Investing in and owning real estate can be both satisfying and profitable. Prospective real estate owners, unlike stock and bond investors, can use leverage to buy a property by paying off a portion of the total cost upfront, then repaying the balance plus interest over time.
In some cases, a 5% down payment is all it takes to purchase an entire property, despite traditional mortgages generally requiring a 20% to 25% down payment. Flippers and landlords benefit from the ability to control the asset the instant papers are signed, enabling them to take out second mortgages on their homes in order to make down payments on additional properties.
How To Make Money From Real Estate
Here are five key ways investors can make money on real estate.
1. Rental Properties
If you are skilled in DIY renovations and have the patience to manage tenants, then owning rental properties can be a great investment. In order to cover vacant months and finance upfront maintenance costs, this strategy does require substantial capital.
From the 1960s through 2006, the value of new homes (a rough indicator of real estate values) consistently increased, before slumping during the financial crisis. As a result, sales prices began to rise again, surpassing pre-crisis levels. It remains to be seen how the Coronavirus pandemic affects real estate values in the long run.
Learn more about how to make money from rental properties.
2. Real Estate Investment Groups (REIGs)
Investors who want to own rental properties without having to run them should consider real estate investment groups (REIGs). To invest in REIGs, one must have access to capital as well as financing. A REIG is like a small mutual fund that invests in rental properties.
Most real estate investment groups consist of a company that buys or builds apartment blocks or condos, then allows investors to buy them through the company, thus joining the group. Owners of self-contained living space can own one or more units, but the investment group as a whole manages all of them, handling maintenance, advertising vacancies, and interviewing renters.
The company charges a percentage of the rent for performing these management tasks. Typically, real estate investment groups lease their properties in the investor’s name, and all the units pool a portion of the rent to guard against vacancies.
Therefore, even if your unit is empty, you’ll receive some income. The pooled units should be able to cover costs as long as the vacancy rate doesn’t spike too high.
3. House Flipping
Flipping houses requires experience in valuation, marketing, and renovation. Flipping houses requires capital and the ability to oversee or do repairs. Real estate investing is the proverbial “wild side.” Real estate flippers are distinct from buy-and-hold investors in the same way as day traders are.
Real estate flippers are often looking to profitably sell their undervalued properties within six months of buying them. Property flippers tend not to improve properties. The investment must therefore have the intrinsic value required to turn a profit without any changes, or it will be eliminated from contention.
The problem with flippers who are unable to quickly sell a property is that they typically do not have enough cash on hand to cover long-term mortgage payments on a property.
Losses can snowball as a result. Flippers who buy affordable properties and renovate them to add value are another kind of flipper. In a longer-term investment, investors can only take on one or two properties at a time.
Learn more about how to make money flipping houses.
4. Real Estate Investment Trusts (REITs)
Purchasing and operating income properties with investors’ money is what creates a REIT. The major exchanges allow REITs to be bought and sold like any other stock. If a corporation wants to maintain its REIT status, it must distribute 90% of its taxable profits as dividends.
In this way, REITs eliminate corporate income tax, whereas a regular company would be taxed on its profits and then have to decide whether to distribute dividends after tax.
REITs, like dividend-paying stocks, provide a stable source of income to stock market investors. As opposed to the aforementioned types of real estate investment, REITs afford investors the opportunity to invest in nonresidential properties, such as malls and office buildings, that are generally impractical for individuals to purchase directly.
Since REITs are exchange-traded trusts, they are also highly liquid. Therefore, a title transfer and a real estate agent aren’t necessary in order to cash out your investment. REITs are essentially real estate investment groups that are formalized.
Finally, investors need to distinguish equity REITs that own buildings from mortgage REITs that issue mortgage-backed securities (MBS) and provide financing for real estate. Both provide real estate exposure, but the nature of the exposure varies. The equity REIT represents real estate ownership, while the mortgage REIT focuses on real estate mortgage financing.
Learn more about how to invest in REITs.
5. Online Real Estate Platforms
A real estate investing platform is for those who would like to invest with others in a bigger commercial or residential deal. Online real estate platforms, or real estate crowdfunding, are used for investing in real estate.
Capital is still needed, but it is less than what is needed to buy properties outright. Investors seeking to finance projects connect with developers online. Investing with a small amount of money can diversify your portfolio.
Why Should You Invest in Real Estate?
If you own real estate or REIT (real estate investment trust) shares, you can add a steady source of income to your budget. In general, real estate assets generate steady, reliable income, primarily through rent payments.
Retirement investors can eventually replace their salary with this stream of income; other commonly held retirement investments (like stocks) cannot offer the same security.
Portfolio investments bring in cash flow from multiple sources, so you’re less likely to fall short if any one investment fails.
Learn more about how real estate investment can make you rich.
You can build out a robust investment program by paying a relatively small part of a property’s total value upfront, whether you use your properties to generate rental income or to wait for the perfect selling opportunity to present itself. Regardless of the market’s overall condition, there is potential for profit and growth in real estate.