Real estate investing is satisfying and lucrative, when done right. This can help you diversify your investment portfolio and generate additional income. Many real estate investments don’t require you to deal directly with tenants. Plus, you can buy a property by paying just a fraction of the full price and then clearing the balance and interest over time. Here are four real estate investment options.
Investing in residential rental properties can be great, especially for people with renovation and DIY skills, who are brave enough to deal with tenants.
• Provides regular income
• Properties can appreciate
• You can optimize capital through leverage
• Many expenses are tax deductible
• Tenant management can be cumbersome
• Vacancies can reduce income
• Tenants can damage the property
You can buy undervalued properties that need upgrading, renovate them inexpensively, and then resell them for a profit. House flipping, however, comes with some risks. First, your repair cost estimate must be accurate, which is not easy. Second, the longer the property is in your hands, the less money you will earn, because you will be paying a mortgage without it generating any income.
• Only ties up your capital in the short term
• Potential for quick returns
• A warm market can cool unexpectedly
• Requires in-depth industry knowledge
Real Estate Investment Trusts (REITs)
REITs are traded on major exchanges, like stocks. A REIT comes into existence when a trust/corporation uses investors’ money to buy and manage income-generating properties. To maintain REIT status, 90% of the taxable income of the trust/corporation must be paid out as dividends. REITs can allow you to invest in non-residential properties, like office buildings and shopping malls, that may not be able to buy directly.
• Very liquid as they can be traded
• These are essentially dividend-paying stocks
• Holdings are generally long-term cash-producing leases
• Does not offer the leverage typically available in traditional rental real estate investing
These online platforms connect investors with developers who need capital for their real estate projects, whether in equity or debt.
• You have the option of investing in a single project or in a diverse range of projects
• Geographical diversification
• Generally illiquid and speculative
• Management fees
The four real estate investment options available to investors include rental properties, house flipping, REITs, and online platforms. Ultimately, the ideal real estate investment opportunities are those that match your investment goals.