How To Invest In Real Estate: A Guide

Different Ways To Invest In Real Estate

Just as real estate in and of itself will diversify your portfolio, you can diversify your investments in real estate. Here are several ways to invest:

Flipping Houses

When you flip a house, you buy a home needing extensive repairs, fix it up and sell it for a higher price. Successful flippers can renovate houses quickly and put them back on the market to make a financial gain.

It takes time and energy to flip a house, and the longer you take, the more it’ll suck away at your profits. So, it’s essential to limit your initial investment with a modest price and keep renovation costs low. However, sometimes large problems take extra time and money to fix and surprises can crop up.

Rental Properties

A rental property is a building you own and lease out to tenants, who pay monthly rent to use your property. For example, you could buy a commercial building and rent it out to a business owner. On the other hand, a residential property would mean renting it out to an individual or family.

This strategy is profitable even if you have a mortgage on the property because you can charge enough rent to cover your monthly payment and have some money left over for a small profit. For example, if the mortgage for your property costs $1,500 monthly, you can charge $1,700 for rent and pocket the remaining $200 after making your payment. Then, once you pay off the mortgage, most of the rental income is then profit. Remember, you’ll still need to pay taxes and insurance.

Along with taxes and insurance, you’ll need to factor in maintenance and monthly management of the property. Will you handle this, or will you hire a management company? If you’re handy, you could save a lot of money by doing repairs yourself.

All of these will factor into your overall cash flow. So, some number-crunching is necessary to find the ideal rental property for your situation. Remember, your property can appreciate as well as generate rental income. Therefore, rental properties can become even more profitable if you sell them in the future.

Real Estate Investment Trusts (REITs)

A real estate investment trust (REIT) allows you to invest in real estate without owning or managing property. Instead, you invest money in a set of real estate assets like you’d purchase shares of stock.

Here’s how it works: investment companies sell shares of stocks, issue bonds and use the revenue to purchase multiple properties. Then, they lease the individual units for monthly rent payments.

The primary benefit of REITs is they have a legal obligation to share at least 90% of their profits with their shareholders. These payouts, known as dividends, come in the form of cash and additional shares in the fund. As a result, your long-term gains can grow exponentially.

However, REITs can contain numerous asset types. For example, your portfolio may include malls, office buildings, apartment buildings and mortgages. These can generate substantial gains over time. Remember, you don’t have complete control over the real estate assets in a REIT, so investment decisions are up to the REIT management company.

Real Estate Investment Groups (REIGs)

Real estate investment groups (REIGs) buy or build properties and then sell off property parts to real estate investors. For example, a REIG will buy an apartment building and allow investors to buy units within it.

REIGs handle locating tenants, property maintenance and the other responsibilities of owning a rental property, giving you a hands-off approach to investing in real estate. However, REIGs charge administration fees for their services, so you’ll lose out on some of the profits. In addition, you rely on the REIG members for their expertise and honesty, with little legal recourse if the investments fall apart.

Real Estate Crowdfunding

Crowdfunding uses social media to attract investors and pool money to invest in real estate. This way, investing is open to everyone, not just the usual real estate investors.

Participating in crowdfunding is an inexpensive way to get into real estate and allows you to pick an investment that appeals to you. For example, you might choose a REIT whose shares are too expensive for an average investor to afford. However, crowdfunding means you can join tens or hundreds of other investors in purchasing a high-value REIT share.

Real Estate Limited Partnerships (RELPs)

A type of REIG, a real estate limited partnership (RELP) is a group of investors who pool their money to purchase property and then develop or lease it. You’d chip in a specific amount and receive equity in the properties the RELP purchases. For example, if five investors put in $200,000 to purchase $1 million in real estate, each person would have an equal 20% share of the assets.

RELPs implement a partnership agreement naming general and limited partners. General partners take care of the property management of the investment, while limited partners have equity shares but don’t participate in day-to-day decisions.