Many investors already have a real-estate position in their portfolio. Adding other real estate investments to your portfolio can help diversify it and protect you against stock market volatility. Let’s look at the pros and cons of investing in real estate and how we can help you get started.
What investment options are available?
These are the top real estate investment options:
- Rent properties
- Real estate investment groups
- Flipping houses
- Real estate limited partnerships
- Real estate mutual funds
Let’s explore how they work.
This list includes rental properties, which are the most hands-on. Renting out residential real estate can be as simple as buying it. Many properties are rented out for 12 months. However, shorter-term rentals through companies like Airbnb or NASDAQ:ABNB_ are growing in popularity.
You are the property owner. You are responsible for maintaining the property, cleaning up between tenants, making major repairs and paying taxes. You may have to pay for utility bills and appliances replacement, depending on your lease terms.
Renting properties can make you money from rental income and price appreciation.
Tax write-offs are also available. If your adjusted gross income is less than $100,000, you may be able to deduct losses from rental properties up to $25,000 from your normal income. If you have a modified adjusted gross income of $100,000 or less, depreciation and interest, which you pay regardless of what, could cause the property to show an accounting loss.
A down payment could be required to buy rental property. If you can charge enough rent to pay your mortgage, your tenant will cover the remainder.
Real estate investment trusts can be a great way to invest in real estate. REITs, which are publicly traded trusts, own and manage rental properties. They can have any type of property: office space, malls or industrial real estate.
High dividend payout rates are common for REITs. This is because investors must receive at least 90% of their net earnings. This requirement is met by REITs and they will not be required to pay corporate taxes.
A REIT also has the advantage that they trade on stock markets, which allows them to sell a rental property quickly and without having to complete a lot of paperwork.
Real estate investment groups
A real property investment group (REIG), is one way to preserve the potential profit of private rental properties and potentially get more upside than REIT trading at premium.
REIGs buy and manage properties, then sell parts to investors. REIGs can purchase something like an apartment block, which investors can then buy units from.
The property is managed by the operating company, which retains a percentage of the rent. The company will find new tenants and take care of maintenance. Investors will often pool some rent to pay down debt or meet other obligations in the event that some units are vacant.
Flipping houses can be one of the most risky and difficult options. However, it can also prove to be the most lucrative. There are two main ways to flip houses: buy, repair and then sell or buy, wait and sell. The key to minimizing your initial investment and keeping renovation costs low is in either case.
Let’s suppose you can buy a house at $250,000 and 20% down. That is $50,000. The house is then listed for sale at $400,000. The $400,000 is used to pay off the $200,000 mortgage and you make $100,000 on your $100,000 investment. If you are able to get it, it’s a fantastic return.
Problem is, you often can’t. Although housing markets aren’t notorious for being volatile, when they’re being leveraged to their utmost — as you must be — it can kill you in the game of flipping houses. It may sound simple to keep renovation costs low, but it can be difficult if you don’t have any construction experience.
Materials prices have soared, workers are in short supply, and there is almost no housing for sale. This is the worst part of the house flipping cycle: Everything is too expensive and the market can turn at any moment.
You can flip houses if you are smart enough to figure out how to keep it cool in the heat. This may sound counterintuitive but it will save you time and money in the end.
Real estate limited partnerships
hedge fund in that there are limited partners (investors), and a general partnership (the manager). The general partner is usually a real estate company that assumes all liability.
RELPs can be a passive way to invest in real estate. The general partner usually sets up the partnership and recruits limited partners. The K-1 is used to report income for taxes. However, investors don’t have any influence over operations.
If you have a reliable general partner, RELPs can prove very lucrative. You are relying on the general partner to manage the property and report back financials.
Real estate mutual funds
REITs and REOCs are investments made by real estate funds. REITs and REOCs have similar growth rates, but REOCs don’t pay dividends.
The easiest way to invest in real property is through mutual funds and ETFs. While you receive dividends, you allow an index or manager to select the best real-estate investment.
Even if your only investment is stocks, you might consider real estate funds for diversification and the same liquidity profile as before.