There are different types of real estate investments, but mostly belong to two categories – physical real estate investment, such as land, commercial and residential properties, and other modes of investing that don’t demand owning physical property, like crowdfunding and REITs.
Investing in physical, traditional real estate can provide a high return, but it also comes with high ongoing costs and demands more money upfront. Crowdfunding and REITs platforms come with a decreased financial barrier to entry, which means you can invest in various types of real estate for way less than what it would cost to invest in one traditional property.
The alternative real estate investments also provide the rare advantage of not having to put on pants for investing or leave your home. Purchasing and owning real estate is an investment strategy that can prove to be lucrative and fulfilling.
As opposed to bond and stock investors, interested real estate owners can utilise leverage to purchase a property by paying a bit of the full cost upfront, then paying the balance off, with interest. Although a standard mortgage takes 20% to 25% as down payment, sometimes, 5% is all it takes to buy a whole home.
If you are interested in investing in real estate, below are the 5 categories to consider.
1. Rental Properties
Possessing rental properties is a stellar opportunity for people who boast DIY renovation skills and patience to manage tenants. But this strategy demands substantial capital to cover vacant months and pay upfront maintenance cost.
- Maximises capital by leverage
- Offers steady income
- Property can appreciate over time
- Tax-deductible related expenses
- Tenants can damage your property
- Handling tenants alone is hectic
- Income is reduced in possible vacancy
As per the US Census Bureau Data, the sales costs of new homes regularly boosted in value from 1960s to 2007, before reducing in the financial crisis.
2. Real Estate Investment Groups (REIGs)
These are perfect for people who wish to own real estate without the tension of running it. Investing in this method requires a capital and access to financing. REIGs are tiny mutual funds that invest in rental properties.
In a standard real estate investment group, a company purchases or builds a range of condos or apartment blocks, then permits investors to buy them via the company, thus joining the group.
So, one investor can possess a single or various units of self-sustained living space, but the company running the group collectively manages the maintenance, units, interviewing the tenants, and advertising agencies. In exchange for operating these management tasks, the company grabs a percentage of the monthly rent.
A common REIG’s lease is in the investor name and all the rental properties supply a part of the rent to guard against frequent vacancies. At this end, you will gain a portion of income even if your property is empty. If the vacancy rate for the properties doesn’t surge high, there should be enough to cover costs.
- Guarantees appreciation and income
- Better hands-off than possessing rental
- Fees similar to the ones linked to mutual funds
- Vacancy risk
- Vulnerable to unscrupulous managers
3. House Flipping
This is for people who possess significant expertise in real estate marketing, valuation, and renovation. The strategy requires the ability to do or predict repairs if needed, and capital. House Flipping is the proverbial wild side of the industry.
Just how day trading is unique from buy-and-hold investors, flippers are different from buy-and-rent landlords. Real estate flippers usually want to profitably sell the undervalued units they purchase within 6 months.
Original flippers don’t invest in improving properties. So, the investment should already come with intrinsic value required to convert a profit without any changes. Otherwise, they will eliminate the property from contention.
Flippers who can’t quickly unload a unit can run into trouble as they often don’t have sufficient cash to pay the mortgage long-term. This can result in snowballing loss.
Another category of flippers earns by purchasing affordable homes in Dubai and adding value by renovating them. This can turn into a permanent investment, in which investors can afford to take a few properties only simultaneously.
- Can deliver fast returns
- Ties up capital for a brief while
- Hot market unexpectedly cooling
- Needs a deep market knowledge
4. Real Estate Investment Trusts
REITA is best for investors who need portfolio exposure excluding the usual real estate transaction. A real estate investment trust is developed when a corporation employs investor’s money to buy and handle income properties. REITs are purchased and sold on the prominent exchanges, just like stocks.
A corporation needs to pay 90% of the taxable profit in the form of dividend to regulate the REIT status. In this way, REITs prevent paying the corporate income tax, while a standard company would be taxed on profits and then decide whether or not to share the after-tax profits in the form of dividends.
Similar to standard dividend-paying stock, real estate investment trust is a solid investment for stock market investors who prefer a steady income. The reason why REITs are rare is because they can afford the entrance of investors in non-residential investment, like offices and malls, that are usually not possible for individual investors to directly buy.
More importantly, REITs are liquid as they’re essentially exchange-traded trusts. In short, you don’t need a title transfer or a real estate agent to cash out your investment. Practically, REITs are a formal version of a real estate investment group.
Lastly, while looking at REITs, investors should differentiate between mortgage REITs that offer financing for real estate and equity REITs that possess buildings. Both provide exposure to real estate, but the nature differs.
For instance, mortgage REITs focus on income from real estate mortgage financing, whereas equity REITs is traditional because it represents ownership.
- Core holdings are cash-producing, permanent leases
- Dividend-paying stocks
- Leverage connected to traditional rental real estate doesn’t apply
5. Online Real Estate Platforms
Platforms investing in real estate are for the ones who want to join others to invest in a larger residential or commercial deal. Investment is done through the online platforms, which are called real estate crowdfunding. This strategy still demands investing capital, but less than what’s needed to buy properties.
Online platforms link investors who are searching ways to finance ventures with real estate developers. Sometimes, you can diversify your investments with less money.
- Geographic versatility
- Can invest in a portfolio of projects or single ones
- Management fees