characteristics and risks. From rental properties to house flipping, from REIGs to REITs, investors have numerous options to choose from. It is crucial to carefully evaluate each investment opportunity and to consult with professionals when necessary to make informed decisions and mitigate potential risks. With proper planning and execution, real estate investment can provide a stable and steady income stream and contribute to long-term wealth accumulation.
