There is more to purchasing real estate than just simply choosing a place to call “home.” Over the past fifty years investing in real estate has become more and more prevalent and is a primary way of investing. Even though there are numerous chances for profit, there is more to it than just buying and owning property. Being involved in the real estate world is a lot more complicated than investing in such things like stock and bonds. Think of this blog as an introduction to investing in real estate.
Investing in rental properties is as old as the responsibility of landownership. One will purchase a piece of property then turn around and rent it to a tenant. The owner to the property is accountable for the mortgage, property taxes and maintenance, thus being a landlord. If possible, the landlord will choose a monthly rent that will cover all the said costs. The landlord might even charge enough to produce a profit, but what is usually practiced requires patience. The landlord will charge just enough to cover all the expenses until the mortgage is paid off, once that is done, the rent then becomes the profit. Additionally, the property might also have grown in value over the progression of the mortgage thus, leaving the landowner with a more appreciated asset.
Naturally, this type of investment isn’t all sunshine and roses; there are some imperfections to the strategy. There are instances where you could end up with a negligent tenant or end up with no tenant at all, which is even worse. No tenant equals no cash flow, which turns into you scrambling to make the mortgage payment. Finding the “right” property is something that needs to be considered too. You will need to make sure to do your due diligence so that you find an area where there are low vacancy rates and in it’s a community where people want to rent in.
One of the leading things that differentiate investing in rental properties compared to other investments is the time spent on sustaining your investment. For example, when you invest in stock, it’s more of a waiting game and the hope that it increases in value. There are more responsibilities when you invest in a rental property that needs to be noted before diving in. For instance, you may be summoned in the middle of the night because the hot water heater stopped working. If this type if handy man work is up your alley, then a phone call in the middle of the night might not bug you; if it does, then hiring a property manager would be the way to go…but at a cost, naturally.
To define a real estate investment group, think of them like a mutual fund for rentals. Say you want to own a rental property but don’t want to hassle with the responsibilities of a landlord; a real estate investment group is the solution for that problem. How this works is that a company will either purchase or construct a set of condos or apartment blocks and then will let investors buy the rentals through the company.
A solo stakeholder can own one or several units, but ultimately the company functioning the investment group jointly manages all the units. The company takes care of everything from maintenance, advertising vacant units and even interviewing tenants. The give-and-take for this is that the company gets a portion of the monthly rent.
There are several different kinds of investment groups, but typically you will see the kind where the lease is in the name of the investor. All of the units pull together a percentage of the rent to safe guard against the chance of vacancies. What this means is that you will get enough money to be able to pay the mortgage in the occurrence of a vacant unit.
Depending on the company offering the investment, this will determine the quality of an investment group. Theoretically, this is a safe way to get involved with investing in real estate, but some groups are vulnerable to the same costs that trouble the mutual fund business. Once more, doing your due diligence is key.
Trading Real Estate
Trading is the more risky side of investing in real estate. Similar to day traders who are miles away from a “buy and hold” investor, those who trade real estate are a completely different kind from landlords buying and renting. A real estate trades is one who purchases properties with the objective of only holding onto them for a short time period, typically 3-4 months. After the time period has passed the investor hopes to sell the property for a profit, this is what those in the industry call “flipping.” Flipping is based on purchasing properties that are cheap or that are in a market that is on fire.
A true property flipper will usually not put any money to fix up the house. The investment needs to have an inherent value to make a profit without repairs or they won’t even take it into consideration. Flipping this way is an all cash investment that is short term. If a flipper finds themselves in a situation where that can’t sell a purchased property, it can be upsetting because flippers don’t normally keep cash on hand to pay the mortgage or taxes. This might lead to continuous losses for the investor if they can’t unburden themselves from the property in a sour market.
There is another type of flipper that is indifferent. They make their profit by purchasing a home that is reasonably priced, renovating it, then selling. This type of investment is more long term depending on how much work needs to be done and how long it takes to finish. What can limit this investment is the time sensitivity and normally you can only take on one property at a time.
REIT stands for Real Estate Investment Trust and it is a way for Wall Street to make real estate publically traded. REIT is made when a trust/corporation uses an investor’s money to buy and work income properties. They are bought and sold on Wall Street just like stock. 90% is what a corporation must shell out from its profit in the form of a dividend to keep it at REIT status. In doing this, the Real Estate Investment Trust avoids paying corporate income tax, while a regular company is taxed in what they bring in as profit. Then they have to choose whether or not to deal out the after tax profit as dividends.
REITs are a good investment for investors of the stock market that want steady income, much like a dividend paying stock. Compared to the other ways of investing in real estate, mentioned earlier, REITs let investors put their money into commercial real estate (i.e. office buildings or malls).
With Real Estate Investment Trusts as the exception, investing in real estate allows the investor something that is not accessible in the stock market: leverage. If you desire to purchase a stock, you must pay the full amount of the stock at that time. Even if you purchase on margin, the extent to what you can borrow is much less than with real estate. “Conventional” mortgages typically require 25% down. Still, depending on where you live, there are several kinds of loans that need as little as 5%. What this means is that you are in control of the entire property and the equity it has by merely paying a fraction of the overall worth. Evidently, your mortgage will ultimately pay the overall value of the property at the time you acquired it, but you are in total control the second the contracts are signed.
Leverage is what encourages real estate flippers and landlords. They have the opportunity to take out a second mortgage on their current home, to then turn around and put a down payment on 2-3 additional homes. Whether they decide to rent out these properties so that the tenant pays the mortgage or if they choose wait for the ideal opportunity to sell for a turnover, they ultimately control these properties in spite of having merely paid for a small portion of the overall value.
I’ve described several different kinds of ways to invest in real estate. Yet, as you may have predicted, only the mere surface has been scratched. These examples give you only an outline of the potential of investing in real estate and don’t even begin to show you the numerous variations of real estate investments. Just like any other investment you are never assured a gain in profit. Always make cautious choices and be sure to weigh the overheads and profits of your actions before going in headfirst.