Real estate investment 101
No matter how big or small the property is, investing in real estate can be intimidating for beginners. An investor can lose big money. And it’s enough to scare him away.
The good news is, investing in real estate is not as daunting as it seems. It’s one of the safest investments, and many people make a killing out of it.
Kinds of investment
Real estate investment falls under five categories, namely:
- Basic rental properties
- Real estate investment group
This one works like a small mutual fund for rental properties. A company purchases or builds an apartment block or a number of condos and puts them up for sale. You purchase one or several properties from this company and let them manage your investments. You earn through monthly rentals, a percentage of which you share with the company. Thus, you and the company share in the property’s earnings.
Best practice tip: Generally, this is the safest way to invest in real estate. The lease under the investor’s name and all of the units are protected against losses when the property becomes vacant. This assures you of having enough funds to cover mortgage, whether your unit is rented out or not.
- Real estate trading
Real estate traders buy property with the sole purpose of selling it off for a profit. They do this in two ways.
- One, they buy undervalued properties and sell them off as is.
- Two, they add value to the property by renovating it and selling it off at a higher price.
Since traders have to sell the property as quickly as possible, both ways carry inherent risks.
Best practice tip: Engage in real estate trading or “flipping” when the market is hot.
- Real Estate Investment Trust (REITs)
A real estate investment trust is made when a trustee or corporation uses investors’ money to operate and purchase income properties. Options for this kind of investment are more varied. It allows the trustee or corporation, for instance, to invest in malls or office spaces. It’s also a great way of generating income on a regular basis. REITs are also highly liquid.
Best practice tip: A trustee or corporation must pay out 90% of its taxable profits through dividends to maintain its REIT status.
This allows you to purchase on margin. You buy the property for as little as 5% mortgage. The best part is, you control the property and the equity it holds, all for a fraction of its total price.
This is the oldest, most basic way of investing in real estate. You buy property and rent it out to a tenant. As the landlord, you must pay the mortgage, maintenance, and taxes for the property. The tenant’s monthly rent takes care of these obligations.
Best practice tip: Charge your tenant only enough to cover general maintenance costs and mortgage. Most of the rent becomes profitable once you’ve paid off your mortgage.
Best practice tip: This is perfect for investors looking for a second mortgage. Leverage allows you to put down money in as many as two to three other properties. You enjoy greater freedom in deciding whether to sell the property or rent it out. You also exercise total control over these assets, having paid only a fraction of its value.
Knowing what kind of investment to make is an important step in making your money grow.
If you want more advice or help, contact us today.