Most people think of rental properties and house flipping when they think of real estate investing. While those are popular options, the world of real estate investing is actually just as diverse as any other type of investment.
Investing in real estate can look like anything from being a landlord to checking your stock portfolio. Investors should think carefully about how much capital they can afford to put up (or potentially lose) and what role they prefer to take in their investment strategies.
Below, consider the most popular ways to invest in real estate and check out our tips for getting started.
Options for investing in real estate
Renting out your property
Becoming a landlord is one of the most popular and reliable ways to make money in real estate.
The concept is straightforward – you buy a property and rent it to tenants. These can be residential properties or commercial properties, and they can be short- or long-term.
Each type comes with its respective pros and cons.
The most important consideration for rental properties is whether you’re comfortable taking on the responsibilities of a landlord. That includes:
- Making mortgage payments
- Paying property taxes
- Buying insurance
- Maintaining the property
- Finding tenants
- Dealing with property or tenant problems
Many landlords opt to hire a property management company to manage their rental properties.
This takes the above responsibilities off your plate as the property owner, but it also puts the cost of overhead in your pocket. Consider whether outsourcing your landlord role is cost-effective for you.
Another important consideration is the mechanism of profit. One of the advantages of being a landlord is that you make money by collecting rent itself and appreciation.
If the property appreciates enough in value, you can sell it for a profit.
You can either wait for the property to appreciate naturally or make upgrades; while the latter option is faster, it can be expensive.
Real Estate Investment Trusts (REITs)
REITs can be a great option for investors who want to make money on real estate without the hands-on labor involved in being a landlord.
These trusts allow you to collect dividends on commercial real estate properties like office buildings, retail spaces and malls, hospitals and clinics, and hotels without buying them outright.
With a REIT, you get real estate exposure without the risks and responsibilities of owning, operating, or financing properties.
The main benefits of REITs are high liquidity, the hands-off role of the investor, and the high dividends they typically pay. However, REITs can also be complex, especially since several different types of REITs use different investment strategies.
Carefully research your REIT options before making a decision, know that you’ll probably need to hire a brokerage firm (and pay their fees), and consider sticking to publicly-traded REITs if you’re a beginner.
Real Estate Investment Groups (REIGs)
Like REITs, REIGs let you invest without managing the property.
Instead, similar to a small mutual fund, investors buy properties through a company that has already bought or built a group of them (often apartment buildings).
The company then manages your property, taking on the responsibilities of the landlord in exchange for a percentage of the rent.
As most people know, flipping houses means buying undervalued property and then paying for the upgrades necessary to sell it at a higher price, ultimately pocketing the profit. This strategy can be very profitable, but it requires a lot of capital, experience, and labor.
Real estate investment tips
Learn the key factors
How do you know whether a property will be a good investment? It depends somewhat on your chosen investment type and your goals, but in general, you should carefully consider the following:
- Property location – What are the risks involved with the location? What kinds of zoning laws are present? How close is it to things like shopping and transportation, warehouses, and freeways?
- Valuation of the property – How much is the property actually worth and how much is it being offered for?
- The purpose of your investment – What do you intend to do with it? Use it yourself? Rent it out? Will the rental be long- or short-term?
- Expected income and profit – What are the chances the property will actually make money, and how? Through rental payments? Flipping? Dividends?
Think like an investor
When looking at real estate property as an investor, it’s crucial to pay more attention to the financial details than any other factor, such as saying how much you love the property’s architecture or location. Look honestly and objectively at the property’s potential ROI and don’t overpay. Some experts recommend looking for a discount of at least 10% off the market price.
The main thing to remember about real estate investment is that it is fundamentally different from buying a property you intend to live in or use, so make your judgments as impartial and numbers-oriented as you would any other type of investment.
Consider the debt-to-equity ratio
Most property is bought through leverage, i.e., paying a portion of the property cost and then paying the rest over time – essentially, you’re financing the property through debt.
Thus it is possible to lose what you put in if you’re not conservative with your debt-to-equity ratio. Some experts recommend at least a 50% debt-to-equity ratio, if not a 100% equity capital structure.
As you can see, real estate investment can be a great source of income, but it can also be risky due to the mechanism of financing (through debt) and fluctuations in housing markets.
Inexperienced investors should proceed with caution.