Here’s What You Need to Know About Investing in Real Estate

Historically, real estate has outperformed the S&P 500, making it one of the best investment vehicles around. The benefits of investing in real estate are many: real estate investors can use a mortgage to fund the purchase of investment properties, and in a good market, real estate can all but guarantee a steady cash flow.

But many investors remain daunted by the prospect of managing properties, or simply believe they don’t have the money to invest in real estate. If you’d like to invest in real estate, but don’t have a lot of money for a down payment, or simply don’t want to deal with the hassles of being a landlord, you’re not alone. There’s more than one way to invest in real estate, including purchasing rental properties, joining a real estate investment group, buying shares in a real estate investment trust (REIT), or even buying vending machines.

Basic Rental

When you think of real estate investment, chances are you think about buying a rental property. This form of real estate investment is as old as property ownership itself. It involves buying a property and then renting it out to a tenant; different kinds of property can be rented, from residential apartments and houses to commercial properties. As a landlord, you have the responsibility to maintain the property, although you can hire a property management company to handle these responsibilities for you.

For many prospective investors, rental property is an appealing choice not only because it can generate a regular cash flow, but also because it allows investors to use leverage, or money that is borrowed for the purposes of investment. When you take out a mortgage to buy a rental property, you’re using leverage to increase the potential for return on your investment. Stock traders do this when they buy stocks on margin, but real estate mortgages allow you to borrow much more money, with down payments ranging from five to 25 percent.

Real Estate Investment Groups

Let’s say you’re interested in purchasing a rental property, but you have some misgivings. Maybe you’re not especially excited about the prospect of being responsible for maintenance and repairs on a rental property. Maybe you’re worried you’ll struggle to keep the unit occupied, and end up scrambling to pay the rent.

These are valid concerns. Real estate investment groups exist to address them. A real estate investment group is a company that purchases an apartment building or a block of condos and then lets investors join the group by purchasing individual units. You can use leverage to invest in such a group by purchasing one or more units. In exchange for a portion of your monthly rent, the company manages the property, including upkeep, repairs, finding and vetting tenants, and collecting rent. All of the owners pool resources so that, if one is empty for a period of time, that owner will still receive some funds to pay the mortgage.

REIT

Let’s say you don’t want to take out a mortgage, or don’t have enough for a down payment. No problem – you can still invest in real estate by buying shares in a real estate investment trust or REIT. Real estate investment trusts turn real estate investment into a publicly-traded instrument, just like stocks and mutual funds. REITs work by using investor capital to buy and manage rental properties, including commercial properties like office buildings or shopping centers. REIT shares are bought and sold on the stock market, and they allow real estate investors to enjoy regular dividends and easy liquidation of assets.

Ancillary Real Estate

Ancillary real estate includes things like laundry facilities in apartment buildings or vending machines in shopping centers or office buildings. With ancillary real estate, you’re effectively establishing a micro-business on someone else’s property, so that you can make money from the more-or-less captive customer base that lives in or uses that property.

Real estate investment can be intimidating, but with all the different options available to investors, it’s actually a very accessible means of growing your wealth. You just need to choose the right investment vehicle, and soon you, too, can be earning the strong returns that real estate investors have always enjoyed.

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Mark Padolsky

Thank you for this great article.