Investing in real estate can be lucrative, but it comes with many considerations and requires careful planning. Deciding when to invest and what to buy are the first steps, but there are several others that need to be evaluated too.
The first decision you'll need to make is how much you can afford to spend. Because real estate is a risky venture, you need to make sure you're not investing money you don't have. The sum you settle on will depend on the property you purchase, or the investment route you take.
It's highly recommended that you draw up a financial plan and assess exactly what costs you can cover, and what size mortgage you need. Once you have a clear way forward, you can focus on selecting the option that best suits your requirements.
Buy Residential For A Rental
If you're interested in investing in residential real estate, and have enough time to commit to the proper maintenance and upkeep thereof, becoming a landlord is a good option. It means that, as long as you have tenants, you've got a guaranteed monthly income.
Rentals are by far the most common way people make a steady income in real estate. Of course, buying and renting out commercial properties is an option as well. But the advance costs are far higher and the management requirements much more complex. For new investors, a residential property is far more straightforward and easy to manage.
You need to bear in mind that, while residential properties are technically passive investments, they require an active level of involvement from their owners. This means you'll need the time and money to make this work. While many landlords handle repairs themselves, others outsource building maintenance to independent companies.
If you decide on the latter course of action, you'll need to take the fees these businesses charge into account. In general, mercantile and multifamily property management charges range between 4% and 12% of the overall rent for the premises. But it's not uncommon for these numbers to drop as low as 3% or climb as high as 15%. And, in some cases, especially for bigger locales, companies may charge a flat, monthly fee.
Focus on Flipping Real Estate
If you'd prefer to buy your own property but want to avoid renting it out, the option of flipping may be ideal. The number of homes flipped in 2019 made up 6.2% of all home sales in the US for the year, an eight-year high. It was an increase of 5.8% of all home sales the year before and from 2017's 5.7%.
The highest recommendation of flipping real estate is that it can see you getting sizable returns in a very short while. You'll be buying undervalued residential properties, renovating them, and then selling at a price that covers your initial investment, the costs of refurbishment, and makes a profit.
Skipping the renovation part altogether and just waiting for markets to improve is also an option, but the houses will need to be in a better condition for this to work.
If this type of investment property comes with too much admin, there are other options you can explore.
Consider Real Estate Investment Trusts
Putting your money into a REIT isn't hugely different from funding stock. As an investor, you'll be giving cash to a corporation or trust that buys property. You'll then get a portion of the dividends as it appreciates. REITs are bought and sold on many of the biggest stock exchanges in the world, so this type of investing is relatively common.
This is a fantastic entry into the world of commercial real estate and comes with a potentially high yield. Corporations pay out a minimum of 90% of their earnings from their properties as dividends to their investors. And your outlay is liquid, which means that you can sell your shares and cash them out at any stage, without having to tackle the sales process. Plus, the trust handles all the management work on your behalf, so it's far less time and labor intensive.
Join a Real Estate Investment Group
Investment Groups are another way to get into real estate without having to face the extra demands landlords have to deal with. Investors with compatible aims pool resources and purchase residential properties, often apartment buildings, via a bigger company. This business then handles issues of maintenance and tenancy in return for a percentage of the rental income. This kind of investment can be compared to a mutual fund on a smaller scale.
Single investors can also purchase individual units within larger, multifamily ones. In this case, the Group will become a legal entity, and each member will stand as a joint owner. Because vacancies are always a risk when it comes to rental properties, many Groups pool a percentage of the rent so that everyone still sees money coming in, even if their particular unit is temporarily empty.
Review Short-Term and Vacation Rentals
If none of these options particularly appeal to you, perhaps shorter-term options are the way to go? 2019 reports revealed that Airbnb hosts earned, on average, just over $900 a month. Of course, this will depend on where exactly you're based, how often you're renting your property out, and the overall quality of your room or home. Any extra services you provide will also be factored in.
The biggest attraction for this route is that you don't need a huge amount of money to get started, just some extra space. And you'll start seeing money coming in far more quickly than you would from a traditional stock investment. It may also give you a clearer idea of whether or not you're suited to dealing with tenants and the responsibilities that being a landlord can bring.
Take Note
As you can see, investing in real estate can be exciting and lucrative. However, you need to be financially and practically able to deal with its demands. You have a lot of options to choose from, so start doing your research, and you'll soon be able to determine which course of action is the right one to take.