Purchasing real estate is more than just finding a place you call home. Though almost everyone has a dream to buy own property, there are some who view real estate as an opportunity to capture and create value. Property is one of the common investment vehicles and continues to gain the interest of investors even when the market is turbulent.
So Why Should You Invest in Real Estate?
It is important to note that investing in real estate gives you certain leverage as against investing in stock, where you have to pay the full value at the time you buy an order. Even if you buy stock on margin, the borrowing amount is lesser than what you can get for a real estate purchase. For instance, a mortgage requires 20% to 25% down payment.
But depending on the location; the percentage of down payment can reduce. Thus, you can control the property and equity it holds by paying a fraction of total amount up front. Though the mortgage will pay the total value of the property at the time of purchase, but it is you who has control of the whole asset.
You can take a property loan on other homes and recover the amount required for down payment required for other properties. This is why landlords and real estate flippers invest in properties. Whether the house is rented to generate income from tenants or the same is sold in the future for a profit, the control of asset is of the owner’s alone.
4 Ways You Can Master Real Estate Investment
Below-given are ways you can begin investing in properties.
If you want to earn an income from your idle lying house, then you can rent out the apartment. You must have sufficient capital to cover up-front maintenance costs during the time when the house is vacant. However, you should have the ability to deal with tenants and be prepared to renovate the house regularly.
As a landlord, you may want to find a property at a low cost or at a place where people want a rental apartment. If the investment is successful, you can earn a regular income and maximize available capital through leverage. Some of your expenses could be tax deductible and any loss can offset gains in other investments.
Ideally you should charge enough rent to cover expenses such as property taxes, maintenance cost, a portion of housing loan repayment (if any), etc. On a long-term, rental property can give you a good profit. You can even sell off the property at any time you want, or when the value of real estate appreciates.
2. Real Estate Trading or Flipping
If you have enough experience in real estate marketing and evaluation and enough capital along with ability to oversee required repairs, then real estate flipping is for you. As a trader, you can purchase properties and hold them for a short tenure up to 3 to 4 months. After this period, you can sell the property for a profit. This system is known as flipping properties and is based on the thought of purchasing properties that are not undervalued or in hot market.
There is a factor of luck involved as the market can go cold without a warning, so tread carefully. Real estate trading comes with a shorter time period wherein the effort and capital is both invested in the property. You can earn significant returns even in a short timeframe. Expert property flippers usually do not put money into home improvements but are interested in pure profits from property’s sale.
As understood, as a flipper you need to have cash in hand or access to funds, as traditional borrowing will not work for such type of transaction. As a trader, if you cannot off-load the property in a bad market, you can run into huge loses, so take every decision of trading, carefully.
3. Real Estate Investment Trusts (REITs)
REITs are stocks, for which you must have investment capital. It is ideal if you want portfolio exposure to properties without having to take the traditional route of real estate transaction. A REIT is formed when a trust or corporation uses your (investor’s) money to buy and operate an income property. These are dividend-paying stocks and the core business point is commercial real estate, where long-term and cash flowing leases are accepted part of investments.
REITs are suitable investment for stock market investors as it helps in earning a regular income. They are highly liquid and can be traded through exchange. Thus, you do not require a title transfer or a realtor to allow cashing out on the investment. They help you to earn from non-residential properties such as office buildings and malls, which are not feasible for a single investor to buy directly.
Real Estate Investment Trusts are sold and bought like any other stock on the major exchanges. A corporation has to pay in the form of dividends, 90% of its taxable profits to retain the status of REIT. Doing this saves REITs from paying corporate income tax.
4. Real Estate Investment Groups
If you want to own a rental real estate without taking too many responsibilities and have sufficient capital cushion and access to funds, then real estate investment groups is for you. You can earn both income and appreciation. These are like small mutual funds, but for rented properties. A company will purchase or build a set of houses and have investors to buy these through the company, thus becoming a member of the group.
As an individual investor, you can own more than one unit. You have to arrange the maintenance cost and take care of the renting out process. In exchange for this management, the group takes a percentage of the monthly rent. The quality of investment groups depend on the company offering it. Thus, do your research about the company, before getting on board.
So how does an investment group work? Basically, the lease is your name. So you can receive a portion of income even if the unit is vacant. There will be enough funds to cover the cost, until the vacancy rate does not rise too high. In unfortunate cases, you will be asked to pay back if the costs are higher than income for a long period of time.
The above-given 4 types of real estate investments have both pros and cons. Take in account major market indicators and metrics of investment, before taking up any of these investment forms. If you tap these investments in the right way and are prepared to be patient through the ups and downs of the property market, then you can earn a profit over a period.