Buying and owning real estate is an investment strategy that can be both satisfying and lucrative. Unlike stock and bond investors, prospective real estate owners can use leverage to buy a property by paying a portion of the total cost up front, then paying off the balance, plus interest over the time. While a traditional mortgage generally requires 20% to 25% down payment, in some cases a 5% down payment is all it takes to purchase an entire property. This ability to control the asset the moment papers are signed emboldens both real estate flippers and landlords, who can, in turn, take out second mortgages on their homes in order to make down payments on additional properties.
BECOME A LANDLORD
Substantial capital needed to finance up-front maintenance costs and cover vacant months. Rental properties can provide regular income while maximizing available capital through leverage. Moreover, many associated expenses are tax-deductible, and any losses can offset gains in other investments. In ideal situations, properties appreciate over the course of their mortgages, leaving landlords with a more valuable asset than they started with it.
REAL ETSTAE INVESTMENT GROUPS (REIGs)
People who want to own rental real estate without hassles of running it, a capital cushion and access to financing. This is a much more hands-off approach to real estate that still provides income and appreciation. Real estate investment groups are like small mutual funds that invest in rental properties. In a typical real estate investment group, a company buys or builds a set of apartment blocks or condos, then allows investors to purchase them through the company, thereby joining the group. A single investor can own one or multiple units of self-contained living space, but the company operating the investment group collectively manages all of the units, handling maintenance, advertising vacancies, and interviewing tenants. In exchange for conducting these management tasks, the company takes a percentage of the monthly rent.
HOUSE FLIPPING
Ideal for people with significant experience in real estate valuation and marketing, and renovation expertise. Capital and the ability to do or oversee repairs as needed. Flipping has a shorter time period during which capital and effort are tied up in a property. But depending on market conditions, there can be significant returns, even in shorter time frames. This is the wild side of real estate investment. Just as day traders are a different animal from buy-and-hold investors, real estate traders are distinct from buy-and-rent landlords. Case in point: Real estate traders often look to profitably sell the undervalued properties they buy in less than six months.
REAL ETSTAE INVESTMENT TRUEST (REITs)
Investors who want portfolio exposure to real estate without a traditional real estate transaction. REITs are essentially dividend-paying stocks whose core holdings comprise commercial real estate properties with long-term, cash-producing leases. A REIT is created when a corporation (or trust) uses investors’ money to purchase and operate income properties. REITs are bought and sold on the major exchanges, like any other stock. A corporation must pay out 90% of its taxable profits in the form of dividends in order to maintain its REIT status. By doing this, REITs avoid paying corporate income tax, whereas a regular company would be taxed on its profits and then have to decide whether or not to distribute its after-tax profits as dividends.
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