Buying and owning real estate is an investment strategy that can be both satisfying and profitable. Unlike investors in stocks and bonds, potential property owners can use leverage to purchase a property by paying a portion of the total cost up front, then paying the balance and interest over time.
Although a traditional mortgage usually requires between 20% and 25% down payment, in some cases a 5% down payment is sufficient to purchase the entire property.
This ability to manage the property at the time of signing the documents encourages both property buyers and landlords, who in turn can take out a second mortgage on their homes to pay off the additional properties. Here are five main ways in which investors can make money from real estate.
#1 Rental Property
A rental property can be a great option for people who have DIY (renovation) and renovation skills and the patience to manage tenants.
However, this strategy requires a large amount of capital to fund the initial maintenance costs and cover the free months.
According to the US Census Bureau, new home sales prices (an estimate of the value of real estate) have risen steadily since the 1940s. Until 2006, when it fell during the financial crisis.
Subsequently, sales prices began to rise again, even exceeding pre-crisis levels. It remains to be seen how the long-term impact of the coronavirus pandemic will be on property values.
#2 Real Estate Investment Groups (REIG)
Real estate investment groups (REIGs) are ideal for people who want a hassle-free way to manage a rental property. Investing in REIG requires a cushion of capital and access to financing.
REIGs are like small investment funds that invest in rental properties. In a typical real estate investment group, the company buys or builds a group of apartment buildings or apartments and then allows investors to acquire them through the company, thus joining the group.
A single investor may have one or more units of separate living space, but the company that manages the investment group jointly manages all housing, takes care of maintenance, advertises job vacancies and interviews tenants. In return for performing these administrative tasks, the company charges a percentage of the monthly rent.
#3 Heart of the House
Home remodeling is for people with extensive experience in real estate appraisal, marketing and renovation. Home conversion requires capital and the ability to make repairs or maintain them as needed.
This is the “wild side” of real estate investing. Just as day trading is different from “buy and hold” investors, real estate sellers are different from “buy and hold” owners. For example, property buyers often seek to sell an undervalued asset profitably in less than six months.
Sellers of pure real estate often do not invest in property improvements. Therefore, the investment must already have the intrinsic value required to make a profit without any change, otherwise the assets will be removed from the dispute.
#4 Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) is best for investors who want the impact of a real estate portfolio without the traditional real estate transactions.
A REIT is created when a company (or a trust) uses an investor’s money to acquire and operate income-producing assets. REIT, like any other stock, is bought and sold on major stock exchanges.
The company must pay 90% of taxable profits in the form of dividends to maintain its REIT status. In doing so, the REIT avoids paying income tax and the profits of the ordinary business will be taxed and then it will have to decide whether or not to distribute the profits after tax as dividends.
#5 Online Real Estate Platforms
Real estate investment platforms are for those who want to connect with others and invest in a larger commercial or residential deal. Investing through online real estate platforms, also known as real estate crowdfunding.
This still requires a capital investment, albeit less than what is required to own real estate.
Online platforms connect investors who want to fund projects with real estate developers. In some cases, you can diversify your investments without having a lot of money.
Whether real estate investors are using their properties to earn rental income or to find their time until they have a great opportunity to sell, it is possible to build a solid investment program by paying a relatively small portion of the property’s total value up front. Like any investment, real estate has profits and potential, whether the single market goes up or down.