6 Ways To Invest In Real Estate
Author Yulin Peng
If you’re interested in real estate investing, take a look at these 6 different and decide which one is right for you.
The first question I have for someone who’s interested in real estate investing is: What type of investing is right for you?
Now when I ask people this question, the response I often hear is: “I didn’t know there were different types of real estate investments. I just want to make some money.”
Well, there are several ways to invest in real estate.
Let me explain.
1. Make Money Monthly (Cash Flow)
You buy property and become a landlord. This doesn’t necessarily mean you deal with tenants. There are plenty of management companies that will do that for a nominal fee.
You buy property and structure the deal so that any mortgage payment, plus the sum total of expenses, are less than the amount of income (rent) you are receiving. Hence the term - Positive Cash Flow! When calculating positive cash flow, don’t forget there are annual tax benefits to owning real estate and appreciation (realized at the time of sale.)
2. Buying and Selling (Flipping)
The idea here is simple: buy property for less than you sell it for. You can buy a distressed property that needs improvement, or buy from a distressed owner that needs out. When you buy property that needs improvement, to make the most money you will want to bring the property up to snuff. Whether you do the work, or hire it done, you will need to calculate your cost to improve the property, as well as your holding costs. Holding costs are the expenses of owning the property during the time of repairs and until the property is sold. These costs include taxes, any mortgage interest payments, utilities, and normal maintenance such as grass cutting, and snow removal. When you buy property from a distressed owner, often the property is fine, but the owner has either fallen behind in mortgage payments or taxes, or does not want the property for other reasons such as relocation, divorce, probate, etc. In this situation, you payoff the owner’s debt, take over the property, and sell for a profit. Obviously the debt needs to be lower than the market value for you to profit.
3. Lease Option
This less common method involves controlling the property without taking title. You lease the property and either sell the property or lease to another tenant until the property sells. This one is a bit more complicated and has some drawbacks, such as the inability to depreciate your lease, but you can reap big profits.
4. Buying Tax Liens
Property in default for back taxes can be purchased from the government. You simply place a deposit as designated by the government and sit out the waiting period. If the taxes are not paid, you get the property. Oh, in the meantime your money earns interest and you are guaranteed by the government not to lose a dime!
5. Private Lending
Individuals are allowed to finance so many properties per year without the regulations of becoming a mortgage company. This is a great way to invest passively in the real estate market. By holding a first deed of trust, your money is secured by the property, and you can charge more interest than you would otherwise earn with a typical safe passive investment such as CDs.
6. Pre-Construction:
Buy property direct from builders before they are built. You lock in a wholesale price and market the property upon completion. This is a good opportunity in many areas. You have no tenants to worry about and no mortgage payments during the construction.
Including Real Estate in Your Investment Strategy
Author: Jill Kane
Designing an investment portfolio that fits your needs is always a complex process. Unfortunately, many people neglect real estate as one of the most attractive ways to diversify their investments because they aren’t aware of the variety of ways real estate can be included. In the past twenty years, the real estate market has exploded and the opportunities to invest in it either directly or indirectly have grown to keep pace.
Individual investors should always consult a professional if they want to design a portfolio that properly balances the opportunity for greater gains against possible risks. This will vary depending on where you are in life, what your retirement plans are and a host of other factors, but a few simple things should be kept in mind.
* Diversifying is always essential to designing a good investment portfolio. That is, you should never have more than a third of your investments tied up in any one form.
* Learn as much as you can about the individual categories and the risks involved with each. Generally speaking, stocks and bonds are somewhat safer, but show a slower return, although it does tend to be steady. Commodities (precious metals, oil, natural gas, etc.) are riskier but with a great return.
* Keep in mind that mutual funds can provide you with the power of group purchasing when investing while spreading the risk over a larger group of investors.
* Don’t forget real estate as a solid investment choice.
Real estate is often neglected when designing a portfolio unless the individual is purchasing property himself. Actually, the best way to invest in real estate is often through what is called a Real Estate Investment Trust, or REIT. This is an entity set up specifically to invest in large properties such as hotels, high rise properties and malls. The three categories of REIT’s are:
1. Equity REITs - These will actually own property which makes money from the rent being paid by tenants. The investors get a portion of the rents received.
2. Mortgage REITs - These are organizations that write mortgages to real estate developers or invest in mortgage-secured financials.
3. Hybrids - Simply an organization that invests in both mortgage and equity REITs.
You can also invest directly in real property without becoming a part of an REIT. After all, the need for real estate will never go away, and land generally increases in value over the long term, so it’s a relatively good investment strategy, particularly if you are planning a long-term portfolio. It’s a low-risk strategy that historically has shown to be quite profitable in most cases (nothing is risk free).
When adding real estate to your investment portfolio, be sure to do the research and legwork to educate yourself. Study the market in your area, learn all you can about any property you are considering and decide whether becoming a landlord or flipping properties will be more lucrative in the long term. It’s important to know if you have enough available cash flow to be able to keep your property until it’s value has reached the point where selling makes the most sense. To include real property in your portfolio, you need to periodically check the market and make sure the property is working for you in the most profitable way possible.
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