Want to get into real estate investing but aren’t sure how to figure out the best type investment for you? This post will examine the pros and cons of investing in real estate through three kinds of real estate investment avenues.
Investment #1: Buying and Renting Properties
The most well-known way of investing in real estate is to buy a property (such as a home or office building) and rent it out.
- You call all the shots. You determine which property to buy, how to fix it up and how much rent to charge.
- Monthly rent payments provide you with recurring income.
- Collecting rent allows you to build equity on your property.
- Rental properties are likely to increase in value over time.
- You can get tax breaks for owning rental properties.
- You have the option to renovate your property to increase it’s value and charge higher rent.
- You need a large amount of cash to buy the property and to afford the ongoing repairs and maintenance.
- Owning and renting property requires a significant time commitment.
- Your property may not be occupied 100% of the time, but you’ll still be responsible for upkeep.
- You may have to deal with problem tenants.
- Your investment isn’t very liquid (you can’t necessarily cash it in quickly and easily).
Investment #2: Real Estate Investment Trusts (REITs)
An REIT is a fund that uses investor money to buy and operate properties that are rented out. With an REIT, you own shares of group owned properties that are rented out. REITs are required to pay out 90 percent of its taxable profits as dividends to its investors.
- Since REITs are professionally managed, you won’t have to worry about finding tenants, collecting rent, making repairs and other administrative work.
- Your risk is more diversified because REITs own many properties instead of just one.
- Your investment is liquid because you can quickly sell your shares.
- Less up-front cash is required to invest.
- REITs often borrow money to buy properties, so if interest rates go up, costs also increase.
- If an REIT specializes in one type of property (such as office buildings), and that sector experiences a slow-down, your profits could decrease.
- You can decide when to buy and sell your shares, but you have no say over most other decisions.
Investment #3: Buying in Order to Sell Quickly (‘Flipping‘)
Some real estate investors like to “flip” properties, which is the process of buying with the intention of renovating it and selling it quickly.
- You can get huge returns flipping undervalued properties.
- You’re in total control and can make decisions about your investment.
- You don’t have to manage or own properties long-term or find tenants.
- You have to own and maintain a property for longer than you anticipated to make it profitable.
- You may encounter unexpected expenses as you improve the property.
- Flip profits may count as short-term capital gains, which are taxed at a higher rate than long-term investments.
- You need money up front – both to purchase the property and to complete any updates.
Even the best real estate investments carry risk, but they also have the potential to turn a nice profit. Understanding the pros and cons of the most popular real estate investment options will help you decide which opportunity is the best fit for you.
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