Real estate is arguably among the oldest yet most popular classes of assets. When investing in this niche, the aim is to put your money to work today and give it time to increase so that you’ll have more in future. The return you make on this investment should be sufficient to cater for the taxes you pay, the risks you take, and costs of owning the investment such as insurance and utilities.
For many, real estate investing could be as simple as being a monopoly where you are conversant with the fundamental aspects of this investment, risk, and economics. To win in this venture, you purchase properties, avoid foreclosure, and generate revenue so that you can invest in more.
However, you should bear in mind that it doesn’t always come easy. The consequences of a small mistake could range from minor inconveniences to massive disasters. You could end up broke or in a worst case scenario, lose your property.
Different Types of Real Estate Investments
Many novice investors in real estate do not know the types of investments that exist. It is crucial to note that each investment type has its potential benefits and downsides, including some unique quirks in lending traditions, cash flow cycles, and standards of what’s considered normal or appropriate. Therefore, you will want to study them properly before including them in your portfolio.
Residential – These include properties like townhouses, apartment buildings, vacation houses, and houses where people or families pay to live on the property. Their length of stay will depend on your rental agreement or lease agreement. Residential leases in the United States are usually on a 12-month basis.
This mainly consists of skyscrapers and office buildings. If you were to use your capital to construct a building with individual office spaces, you would lease them out so that people pay rent to use the space. It isn’t uncommon for commercial real estate to include multi-year leases.
This could result in a more stable cash flow and offer financial protection when there is a decline in rental rates.
This can involve everything from industrial warehouses that are leased to firms as supply centers to car washes, storage units as well as other special-purpose real estates which generate sales from people who use the facility temporarily.
These real estate investments mostly have high fee and service revenue streams, like the inclusion of coin-operated cleaners at car washes to increase the ROI for the owner.
This type of investment usually consists of strip malls, shopping malls, and a variety of retail storefronts. In some instances, a landlord could also receive a share of sales generated by the store in addition to the base rent in order to motivate the tenant to maintain the property in good condition.
These types of investments usually combine any of the categories above into one project. An investor, for instance, would build a multi-story office complex surrounded by retail outlets. These real estate investments are quite common for people who have significant assets since they increase the diversification potential, which is crucial in mitigating risks.
Besides this, there are many other ways you can invest in real estate if you prefer not to deal with properties. Real estate investment trusts have become popular in this investment space. Investing in REIT means that you purchase shares of a company that owns different real estate properties and distributes all its income in the form of dividends.
How Do Investors Make Money With Real Estate Investing?
Investing in real estate presents four ways through which one can make money. Here are the four ways.
- Property Appreciation
This occurs when the real estate increases in value because of changes in the market dynamics. These changes could include the land near the property being scarcer, busier due to the presence of an urban center or upgrades you make on the property to attract prospective buyers and renters. While this sounds interesting, the truth is that property appreciation is tricky and often riskier than investing for purposes of cash flow income.
A real estate collapse, for instance, would mean that your property won’t have a value increase.
- Cash Flow Income
An investment of this nature focuses on buying property, such as apartment buildings, and operating them so that you enjoy a constant stream of income from the rent paid by your tenants. Cash flow income in real estate could be obtained from well-run apartment buildings, rental houses, office buildings, car washes, storage units, and more.
- Indirect Income From Real Estate
This type of income is typically generated by the “specialists’ in this field, including real estate brokers who earn through commissions made from selling and buying property or a real estate management firm that retains a share of the rent in exchange for overseeing the operations of your property.
Well, this type of income is not difficult to understand. For instance, a hotel management firm retains 10 percent of all sales made by the hotel for taking care of all the hotel’s operations including hiring staff, mowing the lawn, running the customer service, and washing beddings.
- Ancillary Income
This can be a great source of profit for some types of investments. This type of investment income often includes things like washing facilities in an apartment or automated vending machines in an office building. Primarily, these serve as small businesses within a bigger investment, allowing you to earn income from a semi-captive collection of your customers.
Before you can dive into real estate investing, it is crucial to note that you should almost never purchase real estate property directly in your name. There are numerous reasons behind this, some dealing with personal asset protection.
If things go wrong and you find yourself trapped in a lawsuit settlement which exceeds your current insurance coverage, you and your advisors should be in a position to put the entity holding the property into bankruptcy so that you have a chance to fight another day.