Ultimate Guide to Real Estate Investment

Everything you need to know about real estate investment

For the most part, real estate prices have risen over the years, making it a wise investment. Real estate has a reputation as a portfolio stabilizer because of its ability to diversify your portfolio and hedge against inflation. However, there’s never any guarantee.

If you are considering including real estate as an investment option, you need to learn about the different ways you can invest in real estate.

Purchase Income Property

Income property can be a great investment vehicle. Income property is a residential or commercial unit that you own and rent out to pay for or help defer the cost of mortgage, taxes, and maintenance. Ultimately, with a little patience, once the mortgage is paid, the rent then becomes profit. Additionally, the property may have appreciated over time, leaving you with a more valuable asset.

However, if you want to own rental properties without the headache of being the landlord, you may want to consider a real estate investment group.

A real estate investment group builds or buys properties and then sells them to investors to use as rental properties. In exchange for a portion of the monthly rent proceeds, the real estate investment group finds tenants, manages maintenance, collects rent, as well as handles other responsibilities.

Tips on Purchasing Income Property

If you’ve decided that income property is where you want to invest your capital, here are some additional tips you should consider:

  • Investment properties add additional financial burden, such as maintenance costs, and the risk of vacancy, so consider carefully what you can afford and have an emergency fund just in case
  • Review your credit and know your borrowing ability
  • Make sure to know the market – shop around – and find the property right for you
  • Consider carefully whether you are prepared to be a landlord and deal with all the potential headaches that go along with the role
  • Find a partner who has invested in rental properties before and can either show you the ropes or wants to invest along with you

As with anything, planning is a big part of the process. Be sure you know what you are getting into and have a contingency plan just in case.

Use Real Estate Investment Trust

Though real estate prices have bounced around over the course of the last few years, many feel that because of its tangible nature, it is still a worthwhile investment. For this reason, one real estate investment vehicle – known as a REIT – has increased in popularity recently.

A real estate investment trust (REIT) is a corporation or trust that uses a pool of capital from investors to purchase and manage income property or mortgage loans. REITs generate returns from lease and mortgage revenue or by selling properties that have fully appreciated. They are traded like stocks on the major exchanges and are granted special tax considerations.

There are two types of REITs: equity and mortgage.

Equity REITs earn from the rent on properties they own in addition to capital gains for the sale of those properties. Mortgage REITs lend money to developers, earning interest on the loan. Hybrid REITs invest in property and mortgages; they earn from rent, capital gains, and interest.

The benefits of an REIT over property ownership include:

  • Liquidity. They are bought and sold as easily as stock, whereas, it takes time and patience to buy and sell real estate.
  • Breadth. Instead of just owning a home, you have a chance to invest in hotels, malls, and other commercial and industrial properties.
  • Flexibility. You can invest as little or as much capital as you want.

A REIT is a fairly safe investment because they pay dividends regardless of how the shares perform.

Invest in a Real Estate Operating Company

Similar to REITs, real estate operating companies (REOCs) invest in real estate; however, instead of passing dividends along to investors, they reinvest their earnings into the business.

You may be asking yourself why you would want to invest and not receive a financial return. Investors in REOCs are after capital gains, not passive cash flow.

If an REOC is your real estate investment of choice, look for:

  • High return on investment
  • Return on equity
  • Return on assets
  • Good valuation