Real estate ownership and buying are investment options that can be rewarding and profitable. In contrast to bond and stock investors, potential real estate owners can use leverage to purchase the property by paying a part of the cost in advance and then paying off the remainder, including interest throughout.
Although a conventional mortgage typically will require a 20 to 25 percent downpayment, in certain circumstances, it is possible that a 5percent down payment can be enough to buy an entire house. The ability to manage the property from the moment the papers are signed encourages landlords and flippers who also borrow loans on second houses to help make down payments on other properties. Five methods investors can earn profit from real property.
There’s an infinite number of investment options in real estate, ranging from getting a mortgage for your home to creating an estate empire that covers the entire country. Although the latter may not be feasible for the majority of us, however, there are plenty of alternatives. Here are five ways of adding the real estate aspect to your investment portfolio.
Real Estate Investment Trusts (REITs)
Suppose you’re looking to start investing in real estate in the shortest amount of money. In that case, you can consider looking into REITs, which are real property investment trusts ( REITs ).
Public companies raise funds by selling shares of their stock and issuing bonds. They use the funds to buy and lease real estate properties like shopping malls, offices, warehouses, and apartment buildings. REITs must pay most of their profits after tax to investors in dividends.
Investment trusts in real estate remove the stress of investing in real property. You relax and enjoy the dividends, usually more than stock-based investments. Management is in charge of renting and ownership details.
REITs are the most affordable real estate investment. You can purchase and sell shares in REIT stock on the market using an account with a brokerage firm, just like every other publicly-traded company. Additionally, you can buy ETF shares (ETFs) that hold REIT shares in various REITs. Investors who aren’t wealthy of money can buy REIT ETFs in fractional shares through investing apps such as Stash, M1 Finance, and Robinhood.
Crowdfunding Real Estate Platforms
Investors looking to take an active investment approach should look into crowdfunding platforms for investing in real estate. These platforms allow investors to invest in particular real estate development initiatives instead of large property portfolios.
Real crowdfunding platforms for real estate pool funds from investors worldwide to help fund projects for development. They typically require investors to invest in real estate for longer durations, five years or more in many instances. It is possible to withdraw some of your cash before the time limit. Still, it will depend on the platform’s discretion, and you could be subject to charges for withdrawals made early.
The platforms might charge fees. Make sure you look for any additional fees or administration costs that could reduce your earnings.
Remember that you might not be eligible on all real estate online platforms. The majority require minimum investments, ranging from $500-$25,000 or more. Certain states require you to be an accredited investor. This means you have $1 million worth of assets outside of your primary residence or make more than $200,000 in a year.
Fundraise, Crowdstreet, and DiversyFund Three popular platforms provide a variety of choices based on the amount of money you can invest, ranging from real estate funds to real estate-related projects.
Invest in Your Own Home
The primary residence is the most popular method for investors invests their money in property. You can take out a mortgage, pay your monthly payments, and then gradually increase the equity in your home. If you are lucky and there is a strong demand in your area, you could be able to cash the equity when you sell your house.
While investing in your home could help you create wealth over time. However, the average annual returns are smaller than what you’d imagine. Between 1994 and 2019, homes have only increased in value by 3.9 percent annually, according to a report from an industry expert Black Knight.
While there are regions of the nation in which appreciation of homes is more, the average home you reside in is not likely to increase in value, especially after you take into account costs such as maintenance and repairs and insurance, taxes on property, and the interest you pay for the mortgage.
Other real estate investment options, including REITs, have experienced average annual returns of 11.28 percent, as per Nareit. Even a vanilla S&P 500 ETF yielded an average yearly return of 10% over the long-term.
It doesn’t mean that you shouldn’t buy the home you want or consider this in terms of an investment. The government’s support to the market for mortgages in general and programs for first-time buyers help you purchase an apartment at a less expensive cost than achievable in other real estate investments.
Invest in Rental Properties
If you’re considering making a significant investment in real estate properties, you should consider renting out properties. Rentals offer an ongoing flow of cash and the potential for growth over time. However, they’re among the most labor-intensive investing strategies in real estate.
Two primary methods to earn money from rentals:
- Long-term rentals. It is possible to purchase an apartment complex or single-family house that you lease to other people. These types of properties are usually intended to be rented out for a minimum of a year and, in theory, offer a steady monthly cash flow. However, this is contingent upon the reliability of your tenants.
- The short-term rental. These properties are geared towards guests who are rotating in their stay. Their stays could be as little as a night, as with Airbnb. You may list your whole property or home when you’re gone or buy a separate home specifically designed to be used for rentals that are short term.
Although investing in property through rental properties has a higher potential, it does require an enormous amount of work from your side. It is essential to locate and screen tenants, pay for maintenance regularly and repairs and address any other issues.
Low funds and interest rates for homeowners with primary residences might not be readily available when leasing rental homes. This makes buying a rental property more costly. You could alleviate some of these issues by employing a property management service; however, this could reduce your profits.
Invest in Real Estate by Flipping Properties
There is no need to purchase rental properties to make the most profits from real estate investments. Flipping and buying properties is a popular strategy. However, like rental properties, flipping is a laborious process. It requires renovating the homes and identifying up-and-coming communities that allow you to sell your properties at a higher price.
In the end, it’s not as simple as it seems on HGTV. If your strategy to flip your house involves construction and renovations, taking on additional risk, and paying high out-of-pocket expenses. It is necessary to obtain permits to build for renovations. The costs for remodeling could be higher than you expected when you work with contractors or outsource tasks.
To reduce the amount of work involved in flipping properties seek out homes that don’t require significant upgrades in booming areas. It can be more profitable if you lease the house while you wait for the value of your home to increase. Remember, the neighborhood you imagine will become fashionable may not be popular and leave you with a complex property to make a profit in.
Should You Invest in Real Estate?
Real estate investments can yield high long-term returns that aren’t entirely linked to the stock market. However, costs and risks could be increased when investing in real estate. REITs could be ideal for those with limited funds to support or who don’t want to buy an investment property for their primary home.
If you decide to invest in rental or flip homes, ensure that you’re aware of your risk and plan how you can return the money you invested. Be mindful that real estate isn’t always liquid for the short term and can be a significant financial investment. If you have any concerns about beginning your journey into investing in real estate, talk to a financial professional.
What is Direct vs. Indirect Real Estate Investing?
Direct investment in real estate includes managing and owning properties. Indirect real estate is investing in pooled vehicle pools that own and manage the property, like REITs or crowdfunding in real estate.
Is Real Estate Crowdfunding Risky?
Compared to other types of real estate investment, crowdfunding is a bit riskier. It is because the crowdfunding market for real estate investment is new. Furthermore, some projects are available on crowdfunding sites because they couldn’t get financing through more traditional channels. In addition, most property crowdfunding sites require investors’ funds to be secured for several years, making them liquid. However, as per Investopedia research, the best platforms have annualized returns between 20% and 2%.
Real estate investors may use their properties to earn rental income or to wait their time until the ideal selling moment arises, the opportunity to roll an investment plan that is robust with a minimal percentage of a property’s worth upfront. Like any investment, it is possible to earn a profit and potential with real estate regardless of whether the overall market is going up or down.