Types of Real Estate Investments
Real Estate Investments - A bird’s eye view
Investment properties range from apartment buildings, condos, rental houses, and even commercial or office establishments. The real estate investment sector has evolved over the years, and is no longer what it used to be 50 years ago, where property investment just comprised of finding a suitable place to live in, an affordable home or just a piece of raw land. It has gone beyond that, making it a lucrative business. Research reveals that some of the wealthiest people in the world have chosen the real estate industry business as their calling. Investing in real estate goes beyond ownership, and here we shall discuss the different types of real estate investment, which is beyond say, just buying a home!
Basic Rental Properties
This type of property investment constitutes landownership. What is landownership? Well, a person buys a property for example a house, and rents it out to a tenant. In other words, a landlord who owns the house and takes it upon himself to maintain the property, pays the taxes and the mortgage related to it. Usually, the rent paid by the tenant covers all the above mentioned costs. However, depending upon the location of the property and other factors, the landlord may charge the tenant additional amounts as rental charge which in turn produces a monthly profit. In this type of investment, however, patience is the key while strategizing. This is because; over a period of time the property turns into an invaluable asset to the owner as the property usually appreciates in value.
However, like any other investment, it is not completely risk-free and can have downsides to it. One would be lucky to get good tenants and who would not want that? If one were to get bad tenants, who would damage property or holdup the monthly rent. That could burn a hole in the landlords pocket and prove to be a hassle. Worse still, would be having no tenant at all. This would result on losses as he would have to scramble to cover the mortgage payments.
Research is the key before making this type of an investment. The primary factors that come into play are the area and the demand for rental property. One has to exercise prudence and try to buy property where tenancy rates are high (which means more demand for rental property) and vacancy rates are low.
Real Estate Investment Groups
Okay, sounds new or sounds like jargon? What exactly are real estate investment groups? In this type of investment, the investor buys the property through a company. The company is responsible for building and buying the property which usually comprises of set of apartments or condominiums and then in turn allows the investor to buy that through them. The investor in turn becomes a part of that group of company. It is entirely up to the investor whether he wants to own a single or multiple properties within that company. Now, it is the responsibility of the company operating the investment group to take care of the property units ranging from maintenance costs to advertising the vacant units and other minor obligations entailed within the written agreements. Now, why would the company do this? What is their share of profit? What’s in it for them? Well, in exchange of management of all the units, the company pockets a certain percentage of the monthly rent.
So basically, it saves you the hassles involved of being the landlord and let the company take care of the property units. Furthermore, it gives the investor the advantage of paying off his mortgage even if his rental unit is vacant. How is that possible? It involves a very basic strategy. All of the units pool in a certain amount of rent to guard against occasional vacancies. Here again, research is vital. One has to keep in mind the company one is investing in, based on its past records, credibility etc.
Real Estate Trading
Real Estate Trading is in no way a risk free venture. This kind of investment requires a keen acumen and good strategizing. It is also called property flipping. This is an investment strategy where the investor buys the property and waits for its appreciation and sells it on a profit and then reinvests the funds realized from the sale on another property with the same motive.
This kind of investment is usually a short term investment for the investor as he plans to dispose or sell the property at a good profit. Fair amount of evaluation goes into this kind of investment as it carries tons of risk factors. Usually, purchase is made when the property is in a hot market or is significantly depreciated.
This kind of investment can also be viewed as a long term, wherein a few property flippers add value to their property by renovating and sprucing up the purchased holding and then selling it at a profit.
REITs (Real Estate Investment Trust)
Here a corporation or trust is created with a motive to use the investors’ money for purchase of income properties. Unlike the above mentioned types of investments, REIT gives the investor the benefit of investing in non residential properties like offices, malls, etc. and hence proves to be a highly liquid asset. In order to maintain and sustain itself, REIT has to keep a momentum of paying out 90% of its taxable profits as dividends and hence save themselves from paying huge amounts of corporate income tax. So if a stock market investor is looking for a steady income, this is the type of investment to be considered.
Leverage
To many of us this again sounds as a corporate jargon. So, first let’s see what leverage is? Leverage is the use of funds borrowed from a bank or other financer with a motive of investment.
By paying only a fraction of the total worth or value, the investor can control the entire property the minute the mortgage papers are signed. Certain mortgages require as little as 5%. This type of investment tool is not available to stock market investors. The real estate flippers and landlords get the advantage of taking out a second mortgage on their homes, with a chance of investing in more properties by paying only a meager part of the total value.
In the light of the above, it can safely be concluded that investment in real estate is not as simple, and requires a fair amount of research, expertise, prudence as well as experience. In fact what we see is just the tip of the iceberg. Although the industry has enormous potential, it entails its risks and not necessarily assures us gains.