Real estate isn’t for everyone, but it undoubtedly can be a lucrative business. It’s one of the best ways to diversify one’s portfolio while adding to one’s income, and it doesn’t even have to be done the old-fashioned, landlord-tenant way.
The promise of making millions on a property, as so many others have done, can make anyone want to dip their toes in real estate. The following are the top three ways to do that. Keep in mind, however, that every type of investment poses different risks, and real estate investments are no different.
1. Buy a Rental Property
One of the most common ways to invest in real estate is to buy a property and rent it out. With a rental property, the investor could rent out the rooms or apartments to different tenants or live in the property and rent out the other available spaces. In either situation, the investor is referred to as the landlord.
The most successful landlords are those who can maintain their property and take the time to listen to their tenants and address their concerns. The landlord generates income from every rent paid by tenants, and the returns are most evident when repair and maintenance expenses are kept low.
This real estate investment option is best for people who have an interest in renovation and are patient enough to deal with tenants. Anyone who has enough funds to purchase a property, pay for repair and maintenance expenses, and survive even when the property is left vacant may consider purchasing a rental property. Aside from the income associated with rental properties, one other benefit is that many related expenses can be written off as tax-deductible. The best part is that properties tend to appreciate over time, becoming more and more valuable since their purchase.
While buying a rental property is easy, it’s easier for some than others. Investors don’t always have enough money to afford a 20% or greater deposit for an investment property loan. There are also short-term risks associated with rental properties such as vacancies and damages, sometimes caused by tenants. Compared to other investments, tending to a rental property can be quite time-consuming.
People who are still unsure of if they want to purchase a rental property can try renting out part of their home or even just a room on a website for the short term. This would allow them to test the waters with prescreened tenants on platforms that guarantee protection for both tenants and property owners.
2. Flip a House
House flipping doesn’t just happen on TV. Investors purchase underpriced homes or properties, renovate them, then resell them for a profit. House flipping requires investors to have enough funds to cover not just the initial investment, but also all the home improvements. Though it has become more popular in mainstream culture because of the transformations that properties undergo, house flipping does lead investors to make a handsome profit if done properly.
Some property flippers choose properties that can already sell at a profit even without improvements, but others purchase affordable properties and add value through renovations. The latter are longer-term projects that require the investor to play an active role in the investment.
People who invest in real estate by house flipping pay attention to two factors throughout the process: the expenses and the time it takes to repair the property. One could quickly lose much of their money paying to repair and maintain a property. At the same time, every day that the property is not sold results in higher expenses and lower profit margins.
The best house-flippers are those who have had experience in marketing, renovation, and real estate valuation. It also helps to be patient because transforming properties takes more than just a few days. Before purchasing a property to flip, the investor must come up with an accurate estimate of how much they would need to set aside for the property’s renovations. They would then have to compare that to the price they expect to be able to receive upon selling the property, then determine if the investment is worth the time and effort to manage the project.
3. Buy Real Estate Investment Trusts (REITs)
REITs are created when companies that own, operate, and manage commercial real estate use investors’ funds to function. These companies tend to own hotels, office buildings, and apartment buildings, among others. Some REITs are traded on the major stock exchanges, while others aren’t publicly traded. New investors are generally advised to purchase publicly-traded REITs that can be acquired through brokerage firms. Corporations with REIT status are required to pay 90% of their taxable profits as dividends, so investors receive relatively high dividends, and the REITs don’t have to pay corporate income tax.
Capital is the only thing that an investor needs to purchase a REIT. Once they buy the REITs, their portfolio would indicate that they have invested in real estate without actually buying any properties. The high dividends that investors tend to receive from REITs have built a reputation as a good investment for retirement. However, investors can choose to reinvest their dividends into the REITs as well.
Profit and potential
As long as the property works to the investor’s benefit, it’s completely possible to profit from real estate. However, real estate poses risks that other investments don’t, and investors must consider these. Anyone who goes into real estate should know their limits in terms of capital and time, and then evaluate their options from there.