In the case of real estate investing, your home is likely to come to mind first. The choice of investments is not limited to physical properties for real estate investors.
Over the past 50 years or so, real estate has become a popular investment vehicle. Here are some of the most popular investment options for individual investors, along with their benefits.
Flipping houses
Similarly to day traders, real estate flippers are entirely different from investors who buy and hold property. The purpose of flipping properties is to hold them for a short period of time — usually three to four months — and then quickly sell them for a profit.
Flipping property involves two primary approaches:
- Repair and update. By using this approach, you purchase a property that you anticipate will increase in value in the future as a result of certain repairs. Your goal is to complete the work as quickly as possible and then sell the property at a price that exceeds your total investment (including renovations).
- Hold and resell. In this type of flipping, the process is different. In this strategy, you purchase a property in a rapidly rising market, hold it for a few months, and then sell it at a profit.
In either case, you run the risk of not being able to sell the property at a price that will generate a profit. Due to the fact that flippers do not usually keep enough cash on hand to pay long-term mortgages on properties, this can present a challenge. Nevertheless, flipping real estate can be a lucrative investment if done correctly.
Real Estate Investment Trusts
Real estate investment trusts (REITs) are corporations (or trusts) formed to acquire, operate, and sell income-producing properties using investors’ funds. Similar to stocks and exchange-traded funds (ETFs), REITs can be bought and sold on major exchanges.
Dividends must account for 90% of an entity’s taxable profits in order to qualify as a REIT. As a result, REITs are not required to pay corporate income taxes, whereas a regular corporation would be taxed on its profits, thereby reducing the return to the shareholders.
Similarly to dividend-paying stocks, REITs are suitable for investors who seek regular income, although they also offer the possibility of capital appreciation. Approximately a quarter of all REITs invest in malls, healthcare facilities, mortgages, and office buildings. REITs have the advantage of being highly liquid compared to other types of real estate investments
Real Estate Limited Partnership
Like the real estate investment group, a real estate limited partnership (RELP) is a type of limited partnership. It is an entity established for the purpose of purchasing and holding a portfolio of properties, or sometimes just one property. However, RELPs are only available for a limited period of time.
General partners are experienced property managers or real estate development firms. The real estate project is then financed by outside investors in exchange for a share in ownership. The partners may receive periodic distributions from the RELP’s properties, but the real benefit occurs when the properties are sold-ideally at a substantial gain-and the RELP dissolves.
Real Estate Mutual Funds
Generally, real estate mutual funds invest in REITs and real estate operating companies. With a relatively small amount of capital, they allow investors to gain diversified exposure to the real estate market. Their strategy and diversification goals allow them to offer investors a broader selection of assets than can be achieved through the purchase of individual REITs. Like REITs, these funds are pretty liquid.
REIT investors also benefit from the analytical and research information provided by the fund. This information can include information about newly acquired assets and management’s assessment of the viability and performance of a particular real estate investment as well as the asset class as a whole. To maximize returns, more speculative investors may invest in a family of real estate mutual funds, tactically overweighting certain property types or regions.
Real Estate Investment Groups
Essentially, real estate investment groups (REIGs) are mutual funds for rental properties. An investment group may be the right solution for you if you wish to own a rental property but do not wish to be a landlord.
When a company purchases or constructs a set of buildings, often apartments, it allows investors to join the group by purchasing the buildings through the company. Investors may own one or more units of self-contained living space. The company that operates the investment group is responsible for managing all the units as well as advertising, finding tenants, and maintaining them. As a result of this management, the company receives a percentage of the rent each month
Investment groups come in a variety of forms. Standard versions of the lease are written in the investor’s name, and a portion of the rent is pooled across all units in order to avoid occasional vacancies. If your unit is empty, you will still receive enough income to pay the mortgage.
In conclusion:
Investing in real estate can be a sound investment, which may provide a steady income and build wealth over time. Despite this, one disadvantage of real estate investment is its illiquidity, i.e., the relative difficulty of converting an asset into cash and cash into an asset.
In contrast to a stock or bond transaction, which can be completed within seconds, a real estate transaction may take several months to complete. Even with the assistance of a broker, finding the right counterparty can take several weeks. Real estate investment trusts and real estate mutual funds offer a greater level of liquidity and better market pricing. However, they are associated with higher volatility and a reduced degree of diversification, as they are highly correlated with the stock market as a whole.
Make sure that your expectations are realistic and that you do your homework before making any investment decisions.
