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How To Invest In Real Estate: 5 Simple Ways
When you think about real estate, the first thought that might come to mind is a home. But did you know that there are more options for real estate investors in the market today? In fact, you don't have to own physical property to become a real estate investor.
if you are keen on knowing what other options are out there, here are some of the leading options for individuals and investors looking to invest in the real estate market.
Key Points
- Real estate has been a popular investment option among investors from the early 1900s
- You don't have to own physical property for you to become a real estate investor. You can take advantage of alternative investment options such as REITs and REIGs
- Some ways in which you can invest in real estate include rental properties, REITs, REIGs, house flipping and real estate crowdfunding platforms
Disclaimer
The contents of this article are for educational purposes only. They are not intended to be a source of professional financial advice. You will find experts on financial planning, financial management, and real estate here. More on disclaimers here.
1. Rental Properties
Owning rental property is one of the most popular ways of investing in the real estate market. Getting started is as simple as acquiring a unit or several units, making the necessary renovations and then start taking in tenants. If you're a hands-on person, you can directly manage the property. If not, you can hire an individual or company to take over management of the unit(s).
It is important to note that significant capital is required for such renovations and for maintenance of the property. Also for regular maintenance and upkeep, you might need to hire a property manager, unless you're willing to be the sole manager of the property.
As an investor, you should also be aware of the fact that this strategy does require substantial capital to finance upfront maintenance costs and to cover vacant months as well as property tax payment.
Here are some pros and cons to consider for this investment strategy.
Pros
- Rental properties provide investors with a regular income stream through rent payments.
- If well taken care of, the investment property may appreciate in value, providing investors with potential capital gains.
- Rental property owners may be able to take advantage of tax deductions such as mortgage interest, property taxes, repairs, and depreciation.
- Rental property owners have direct control over the property and can make decisions about things like rent prices, upgrades and tenant selection.
Cons
- Rental property owners are responsible for managing the property, which can include things like tenant selection, maintenance and repairs. Rental properties can be subject to vacancy and tenant risk, which means that there may be periods of time when the property is not generating income.
- Rental properties can be expensive to purchase and maintain, which means that investors may need to take on significant financial risks to make the investment.
- Like all real estate investments, rental properties are subject to market risks, which means that their value can fluctuate based on market conditions.
2. Real Estate Investment Groups (REIGs)
A REIT (Real Estate Investment Trust) is a company or corporation that owns and operates income-producing real estate properties. REITs operate like mutual funds in that they pool money from multiple investors to buy and operate income generating real estate. Commercial real estate owned by REITS may include malls, apartment blocks, hotels and office buildings.
Just like normal stocks, REITs are bought and sold on the major exchanges. As a result, individual investors are able to earn dividends from real estate without having to buy or directly manage any property physically.
REITs are a popular type of investment as they tend to pay high dividends, which makes them a common investment among individuals. If you're an investor and you don't want to receive the regular dividends, you can choose to reinvest that income to grow your investments even further.
Pros
- REITs are a hustle free kind of investment as you don't get to directly manage any properties directly.
- They are required to distribute at least 90% of their taxable income to shareholders in the form of dividends, which means that they provide investors with a steady income stream.
- REITs invest in a wide range of properties, which means that investors can diversify their portfolios without having to purchase and manage properties themselves.
- REIT shares are listed on major stock exchanges, which means that they can be bought and sold easily, making them a liquid investment.
- They are managed by professional teams with experience in the real estate industry, which can lead to better investment decisions and performance.
Cons
- REITs can be sensitive to interest rate changes as higher rates can lead to higher borrowing costs, which can reduce the profits of the REIT.
- Like all stocks, REITs are subject to market risks, which means that their prices can fluctuate depending on market conditions.
- Investors in REITs do not have direct control over the properties owned by the REIT, which means that they cannot influence the decisions made by the management team.
- REIT dividends are generally taxed as ordinary income, which means that they can be subject to higher tax rates than other types of investments.
3. Real Estate Investment Groups (REIGs)
If you would like to own rental real estate without the stress of running it? Then REIGs are a great investment option for you.
Similar to mutual funds, in a REIG, members typically contribute money to a fund, which is then used to purchase and manage real estate properties. The group may be managed by a professional investment manager or the members may have direct control over the investment decisions.
It is important to note that to invest in a REIG, you need a capital cushion and access to financing. As an investor, you can own one or multiple property units. While you are the owner of the unit(s), the company that operates the investment group is the one that is in charge of handling maintenance, taking in new tenants and advertising for vacancies. As an exchange of these services, the company will take a percentage of monthly rent from all the unit owners.
A great advantage in investing in REIGs is that even if your unit is empty or unoccupied, you'll still receive some income. This is because part of the rent paid is usually kept aside in the case of occasional vacancies.
Pros
- Investing in a REIG allows for diversification in the real estate market. This can help spread the risk across multiple properties, lowering the overall risk of the investment.
- REIGs are typically managed by experienced real estate professionals who have expertise in property selection, acquisition, and management.
- By pooling resources, REIG investors may be able to invest in larger, more valuable properties than they would be able to on their own.
- REIGs provide investors with a passive source of income as they are not directly involved in the management of the property.
Cons
- Investors in REIGs have little control over the management decisions of the property.
- REIG investments are not as liquid as other investment options, such as stocks and bonds, which may make it difficult to sell the investment when needed.
