Real estate investing can be a great way to further diversify your portfolio and add an asset that will help you reach your financial goals. Unlike the other investment types that we have discussed together in our mini-series, real estate investing provides comfort that typically you won’t have with the rest – that is an investment that you can touch and stand on during hardships.
In many ways, this is a major advantage for investors. This is because, when the economy is struggling, or the market is going through a downturn, you will still have your residential or commercial property. However, this also leads to confusion, with many investors thinking that the value of your real estate property will always increase, or that it will, at the very least, keep its current value. But there is always the possibility that the land you buy will become less attractive to other potential buyers or that the area the land is in will become less popular. This can, in fact, reduce the profit you get from the property, or even cause the value of your property to collapse. And let’s not forget that property investing is also associated with additional costs such as property upkeep, taxes, insurance, and other expenses.
Now, this doesn’t mean that investing in real estate isn’t a great way to enhance your income and add an extra revenue stream. It’s just a matter of finding the best approach and avoiding potential pitfalls.
How To Invest In Real Estate
There are many ways to get into real estate investing, and here we will cover some of the most common approaches, based whether you are looking for a hands-on or hands-off investment.
Real Estate Investment Trusts or REITs
These investment vehicles operate on the open market as funds. They allow you to purchase their stocks, and enable you to indirectly invest in their investment properties. Like with other types of fractional investing, what you need to keep in mind is that the results of the REIT depend on its leadership. As such, you should evaluate REIT investments in the same way that you would typically approach equity investing. That means you need to look at the debt ratio, as well as the company’s equity, vision, commitments, and long-term plans.
Investing in REITs can be pretty appealing if you are new to real estate investing and if you simply don’t have the time or the experience needed to run your own investment property. In addition to this, REITs are also a great option if you’re looking for a liquid investment; one that you can cash out easily in emergencies and that you can sell in stocks on the open market. Real Estate Investment Trusts also come with the added advantage of being very transparent. They need to disclose a great deal of information about their company’s dealings, costs, and revenues. On top of this, REITs are required to distribute the majority of their after-tax profits as dividends to the investors in the Real Estate Investment Trust.
Another type of real estate investing is land speculation. This type of investing is a bit more hands-on. The goal here is to purchase land and re-sell it at a higher price. This can work well if you anticipate an increased demand for the property – from farmers, home builders, oil and gas companies and others. For example, you may want to sell the mineral rights to an oil and gas company, or sell the land to farmers for farming, or sell it to property builders for large commercial projects like malls. Land speculation is straightforward; however, it has certain risks that you need to be aware of. On the one hand, it is a more short-term investment, as you are mainly acting as the middle man, buying from one and reselling it to the other. On the other hand, interest in the land may dry out.
Many of you have probably seen different programs about property flipping, the potential profits, and the work involved. As you may have guessed, property flipping refers to purchasing an under-priced house, renovating it at a low cost, and then reselling it for a profit. Property flipping may initially seem like a good option, but it’s important be aware of potential pitfalls. It is nothing like you have seen on TV. And there are many things to consider before trying this type of investment.
First, you need to envision how the property market will develop in that area – basically, the likelihood of a change in the attractiveness or in the popularity of the site. Next, you need to know how to determine the potential renovation cost. Calculating costs can be tricky – unless you have previous experience or an experienced contractor. In addition, you need to factor in your budget and the possibility that it might change. You may require more money than you initially thought, and you need to consider how this will affect the overall Return on Your Investment.
Finally, you should consider having an emergency plan. For example, if you can’t sell the property at the desired price or the market conditions aren’t favourable, you can try renting it out.
Investing in Rental Properties
Some people prefer to buy a residential property that they then rent to others on a short-term or long-term basis. If this is the first time you’re investing in real estate property, then you can start by purchasing and renting out an apartment. This will enable you to start with a smaller project, get some hands-on experience, and learn how to run a real estate business. This will also help you understand how much time and effort you need to commit when it comes to the tasks associated with owning an apartment. Another approach is to hire a property management company to take care of this for you, but this will cut your returns, and reduce the profitability of your investment.
It is worth taking into account how property values increase with time. From 1994 to 2019, most homes increased in value on average by 3.90% annually, according to industry analyst Black Night. Meanwhile, Real Estate Investment Trusts averaged an annual return on investment of around 11%. As such, you may want to explore all your options and perhaps build a portfolio that maximizes your returns.
Another approach is to invest in crowdfunding platforms – ones that allow you to invest in projects – as these are relatively smaller investments. This means you won’t be investing in large builds like malls and other big commercial projects. Crowdfunding platforms often offer the opportunity to invest in small residential and commercial properties projects. You can invest through a group, allowing you to get exposure to real estate, and potentially benefit from value increases.
Investing in real estate can be a great way to balance your portfolio and further diversify your investments. While investing in real estate might seem tricky at first, there are plenty of online resources available to you. If you’re unsure where to start, you can also get more information from real estate companies or licensed investment firms. For more information about investing, feel free to check out our blog. For more investing ideas, feel free to also subscribe to our Telegram channel.