To invest or not to invest in real estate? In the past real estate was seen as an alternative asset that proved challenging in terms of costs and accessibility, contrasted to the standard assets of the stock markets. Nevertheless, things have started to change.
Investing in real estate may be unexplored territory for you but that’s no reason to be reluctant. When done properly real estate investing can be both profitable and a dependable source of income. Usually with time the financial worth of real estate investments increase.
So, what does investing in the real estate business involve?
Real estate investments attempt to make profits by buying, selling and renting land and any properties that are built inside that land. Real estate can be divided into three categories: industrial, residential and commercial.
What is industrial real estate? Industrial real estates are buildings or properties used by industrial businesses to carry out their work. A few examples of industrial real estate are warehouses, factories and garages.
What is residential real estate? “Residential real estate is an area developed for people to live on. As defined by local zoning ordinances, residential real estate cannot be used for commercial or industrial purposes. Such laws vary from location to location and can restrict how many buildings are allowed on a single block and what kinds of municipal services reach those buildings.”
What is commercial real estate?
“Commercial real estate is property that is used exclusively for business purposes and that is leased out to provide a workspace rather than a living space. Ranging from a single gas station to a huge shopping center, commercial real estate includes retailers of all kinds, office space, hotels, strip malls, restaurants, and convenience stores. While some businesses own the buildings they occupy, the more typical scenario is that an investor owns the building and collects rent from each business that operates there. While residential real estate lease rates may be quoted in an annual sum or a monthly rent, commercial real estate is customarily quoted in annual rental dollars per square foot.”
Real estate revenue can either result from property leasing, the gradual increase in worth of a property, and interest from a real estate loan.
- An investor who owns any type of real estate can secure revenue by leasing that property. Earnings that derive from rent could supply a stable source of income every month.
- In most cases real estate gradually increases in worth as time goes on. Owning equity gives a real estate investor the opportunity to make a high-profit margin through the sale of that equity once it has acquired greater value or appreciation.
- A real estate loan is when a real estate business or developer takes out a loan with an investor, who then makes a profit from a charged interest rate on that loan.
A breakdown of rental properties
This is a very traditional form of real estate investing. It involves buying a property which is then leased to tenants. The costs of the mortgage, general maintenance of the property and government taxes are all covered by the owner, who charges the tenant a monthly rent fee to pay for the expenses.
It is important for an investor to research the location of the property. For example, a property that is located near a college or university usually has a high demand from student tenants. However, there are associated risks when investing in a rental property. For instance, a tenant who damages the property or not having any tenants at all, hinder the profitability of the investment.
A breakdown of real estate flipping
Another type of real estate investment is known as flipping or real estate trading. This involves the swift purchase and sale of properties that have the potential of bringing in profits. There are two types of real estate traders. The first is the trader that buys a property but does not renovate, modify or invest further money into it, and sells it for more than they bought it for. The second is the trader that buys a property and then spends money on renovations and alterations in an effort to raise the selling price.
A breakdown of real estate investment groups
“A real estate investment group is an organization that builds or buys a group of properties and then sells them to investors as rental properties. In exchange for finding tenants, handling maintenance and other responsibilities, the organization receives a portion of the investors’ monthly rent proceeds.”
A real estate investment group either purchases or constructs properties, which can then be sold to real estate investors, thus making them a part of the investment group. The organization that runs the group undertakes all managerial procedures including general upkeeping and searching for renters. In return, the investment group is entitled to a fraction of the rent.
A breakdown of RELPs (Real Estate Limited Partnerships)
A RELP (real estate limited partnership) is an organization that buys and maintains one or more properties, with the general partner role being filled by a real estate development business. Funding for the RELP is supplied by external real estate investors who are then entitled to a percentage of the profits through a limited partnership.
You may be wondering what a limited partnership is. Investopedia.com defines it as:
“A limited partnership (LP)—not to be confused with a limited liability partnership—exists when two or more partners unite to conduct a business in which one or more of the partners is liable only up to the amount of their investment. Limited partners do not receive dividends but enjoy direct access to the flow of income and expenses. The main advantage of this structure is that owners are typically not liable for the company’s debts.”
A Breakdown of REITs (real estate investment trusts)
A real estate investment trust allows a firm or company to take the investments of multiple investors in order to buy commercial real estate. A REIT gives investors the opportunity to purchase shares in real estate.
“REITs are bought and sold on the major exchanges, just like any other stock. To keep its status as a REIT, this entity must pay out 90% of its taxable profits in the form of dividends. By doing this, REITs avoid paying corporate income tax, whereas a regular company would be taxed on its profits, thus eating into the returns it could distribute to its shareholders.”
“Much like regular dividend-paying stocks, REITs are appropriate for stock market investors who want regular income, though they offer the opportunity for appreciation too. REITs allow investors into non-residential properties such as malls (about a quarter of all REITs specialize in these), health-care facilities, mortgages or office buildings. In comparison to the aforementioned types of real estate investment, REITs also are highly liquid.”