- They can be easily susceptible to unscrupulous managers.
- REIGs can come with high fees and expenses, including management fees, acquisition fees, and other transactional costs.
- Like all real estate investments, REIGs are subject to market risk, meaning that their value can fluctuate based on market conditions.
4. House Flipping
House flipping refers to the process of buying a property, renovating it and then selling it at a profit. Flipping houses is an advisable investment strategy for people with considerable experience in renovation, sales and marketing and real estate valuation. You can also hire a professional to guide you.
The two approaches when it comes to flipping houses or property are:
Buying a property whose value you foresee rising, renovating it and then selling it at a profit.
Buying a property in a market that's rising rapidly, holding it for a few months and then selling it at a profit.
Here are some pros and cons to consider if you'd like to get into house flipping.
Pros
- Done correctly, house flipping can be a lucrative investment, with the potential for significant profits if the property is purchased at the right price and renovated effectively.
- Flipping a house allows for creative expression through the renovation and design process, which can be satisfying for those interested in home improvement and design.
- In some cases, house flipping can offer great returns in a short amount of time, with the property being sold within months of the purchase.
- Your capital is tied up only for a short amount of time.
Cons
- House flipping carries significant financial risk, as the cost of the property, renovations, and carrying costs can add up quickly. If the property doesn't sell quickly or for the expected price, the investor may lose money.
- Flipping a house can be a time-consuming process, requiring a significant investment of time and energy to oversee renovations, manage contractors, and market the property for sale.
- The real estate market is subject to fluctuations, which can impact the profitability of a house flipping project. If the market is down or the property doesn't sell quickly, the investor may lose money.
- This process requires substantial knowledge of the flipping process as well as the real estate market
5. Real Estate Crowdfunding Platforms
If you'd like to get into online real estate investing then this is a route that you should consider taking. Real estate crowdfunding platforms are online platforms that allow investors to pool their money together to invest in real estate projects.
The investment is usually made via online real estate platforms. Investors who put in their money usually expect to receive payment monthly or quarterly in exchange for taking the risk and investing their money in these platforms.
Like many real estate investments, these are speculative and illiquid, meaning that you can’t easily unload them the way you can trade a stock.
For some of these platforms, you may need to be an accredited investor as defined by the Securities and Exchange Commission. However, some platforms like Fundrise and RealtyMogul cater to those who don't qualify to be accredited investors.
Pros
- Real estate crowdfunding platforms allow investors to diversify their portfolio by investing in multiple real estate projects across different locations and property types.
- Many real estate crowdfunding platforms have experienced real estate professionals managing the projects, providing investors with access to their expertise and experience.
- Real estate crowdfunding platforms typically have lower investment minimums than traditional real estate investments, making it more accessible to a broader range of investors.
- Real estate crowdfunding platforms often offer the potential for higher returns than traditional real estate investments due to the use of leverage and the ability to invest in a wider range of projects.
- Real estate crowdfunding platforms typically offer transparent reporting and regular updates on the progress of the projects.
Cons
- Real estate investments, including those made through crowdfunding platforms, can be risky and there is a possibility of losing some or all of your investment.
- Investors in real estate crowdfunding platforms have limited control over the management and direction of the projects they invest in.
- Real estate investments made through crowdfunding platforms can be illiquid, meaning that it can be difficult to sell your investment before the project is completed.
- Real estate crowdfunding platforms typically charge fees for their services, which can eat into the potential returns of your investment.
Conclusion
Real estate investing can be profitable if done the right way. It is also a great way to diversify your investment portfolio.
Be sure to do your own research and consult an expert before going ahead to make your investment.
As you get started on real estate investing, here's a prime group of properties that are worth checking out.
Resthaven Properties
Resthaven Properties is a collection of Black-owned luxury vacation properties. Resthaven Properties focuses on acquiring vacation property across the world's best travel destinations for predictable income and appreciation.
So far, the luxury properties under the Resthaven Properties portfolio include Resthaven Los Angeles, Resthaven Tahoe, and Resthaven Zihuatanejo. Resthaven Properties operate under membership options that disrupt traditional lodging and timeshare accommodations by implementing a pay once and use for a lifetime strategy.
The team opportunistically acquires properties in the 5-7M range based on the high potential for appreciation and a prime location for leisure travel and intentionally supports diverse vendors in each property.
For more information on either of the properties, contact us today.
Bay Street Capital Holdings
Bay Street Capital Holdings is an independent investment advisory, wealth management, and financial planning firm headquartered in Palo Alto, CA. The firm manages client portfolios with a keen focus on maximizing returns and managing total risk and volatility.
Bay Street Capital Holdings was founded by William after 13 years of supporting the United States' largest retirement plan ($650B) Thrift Savings Plan. He is supported by Ekenna Anya-Gafu CFP, AAMS in Scottsdale Arizona. Ekenna is recognized among the Best Financial Advisors for his responsiveness, friendliness, helpfulness and attention to detail.
In 2021, Bay Street was selected as a finalist out of over 900 firms across the US in the category of Asset Manager for Corporate Social Responsibility (CSR).
Sources
https://www.investopedia.com/investing/simple-ways-invest-real-estate/
https://www.investopedia.com/mortgage/real-estate-investing-guide/
https://www.nerdwallet.com/article/investing/5-ways-to-invest-in-real-estate
https://www.forbes.com/advisor/investing/how-to-invest-in-real-estate/
