How to Invest in Real Estate
Investing in real estate has dramatically increased in popularity over the last 50 years, and although many people have made a lot of money, there are just as many people who have lost money on this type of investment. In order to make money in real estate, an individual really needs to know what they’re doing, and as a novice it is important to be aware of schemes such as flipping, get rich quick, no money down, and purchasing foreclosure properties. This is not to say that money cannot be made through these avenues, but it is probably best to leave it to the experts.
The first place to start in real estate investing is to look at the basic rental properties. This is where a person will basically purchase a property and then rent it out to a tenant. The owner will then, of course, become a landlord, although they will still be responsible for paying the mortgage, taxes and any costs associated with maintaining the property. In an ideal scenario the landlord should charge enough rent to cover all of these expenses, and possibly enough to make a small monthly profit.
However, many landlords follow a common strategy which will require them to be patient and only charge enough rent to cover the basic expenses until the mortgage has been paid in full. It is at this time that the majority of rent charged will become profit. In addition to this, it is likely that the property will have appreciated in value over the course of the mortgage term which will of course leave the landlord with a far more valuable asset.
This, of course, is a perfect scenario, and unfortunately renting out a property does not always work out like this. A landlord may end up with a bad tenant who either damages the property, is consistently late on their rental payments, or have even managed to get into arrears on their rental payments. The worst case scenario would be the landlord is left with no tenant at all, and therefore leaving them with a negative monthly cash flow. This would mean that the landlord will need to cover their mortgage payments from another source.
This is just the tip of the iceberg, as a landlord will also want to find the right property, find an area where vacancy rates are low and also to choose a home that people want to rent. There is without doubt a lot of time and work that needs to be devoted to owning an investment property, and indeed numerous responsibilities that come along with being a landlord.
Another way to invest in real estate is to become part of a real estate investment group, which are fairly similar to small mutual funds for rental properties. This is ideal for an investor that wants to own a rental property, but could do without the hassle of being a landlord. In this scenario a company will typically buy or build a set of apartment blocks or condos and then allow investors to purchase them through the company, and therefore join the group.
A single investor is able to own multiple units, although the company operating the investment group will collectively manage all the units. This will mean that the company will take care of interviewing tenants, advertising vacant units and maintenance of the properties. The company will typically take a percentage of the monthly rent in exchange for the work that they have to complete.
There are various ways in which an investment group can work, although the standard version is where the lease is in an investor’s name and all the units will save a certain percentage of rent in the event that there are occasional vacancies, which will typically mean that there will be enough money to pay the mortgage even if a particular investor’s unit is empty.
Real estate trading is another form of real estate investment, although there are typically far more risks associated with this type of investing. Real estate trading will generally involve purchasing properties with the intention of holding them for a short period of time, before selling them for a profit. This technique is often referred to as flipping properties, and usually an investor will not hold onto a property for any longer than 3 to 4 months.
This type of real estate investing is based on purchasing properties that are either in a very hot market or significantly undervalued. An investors interested in real estate trading will usually not put any money towards home improvements, as their main aim is to make a short-term profit. However, the main risk with this type of investment is an investor is unable to sell a property, and find that they do not have enough cash to pay the mortgage.
Real estate investment trusts (REITs) are generally created when a corporation or trust will use an investor’s money in order to purchase and operate income properties. However, for a corporation to keep its status as a REIT and they will need to pay out 90% of their taxable profits in the form of dividends, as this will allow them to avoid paying corporation income tax. This is actually how Wall Street has managed to turn real estate into a publicly traded commodity.
These are just a few types of real estate investment, although there are actually countless variations within each of these examples. It must be noted that although there is much potential in real estate investing, as with any other type of investment, it carry certain risks. Therefore, an investor should always make careful choices and weigh up the costs and benefits prior to taking any action.