Real estate investment is a tricky business – you need to gain quality experience quickly to move ahead in the game.
Whenever you are thinking to invest, the first thing that you want to secure is a roof over your head. That’s one of the reasons why most people in the beginning of their investment journey choose to put their money into real estate. Not only does the industry provides housing options for your own self but it can also generate your income by means of rental properties, flipping strategies, real estate investment trusts, etc.
Therefore, it goes without saying that real estate is often the favorite choice for investment all around the world. The safety cushion coupled with the financial security makes the real estate an ideal asset to own. However, before you jump in headfirst, there are certain things that you must understand about the real estate investment to make smart investment decisions that will help you in utilizing your capital in a better way.
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Before you go on to figure out how, when and where you want to invest, first you must understand all the investment options available to you in the real estate market. Where goal of investment does serve as the primary factor while deciding where and how you want to invest your money, there are certain other things that you must consider while making an investment decision. Here, we are discussing some of the major real estate investment methods available.
Own Housing Property
Although own housing properties are the most favorite investment options, yet studies have found that it does not provide much opportunity for growth of wealth. A report published by Dark Knight claims that between 1994 to 2019, there was only a 3.9% annual rise in the value of housing properties. The fact that housing properties come up with underlying expenses such as mortgage repayments, repair and renovation, maintenance costs, insurance coverage, tax payments, etc. makes it an expensive affair, if you are looking for a quick method to raise capital.
However, if you are looking for a long-term investment opportunity, owning a house proves to be a promising real estate investment. It not only provides you with the luxury of being a homeowner but also offers a high cash out when you choose to get out of this commitment. Add to this the mortgage benefits the government offers to the first-time home-buyers, which makes this investment even more lucrative.
Rental Housing Property
Investing in additional housing properties for means of earning rental income has been, historically, the most effective way to diversify your income. They not only offer a stable source of income but also serve as a quick method to raise capital pertaining to the fact that the value of housing properties often appreciates with time. This makes them very attractive for various first-time investors. There are two major options when you are planning to make an investment in this sector:
- Single-family House: Single-family houses, as the term suggests, are the houses that have a single occupancy unit, meaning that only one family can reside here at a time. They are often a cheaper investment to begin with, require less maintenance, attract a large tenant pool, generally have a very low turnover rate, provide easy buy-out option due to their high demand and are a good way to diversify your income. They are also least vulnerable to market volatilities of demand. However, alongside these advantages, there are also certain disadvantages attached to them such as lower flow of income, high cost of vacancies and difficulty in management in case one owns multiple single-unit houses.
- Multi-family Houses: As opposed to single-family houses, multi-family houses come with multiple housing units, meaning they can be occupied by multiple families at once. They prove to be a very promising source of income as they provide a smoother and better flow of income, their vacancies are easy to adjust, they have very low overall costs of maintenance, offer the advantage of house hacking and are comparatively easier to manage. On one hand multi-family houses do offer numerous advantages however, on the other hand, they have certain drawbacks as well. These include difficulty to maintain a decent tenant pool, having to deal with multiple vacancies at once, high vulnerability to market volatilities, high turnover rates and the tedious task of finding prospect buyers.
Besides the number of occupancy units, rental properties can also be classified into long-term and short-term rentals. Where long-term rentals involve regular tenants who enter rental contracts of at least a year, thus guarantying a steady income, short-term rentals refer to tenants who generally occupy the place for short durations such as a single night.
Picking the right type of rental property is a challenge. Add to it, the high mortgage costs, and the regular maintenance fiasco, taking care of the various needs of tenants and dealing with other housing problems on a frequent basis. However, this type of real estate investment offers a huge profit potential. Therefore, you can easily hire a maintenance firm to take care of all these issues for you.
Flipping is a very common trading technique in the world of real estate investment. Buying and selling houses is a very effective way to raise capital over a short period of time. Most investors generally hold a property only for a short period of about three months or so. Flipping, however, demands a certain level of expertise in the areas of managing properties, real estate valuation, and overseeing repairs.
There are again, two approaches when it comes to flipping. These are:
- Remodeling: Here, the investors buy a property that they see the potential in increase of valuation by certain repairs and minor updates. As soon as these updates are made, the value of a property rises, exceeding your overall investment costs, including the amount spent on renovations. You can therefore sell the property immediately and earn a profit. Although it looks like a promising way to earn immediate profits yet it’s not everyone’s cup of tea as it requires keen analytical skills, management skills and effective decision making.
- Buy in a Rising Market: In this approach, an investor buys a property in a competitive market, where prices are continuously rising, hold the property for some time and sell it to earn lucrative profits. This again requires for an investor to be very calculative and intuitive. It involves a huge risk, and so all investment decisions must be based only after considering all the different aspects related to the real estate investment market.
REITs (Real Estate Investment Trusts)
REITs can be understood as public companies who raise capital by means of issuing bonds and selling shares. They use these funds to invest in real estate sector by means of buying or leasing out properties such as housing buildings, commercial buildings, corporate houses, office buildings, shopping malls, etc.
Just like traditional stock markets, REITs also save you from the hustles of real estate investments as they will take care of all the things that your property requires. You just need to make an investment and enjoy your dividend payments without having to make any effort.
A big advantage of investing in the real estate investment trusts is that you do not require the large sum of money unlike other real estate investment options. The dividend payments are very promising as the companies are required to pay 90% of their taxable income to shareholders. Therefore, it makes REITs a better investment option compared to traditional stock market.
In addition to this, REITs also come with an easy exit option as they are very liquid and can be sold by means of a brokerage account. Furthermore, you can also go for Exchange Trade Funds rather than investing in a single REIT, thus holding shares in multiple REITs at once.
Being a stable and steady source of income with regular and handsome dividend receipts, REITs prove to be the most promising investment option, especially for the beginners.
Also read the best way of structuring real estate deals.
Real estate crowd funding refers to online platform that are employed to pool money for real estate development projects. These are often long-term investments and last if five years or more. They are a good option for those who want to get involved in a big commercial or residential project.
Crowd funding offers diversification options, and you have a range of options to choose from. You can also invest in projects from different geographical locations. They make you the shareholders of big development projects without having to take any responsibilities.
However, the long lock-up period is a big commitment as you cannot simply cash your way out of a development project once you have invested in it. If you still, however, choose to, you will be charged with a penalty which is usually high.
Furthermore, the crowd funding platforms also charge certain fees. There are often certain additional maintenance charges attached to the projects. Therefore, make sure to go through all the details, and check for additional charges that can limit your earnings.
Besides all these drawbacks, crowd funding is still a smart investment move as you will receive monthly, quarterly, or annual distribution once the project gets successfully completed. Therefore, in the long run the investment proves to be very resourceful.
One thing that you should not here is that most crowd funding projects only accept accredited investors. Therefore, you might not be eligible to participate in all development projects at a platform. Furthermore, most of these development projects have minimum investment requirements set, which generally ranges from $500 to as high as $25,000. Therefore, arranging the funds can be a little bit of a challenge while thinking to go for this option.
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Before making any investment decision it is important to be completely familiar with all the risks and setbacks attached to your investment option. While owning a physical property sounds very lucrative, they bring along a lot of responsibility and challenges along with them. You need to learn to be adapt and be very patient while handling investments. Most real estate investments are long-term commitments which means that before you decide to enter, you must be fully prepared for all scenarios and always have a plan ready to deal with any kind of challenge that you may face.
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