While growing wealth and investing can encompass many platforms and strategies, real estate has proven to be one of the most successful and dependable. Moreover, effective real estate investing can be a stabilizer and even a catalyst for increasing your net worth and is not as susceptible to market shifts and global uncertainty.
Besides buying one’s own home (which can be profitable itself), real estate investing can take many forms. There are ways to invest in real estate beyond rental properties and “flipping” houses.
Adding real estate investment to one’s portfolio provides diversification to grow value and income when equities, fixed income, and savings accounts may be floundering.
Ways to Invest in Real Estate
Real Estate Investment Trusts (REITs) provide an investment option similar to investing in mutual funds. Individuals can buy shares in firms that own a portfolio of revenue-producing investment properties like office or retail buildings, apartment complexes, hotels, and more.
REITs can pay regular dividends to provide an income stream, or you can choose to have the proceeds automatically reinvested to purchase more shares. Some REITS trade publicly and can be purchased online or through an investment broker.
Real Estate Investing Platforms
Real estate investing platforms (crowdfunding) connect investors with real estate developers to pursue specific projects. Some sites allow everyday investors access, although many are limited to high net worth investors.
Like REITs, platforms are passive investments intended to pay regular distributions. These can be risky and are difficult to exit, so investors should be careful in this space.
Purchasing Rental Properties
Buying a home or condo to rent is a common practice. However, before buying, individuals must carefully research the rental market to determine the rent potential for comparable properties. After all, ongoing monthly expenses must be less than the rental income to make the investment profitable.
Note that the property’s value should also appreciate over time, further enhancing the investor’s net worth.
Investors should work with a qualified Realtor when conducting their property search. These individuals know the local market conditions and access current listings throughout the marketplace.
Some of the typical rental properties that can be investments include:
- Long-term rentals.
- Vacation rentals.
- Home-sharing or room-renting.
- Commercial real estate properties.
To escape the late-night phone calls regarding repairs and other incidents, property owners often turn the day-to-day management over to a professional property management company to handle leasing and maintenance. Working with a management company means giving up some of the income but helps eliminate a long list of headaches.
However, investors with only one or two properties can often save expenses by opting to manage the property themselves.
Flipping Investment Properties
Buying properties, fixing and renovating, then reselling at a higher price has been lucrative for many investors.
However, making this type of investment profitable requires substantial market knowledge and relies on existing local market conditions. For example, a real estate market experiencing high demand and low supply can make this strategy successful. But if local housing demand drops and prices fall, flipping properties can result in losses.
Again, working with a qualified Realtor who knows the local market conditions and has access to current listings can help investors interested in flipping real estate.
Calculating Your Expected Return
Before making a move to borrow money for any real estate investment, make sure the investment will be profitable. Then, project various scenarios to allow for unexpected outcomes, like extended vacancies or changes in rent levels due to economic or competitive factors.
Create a profit-and-loss sheet for each real estate investment. Besides monthly principal and interest (if borrowing) plus taxes and property insurance, the calculation should also factor in management fees (if any), pest control, landscaping, general maintenance, and other upkeep expenses.
To make the right investment decision, investors should always compare the proposed costs against the expected revenue totals to determine whether the investment will make sense. Some real estate investments may not be profitable.
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