Whether you are an established investor looking to diversify your holdings or a newbie just learning the ropes of investing, you should make property investing a central part of your overall investment strategy, suggests Yellow Key Property Management. There is a reason why lands and houses existed as a form of asset long before stocks and other types of investments were invented.
Why is real estate a great investment option?
Cash flow: Very few, if any investments, can rival properties in their ability to generate a reliable stream of passive income. Moreover, this income is not just substantial but sustainable.
Leverage: Real estate offers access to a level of leverage not available when investing in stocks and commodities. Property investors have the opportunity to use money to build their wealth.
Hedge against inflation: Real estate values move in tandem with inflation. Property prices rise with increases in the price of goods and services. Additionally, landlords can raise the rent to offset the effects of inflation.
Control: Property can direct the day-to-day decisions and operations of their investments. Unlike when investing in stocks and mutual funds, they are not at the mercy of fund managers or the company’s management.
Appreciation: The value of real estate always goes up. This increase can be due to market forces. It can also be achieved through forced appreciation when an investor renovates their property to make it more attractive.
How real estate investing works and how to get started
Broadly speaking, there are two ways to invest in real estate: short-term and long-term, or a combination of both strategies. Also, it is possible to invest in real estate directly or indirectly.
Here are the different real estate investment options:
1. Rental Properties
Rental properties are the most popular form of real estate investing. There are three types of rental properties:
- Residential rental properties: These homes are bought by an investor to lease them to tenants. They include single-family homes, condominiums, townhouses, and duplexes.
- Commercial rental properties: These buildings are bought and leased to businesses. They include malls, office complexes, farmlands, factories, hotels, and motels.
- Vacation rentals: Unlike residential and commercial buildings, these apartments and houses are leased for a short duration. They serve as substitutes for hotels.
Getting started with rental properties: To invest in rental properties, these are the steps to follow:
- Find a great location: The location of a rental property is its number one success factor. Investors must know how to evaluate the parameters of a viable neighborhood.
- Know your numbers: Before buying a rental, you must assess its income potential via its past performance and the area’s overall rental rate.
- Get financing: Financing your rental will often require a loan. You should know the different loan options and lenders’ requirements, with their pros and cons.
- Manage the property: A rental property is not a set-it-and-forget-it investment. How you manage the property determines your eventual success as an investor.
House-flipping is a more advanced real estate investment strategy. It is a short-term strategy that involves finding and buying properties that are undervalued, renovating those properties, and then selling them immediately for a profit.
Getting started with house-flipping: To use this strategy, here are some steps:
- Find a good property in a good location: You need a system for spotting homes that are undervalued yet in relatively good condition and within a great neighborhood.
- Finance the property: Financing a house flip is more complicated because you cannot use a conventional loan for this investment. You will often need to pay cash.
- Renovate the building: Before you buy a building, you should know how to assess it to make sure you can make money on it. You must know a lot about home renovations.
- Sell the home and repeat the process: Finally, you need a watertight marketing strategy to ensure you can find a buyer for the house as soon as it is ready.
3. Indirect investment strategies
In addition to the above strategies, you can invest in real estate without directly owning a building. Primarily, there are two indirect real estate investment strategies:
- Real Estate Investment Trust (REITs): A REIT is a company that owns, operates, and finances major property projects in different regions. Individual investors are offered shares in these large projects. Shares are similar to stocks and traded on the stock exchange.
- Real Estate Investment Group (REIGs): These are small groups of investors who pool funds to own and operate apartment buildings and commercial properties. While the company owns the building, the group members are the shareholders.
What is the best real estate investment strategy for you?
The answer depends on your age, capital, how much time you have, investment timeframe, investment goals, and technical know-how. Regardless of the strategy, every property investor needs a competent professional to help them avoid many pitfalls of real estate investing.