Real estate investment is becoming an increasingly common investment type among professional and amateur investors alike. If you’re looking to enter the world of real estate investing, you will need to understand all the different aspects of the real estate market. You can’t just apply what you’ve learned from stocks and bonds here, it’s a completely different ball game.
Most mortgages require a 20-25% down payment while some might only require a mere 5%. In those cases, a low down payment emboldens investors as it makes their barriers to entry low. This guide will show you the 4 main ways that you can go about real estate investing, listing both pros and cons.
Become a Landlord
While becoming a landlord sounds like an interesting and exciting role, it requires someone who has substantial up-front capital. You will first need to have the capital to buy a property before renovating it. Depending on how you want your property to look, you can opt to bring in a contractor or DIY. Next, you will need to source for tenants by conducting inspections and credit checks. For dull months where you don’t have any prospective tenants, you will also need enough capital to cover those. Furthermore, you will also need to conduct regular maintenance such as pest control, lawn mowing, etc. to make sure that the property is livable.
Having a rental property brings in a regular flow of income. With the assumption that the value of homes appreciates over time, as with most properties, you will be able to hold a more valuable asset compared to what you first started with. Furthermore, most of the costs can be tax-deductible, which allows you to offset the amount using other investments that you might have. However, once the full mortgage has been paid, the majority of the rent collected will be considered profits.
Managing an investment property on your own can be extremely troublesome, especially since you will also have to look over any administrative matters on tenants and maintenance. In some cases, you might even have to personally deal with uncooperative tenants which could lead to eviction.
Thus, we recommend getting a property management company to help you with these matters, such as https://rentbottomline.com/property-management/.
Real Estate Investment Groups (REIGs)
REIGs are small mutual funds that invest in rental properties. Typically, investors will pump in capital through the company, owning as many units of the apartment/condo as they would like. As the investment property is managed by the company, the company will have the responsibility of handling maintenance, screening tenants, and taking care of other administrative duties. As such, a part of the monthly rent will be allocated to the company for helping with these duties. In order to guard against vacant rooms, the company will pool together investors’ capital. This means that as an investor, you will still receive some income even if it means that your unit is empty. Most of the time, the combined investors’ capital will be able to cover the costs of the occasional vacant properties
Investing in REIGs will be a perfect choice for the investor that does not have time to entertain administrative duties. This is because all the work is done by the company, while you will continue receiving an income whether or not your unit is occupied or vacant.
You will need to be discerning and invest in properties where you personally trust the companies that own it. Furthermore, there is also a risk of there being more vacancies than the pool of investors’ capital can cover. This might put you in a potentially risky investment situation.
Real Estate Trading
Real estate trading is more suitable for investors with bigger risk appetite. This is due to the fact that real estate traders usually plan to purchase undervalued properties and sell them off within 6 months of their purchase. Most real estate traders do not have enough cash on hand to last them through tough times to pay off their mortgage. Thus, if you are in a situation where you can’t unload a property, you might experience continued losses. There are other ways to go about real estate trading. For example, you could look at your investment as more long term – buying a property cheap and adding value by renovating it.
When the market is doing well, you might be able to snag a good deal and gain significant rewards even within a short period of time.
Not suitable for investors with small risk appetite. You will need a deep understanding and knowledge of the market as you will need to know when to buy and how to sell in order to make a good profit. You might even experience losses when times are bad and you aren’t able to sell your property.
Real Estate Investment Trusts (REITs)
REITs allow anyone to own or finance properties in the same way shareholders benefit by owning stocks and other corporations. The stockholders of REITs earn a share of the income produced through real estate investment, and they can do so without having to go out and buy or finance the property. REITs often are classified into equity REITs or mortgage REITs. Equity REITs include offices, shopping centers, hotels, etc and derive most of their revenue from rent from those properties while mortgage REITS might finance both residential and commercial properties and derive their revenue from interest earned from their investments from interest or mortgage-backed securities.
The purpose of REITs is to give ordinary investors access to commercial real estate. Not everyone can purchase a whole tower all by themselves and REITs allow you to own a share of it.
REITs work best as long term investments. If you are looking to invest money that you might need within the next 5 years, it is not recommended that you invest in REITs due to its interest rate fluctuations.
Now that you know the most common ways to invest in real estate, it’s time to find the right sponsor to handle your investments. Take time to do your research. A good place to start your search for a crowdfunding sponsor would be CrowdDD’s sponsor ratings and reviews page. Review platforms help ensure you find the right sponsors and crowdfunding platforms for real estate investments. They rate crowdfunding sponsors based on their track record, communication, and fees, making it easier for you to choose the right one to trust.
We hope that this guide gave you a deeper understanding of how to enter the real estate market. It might seem daunting at first, but once you’ve become a more experienced investor, don’t forget to credit us!