Investing in real estate is not easy. But for the pro, it is lucrative, something that cannot be missed!
Unlike stocks and other financial products, real estate is a tangible asset. A solid real estate investment has the potential to be a multi-bagger, given you have the patience to invest and wait. But, of late, real estate investment is not limited to physical buying. There are various sources to invest in real estate, directly and indirectly.
Here, let us explore the five great ways to invest in real estate and earn huge profits.
One of the best methods to own a physical property is to buy a real estate property to generate rental income. The property may be a multi-family home or a commercial property. Owning a commercial property generates better rental, but the investment is also high. The real estate market, the location, the financing capacity of the individual are to be considered before investing in rental properties. The best solution to have a high-income-yielding rental property is to hire the services of a real estate consulting firm. They guide you in the selection and buying procedure of your rental property.
Advantages of investing in rental properties-
- It provides a solid source of a second income.
- The real estate property value appreciates over time.
- The rental income is not subjected to social security tax.
- You can deduct tax from the interest you pay on the rental property loan.
- Real estate is a physical form of asset, unlike stocks and other financial products.
Disadvantages of investing in rental properties-
- The rental income generated depends on the consistency of the tenant’s stay.
- The rental property maintenance costs are high.
- It is not easy to liquidate real estate if you are in urgent need of money.
- Managing tenants is not everyone’s cup of tea.
- If your gross income is more, you will be charged a surtax on the investment and rental income.
- The rental income may not cover your repayment finances.
It differs from buying and holding properties that provide passive income. Flipping properties is done in two ways-
- Buying a fixer-upper and doing structural and design modifications to create value.
- Purchasing properties in financial distress for a rate below the current market value and making a profit by selling them at the market price.
The risk with flipping properties is that it requires your time, effort, expertise, and money. It is advisable only when you need to generate active income and don’t have the patience to buy and hold the property.
Advantages of flipping properties-
- It is a great source of active income if you have expertise in flipping properties.
- You need to time the market to generate profits.
- It is a safer investment as you have done due diligence while buying the property.
Disadvantages of flipping properties-
- Buying a fixer-upper requires money for renovations and repairs.
- The profits are treated as short-term capital gains and are heavily taxable.
- You need time, effort, and money to flip properties.
REIT (Real Estate Investment Trust)
The REIT is a trust or fund that owns and manages income-generating real estate properties. They derive at least 75% of their income from rents and interests on mortgages that finance real estate. The benefit of REITs is that many are publicly traded in the stock exchange funds, and you can liquidate them easily. They offer an annual dividend even though the value of the fund doesn’t increase drastically.
The REIT is good for investors who do not have the money to invest in commercial properties. You buy the funds even with a small amount and count the annual dividend as your rental income. Ask the advice of a real estate consulting firm for the best REITs available in the market. They have expertise in the real estate market, and they will guide you on the best real estate investment strategy.
Advantages of investing in REITs-
- They provide a strong stable dividend every year.
- They have the potential for long-term capital appreciation.
- They are easy to buy and sell on public exchanges
- They offer risk-adjusted returns
- It provides portfolio diversification
Disadvantages of investing in REITs-
- REIT dividends are taxable
- Some have high management fees.
- They do not offer much capital appreciation
- Since the REIT has to pay back 90% of its profit to the investors, they have only 10% to reinvest in new properties.
REIG (Real Estate Investment Group)
A group of investors who choose to buy, renovate, sell, or finance properties form the REIG. These groups buy multi-unit properties. They then sell individual units to investors while making profits. They take ownership of the property maintenance. For instance, an REIG builds a set of apartment blocks. The investors purchase individual apartments making them partners in the group. To be a partner in REIG, you need a lot of investment larger than you would in individual real estate property. This investment appeals to high net-worth individuals.
Pros of investing in REIGs-
Since they pool in a lot of money, they have unrestricted investment opportunities. They may indulge in investment opportunities like financing, flipping, and leasing of properties or selling units in a property.
- They can diversify their portfolio for maximum returns if they have good managers.
- The profits generated are shared between the partners every month.
Disadvantages of investing in REIGs-
- The withdrawal of funds in REIG is subjected to the group’s laws.
- The returns may not be attractive if the real estate fund is not managed properly.
- The fee paid to managers is usually high that eats a considerable part of the profit.
Real estate crowdfunding
It is similar to REIG, but it appeals to small investors. Real estate crowdfunding raises money for real estate investment by reaching an audience of potential real estate investors. They are contacted either through emails or on social media platforms.
Benefits of real estate crowdfunding-
- It allows investors to be partners with minimum investment.
- An investor becomes a shareholder by investing in the group.
- It acts as a real estate investment diversification.
- There can be good investment gains if the company goes public and lists on the stock exchange.
Disadvantages of real estate crowdfunding-
- It is risky since the company is relatively unknown to investors.
- The returns may be negative if the fund is not properly managed.
- Accountability and trust can be challenging factors.
Real estate consulting firm to your rescue
Each of the five ways to invest in real estate has its pros and cons. It is better to hire the services of a real estate consulting firm to pick the best options and diversify your risks. It helps you to keep your finances secure and earn good profits in the long run.