How to Invest in Real Estate
There are several ways for investors to actually invest in real estate. They range from being very involved to strictly an investment in a fund that is professionally managed by real estate managers.
The following are potential investment approaches that consumers can become involved in:
- Renting out a room or portion of your home
- Purchase Real Estate to Fix Up and Resell
- Purchase Rental Properties
- Real Estate Investment Platforms
- REITS or Real Estate Investment Trusts
We will discuss each of these investment opportunities in a little more detail to help our readers understand the alternatives along with the pros and cons of each. When you view their website, investors will be better prepared to make the correct decisions regarding reward and risk.
Renting out a room or portion of your home
Homeowners can rent out a room or a separate area of their home to short term tenants using apps such as AirBNB. The app provides pre-screening of tenants and provides a professional methodology to manage your tenant agreements and collection of rental income. If you have a separate entrance with a dedicated area of your home, homeowners can rent these areas out to longer term tenants.
Purchase Real Estate to Fix Up and Resell
While they make it look easy on the various TV programs about flipping houses, there is a greater degree of risk. The investor is looking for a home they can purchase under priced that they can repair and / or upgrade to resell for a higher price on the market. The risk involves uncovering more repairs than they were aware of when they purchased the home which leads to more expense. The longer they hold the property, the higher the costs and the lower the profit.
Purchase Rental Properties
That investors can either live in one unit or rent out the entire property. They need to pay close attention to income and expenses to ensure they turn a profit. Empty units, unpaid rent, higher management costs for repairs etc can increase the risk level for these properties. Many investors will hire professional property managers to manage all aspects of the rental, however as can be expected there are costs for this service that can range from 5% to as much as 15% of the rental income. This is in addition to repairs that may be needed, utility costs, interest and mortgage payments as well as property tax.
Real Estate Investment Platforms
For the investor that has funds available to invest in projects. The risk is much higher in that the investor is relying on a third party to manage the property development and subsequent sale or rental before seeing any return on their investment. Unfortunately you cannot unload the investment easily and they are considered highly speculative. The returns are potentially high however so are the risks.
REITS or Real Estate Investment Trusts
Are compared to mutual funds. They allow the investor to invest in the REIT without actually owning any real estate. The REIT will invest in various properties to generate income and pay dividends to the investor. Publicly traded REITs are relatively easy to purchase and sell through an online broker. Private REITs are not as liquid and carry more risk. If you might need your money in a hurry, invest in the publicly traded REITs. Once you open a brokerage account, investors can purchase publicly traded REITS easily online.
Before investing in real estate take a few minutes to evaluate what kind of an investor you really are. Do you want to be hands on buying real property to fix up and resell or rent out? Perhaps you just want to make a few extra dollars from your home by renting out a room or one area of your home. Much less risk and you can dabble as often as want. For investors with larger sums of money to invest and those that really would prefer to be hands off, REITs may be more attractive. Investing in projects usually requires larger sums of money and there is much more risk with little liquidity.
Have a look at the infographic image by Homelight.