When you think of real estate, the first thing that probably comes to mind is buying a home. However, physical property can also become an indispensable part of your portfolio. While real estate has emerged as a strong investment vehicle in the last few decades, buying and maintaining estates is no child’s play.
Buying real estate is about finding a place you can call your own. But when it comes to investing, you will find yourself in an altogether different ballpark. There are many options like rental property, real estate investment group, REIT, etc.
Although the property market creates many chances for the big gains you undoubtedly love, owning brick and mortar is way more complicated than investing in bonds and equities. In this post, we will introduce you to the world of real estate investment.
I. Basic Rental Properties
This is one of the oldest and most popular investment options; probably as old as land ownership itself.
An individual buys a property and rents it out to a tenant. The owner needs to pay the mortgages, maintenance, and taxes due on the estate. Usually, the rent charged is enough to recover all the above-mentioned expenses. The landlord may also charge a premium (for profit) if the property is located strategically.
However, there are a few downsides to what seems like an ideal investment. For starters, one can end up with a pathetic tenant who damages the estate and does not pay rent on time. The situation could be even worse if they have no tenant at all!
II. Real Estate Trading
This is the flip side of rental properties. Real estate traders are totally different from the buy-and-rent landlords.
They purchase estates and hold them for a short period, no more than 3-4 months, after which they try to sell them for a decent margin. This practice also goes by the name ‘flipping’, and is based on purchasing estates that are either in a very hot area or significantly undervalued.
If a flipper is stuck with a property, the results can be devastating as they do not have enough resources to pay the mortgages of the property for the longer haul. This means continued losses – something which no trader would want to hear in their life.
III. Real Estate Investment Group
A real estate investment group is like a smaller mutual fund for rentals. If you are interested in investing in a rental estate but do not want troubles associated with land lordship, then it might be the right solution for you.
This is how it goes: first, a company buys or builds several apartment blocks or condominiums and then allows investors to buy them through it, thus becoming a member of the group. An investor can own one or multiple units, but the company collectively looks after all the units. This includes maintenance, advertising available units, interviewing potential candidates, etc. In exchange for their services, the company takes some percentage of the rent.
The concept of real estate has been around from the time our cave-dwelling ancestors started pushing unfamiliar faces out of their personal space. So, it should not come as a surprise that Wall Street figured out a way to convert land into a publicly-traded commodity.
A Real Estate Investment Trust (REIT) comes into existence when a trust or corporation employs investors' funds to purchase and run income-producing properties. Just like any other stock, REITs can be freely bought and sold on the major exchanges.
The firm has to distribute 90% of its taxable profits in the form of dividends to retain its status as a REIT. This way, REITs save corporate income tax. A standard firm first pays tax on the profits and then decides whether to distribute its post-tax earnings as dividends or not.
Much like the usual dividend-paying stocks, REITs are a rock-solid investment alternative for financial market investors looking for a regular stream of income. They allow investors to put their money into commercial estates such as office buildings or malls and are highly liquid. In simple words, the investors will not need a realtor to cash out their investment.
The Bottom Line
We just looked at the four key types of real estate investment. Real estate has potential, but by no means think of it as an assured gain. You need to do some homework in order to make calculated decisions (instead of rushing) for a profitable outcome.
For more information on REITs, rental properties, or real estate investment groups in Rancho Cucamonga, feel free to contact us on firstname.lastname@example.org or (909) 377-3137.