When most people think about buying real estate, they think about purchasing a home for themselves. However, buying real estate can be much more than simply buying a home for yourself or your family. Over the last few decades, investing in real estate has become a popular and common investment vehicle. Although investing in real estate provides the potential to make big earnings, it can be a lot more complicated than just simply investing in the stock or bond markets. This blog post will explain how you can go beyond just purchasing a home for yourself and how you can learn to invest in real estate.
Rental Properties as an Investment:
The act of purchasing a property and renting the property out to others is as old as the ancient act of land ownership. When you purchase an investment property, you are responsible for paying the mortgage, taxes, and costs associated with maintaining the property. Ideally, you would want to charge enough rent to cover all of the costs that are associated with owning the property. You may also want to think about charging a bit more for your rental fee so that you can generate a monthly profit above the associated costs. However, most landlords are concerned with covering their expenses until the mortgage has been paid off, after which the majority of the rent paid will become profit. Also, the property you have purchased may have appreciated in value over the course of the mortgage being paid, which would leave you with a valuable asset.
That is not to say that there are not downsides to investing in real estate. As a landlord, you can end up with a terrible tenant who damages your property. It is also possible to not find a tenant for your property, which would leave you stuck with the mortgage payments. This would leave you with what is called a “negative monthly cash flow”. It is also important to be able to discern the right area for your property. You will want to pick an area where the vacancy rates are low, while also making sure that this is an area where people will want to rent.
There is also the issue of time. A big difference between most investment vehicles and rental property is the amount of time it takes to maintain the investment. When you buy an investment such as a stock in a company, the stock will sit in your brokerage account and hopefully increases in value. If you were to purchase a rental property as an investment, there may be some basic responsibilities with managing this type of investment. If the property gets a leak in the middle of the night, you are going to be the one who gets the phone call. If this type of situation annoys you, you may want to use a professional property manager who will be happy to deal with this situation. In fact, that is what most property managers are paid to do.
Real Estate Investment Groups:
If the idea of being a landlord sends shivers up your spine, don’t worry, there are other investment real estate related investment vehicles that you can use to generate wealth for yourself. Real estate investment groups are one such option. Real estate investment groups are similar to other investment vehicles such as mutual funds. These types of investment vehicles are ideal for individuals who wish to own rental property but do not want to be landlords. These types of investments work when a company buys a set or apartments or condos, and then allows these blocks to be bought by investors. However, the operating company manages all of the the units, which takes care of the required maintenance and finding tenants. In exchange for these performed services, the investment company would take a percentage of the monthly rent.
Real estate has been around forever, as well as investing in real estate. It is no surprise that the wizards of Wall Street have found ways to capitalize on real estate investing by turning these ideas into publicly-traded investment instruments. One such instrument is a Real Estate Investment Trust (REIT). An REIT is created when a corporation uses money from investors to purchase and operate income generating properties. REITs can be bought and sold on most major stock exchanges, just like the stock of any other company. I order for an REIT to maintain its investment status; it must pay out ninety percent of its taxable profits in the form of dividends. By adhering to this principal, REITs can avoid paying corporate income tax. A regular company’s profits would be taxed and would then decide to distribute these after tax profits in the form of dividends.
Using Your Property as Leverage
Investing in real estate gives an investor a very powerful tool at his/her disposal. This tool is known as leverage. Leverage is not available to other asset classes such as stocks and bonds. If you wish to purchase stock in a company, you must pay the full value of the stock at the time of purchase. However, with real estate, most conventional mortgages only require around twenty percent down to be able to purchase the property. Keep in mind that twenty percent down is usually the amount required to avoid having to pay for Private Mortgage Insurance (PMI). There are many types of mortgages that will allow borrowers to put as little as five percent down. This means that you can control the equity of the property while only paying for a fraction of the property’s total value.
This is the idea behind investors who flip houses. You can take out a second mortgage and put down payments on other properties. However, this is seen as a risky investment behavior and one should consult a financial professional before in engaging in such activities. Before making any investment decision, it is important to weigh the costs and the benefits of such investments.