Real Estate Investment Avenues
There are numerous benefits of investing in real estate. From predictability in cash flows to excellent returns, tax advantages, and diversification, real estate is one of the most profitable ways of building wealth (Chen & Scott, 2021). There are many ways through which an investor can make money from real estate. Rental incomes, appreciations, and profits generated by business activity on the property are the most significant sources of generating profits. The benefits of investing in real estate include the generation of passive income, stable cash flows, and leverage (Yale, 2021). There are also ways to invest in real estate without owning, operating, or having to finance properties using real estate investment trusts (REITs). Investments in real estate based on loans are also beneficial as the cash flow and net income after expenses increase over time as loan payments are reduced. Continue reading to understand the different approaches to making investments in the real estate sector.
Why Invest in Real Estate?
People usually invest in stocks, bonds, and other assets, but investments in real estate have many additional benefits which have always made them a lucrative option. Investors in real estate make income by rentals, business activities based on the property, and appreciation over time. Land usually appreciates over time and is positively affected by developments in urban infrastructure. Rentals also increase every year allowing for a significant cash flow to be generated. Investors in real estate can also take advantage of tax breaks as loans mature over longer periods and the owner can deduct reasonable costs from his earnings such as owning, operating, and managing a property. Moreover, as one pays off his loan towards a real estate investment, it helps grow the individual in equity which can further be used to purchase more real estate. There are also many options for investing in real estate that offer diversification of the investment portfolio. Almost all assets are affected by inflation, but real estate is considered the most powerful hedge against inflation. Real estate maintains the buying power of the capital as growth in the GDP also drives more business activity and demand for real estate. Therefore, investing in real estate is among the best investment options.
Ways to Invest in Real Estate
Investing in real estate is satisfying and profitable. Unlike stocks and bonds, people have the option to invest in real estate by paying a small upfront cost and paying the remaining amount later. This takes us to the first way of investing in real estate. Traditional mortgages only require a 20 to 25 percent down payment for legally purchasing a property, whereas in some cases it may be as low as 5 percent. This makes the purchaser a landlord of a rental property that can be leased to pay off the mortgage and cost by simply signing on a document and paying a small upfront cost. After completion of the mortgage period, the income generated from rentals can become the profit of the owner with considerable cash flows. The option is great for maximising capital through leverage; however, it can also be a tedious task to manage tenants (Beattie, 2021).
Another investment option for real estate investors is to invest in real estate investment groups (REIGs). This option is more considerable for people who want to invest in rental real estate without having to manage the property themselves. REIGs are small mutual funds that invest in rental properties and allow multiple investors to buy stakes in a single property. It is usually a company that operates the investment group and manages all the units, maintenance, vacancies, and tenants. Although it is a more hands-off experience than managing properties personally, there are vacancy risks, fees for the company offering managing services, and susceptibility to bad management that can harm potential profits (Robbins, 2021).
The third method of investing in real estate is called property flipping. The method is suitable for people with significant experience in property valuation. Renovation and marketing skills are also required for successfully flipping properties. Those who invest in property flipping are mostly different types of investors than those who buy and rent. The main goal is to sell an undervalued property profitably within six months. They do not look to invest in improving properties, and therefore, the property needs to have the potential of increasing in value without making major alterations to it. Properties that are bought with renovation in mind are mostly longer projects and can be riskier to sell. The method offers quick returns and ties up capital for a shorter period. However, a deeper knowledge of the market is required in this method (Stammers, 2021).
The fourth method is investing in real estate investment trusts (REITs). The method is best for those investors who want real estate in their investment portfolio without conducting a real estate transaction. It is a trust that uses investor’s money to purchase and operate income-generating properties. The difference between REIGs and REITs is that REITs are sold on major exchanges like any other stock. To qualify as a REIT, a company must pay around 90 percent of the taxable profits to investors as dividends. Therefore, they do not pay a corporate tax like regular companies who would have had their income taxed before being disbursed as dividends to investors. More importantly, unlike normal real estate investments, REITs are very liquid and can be exchange-traded. REITs also differ based on what type of real estate they work on. Mortgage-backed REITs and equity-backed REITs are the two major types (Nareit, 2021).
The last method is investing in online real estate platforms. These platforms offer the ability for a large number of people to invest in a bigger commercial or residential deal. The investment takes place on an online platform and is also called real estate crowdfunding. It requires significantly less capital than purchasing properties outright and investors are linked with developers who are looking to finance projects. The method gives the option to invest in a single project or have a diverse portfolio of investments. Geographical diversification can also be achieved as developers from various areas can offer projects on the same platform. However, the investments are mostly illiquid with lockup periods on purchases, and online platforms have to offer higher management fees for their managers (Plainfinances, 2021).
Investments in real estate can be among the most profitable sources of income and wealth generation. From predictability in cash flows to excellent returns, real estate is fast becoming the favourite investment choice of millions of investors around the world. There are many ways to invest in real estate. Rental incomes, real estate investment groups (REIGs), property flipping, real estate investment trusts (REITs), and online real estate platforms are among the most popular methods of investing in real estate. Each method will be suitable to different types of investors, and therefore, a wide range of investors can consider real estate while diversifying their portfolios.