Real estate investing is satisfying and lucrative, when done right. It can help you diversify your investment portfolio as well as generate extra income. Many of the real estate investments don’t require you to deal directly with tenants. Also, you can purchase a property by paying only a fraction of the total price and then clearing the balance and interest over time. Here are four real estate investing options.
Rental Properties
Investing in residential rental properties can be great, especially for individuals with renovation and DIY skills, and have the fortitude to deal with tenants.
Pros
• Provides regular income
• Properties can appreciate
• You can optimize capital through leverage
• Many of the expenses are tax-deductable
Cons
• Managing tenants can be tedious
• Vacancies can reduce income
• Tenants can damage property
House Flipping
You can purchase underpriced properties that need a bit of an upgrade, renovate them inexpensively and then resell them at a profit. House flipping, however, comes with some risks. First, your estimate of repair costs must be precise, which is not a simple thing to do. Second, the longer the property is in your hands the less money you’re likely to make because you’ll be paying a mortgage without it generating income.
Pros
• Ties your capital only in the short term
• Potential quick returns
Cons
• A hot market may cool unexpectedly
• Requires deep industry knowledge
Real Estate Investment Trusts (REITs)
REITs are traded in major exchanges, similar to stocks. A REIT comes into being when a trust/corporation uses investors’ money to buy and manage income-generating properties. To maintain the REIT status, 90 percent of the taxable income of the trust/corporation must be paid out as dividends. REITs can enable you to invest in nonresidential properties, like office blocks and malls that, may not be capable of purchasing directly.
Pros
• Highly liquid because they can be traded
• They are in essence dividend-paying stocks
• The holdings are typically cash-producing long-term leases
Cons
• Doesn’t offer the leverage that’s usually available in traditional rental property investing
Online Platforms
These online platforms link investors with developers who need capital for their real estate projects, either through equity or debt.
Pros
• You have the option of investing in a single project or a diverse range of projects
• Geographic diversification
Cons
• Typically illiquid and speculative
• Management fees
Conclusion
The four real estate investment options available to investors include rental properties, house flipping, REITS, and online platforms. Ultimately, the ideal real estate investment opportunities are those that align with your investment goals.
