Real estate investing is fun and profitable when done right. This can help you diversify your investment portfolio and also generate additional income. Many real estate investments do not require direct communication with tenants. Alternatively, 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 options for investing in real estate.
Real estate rental
A rental property investment can be great, especially for people who have repair and DIY skills and the fortitude to deal with tenants.
Pluses
• Provides regular income
• Properties can be evaluated
• You can optimize capital through leverage
• Many expenses are tax deductible
Cons
• Managing tenants can be tedious
• Vacancies can reduce income
• Tenants may damage property
Flip through the house
You can buy an inexpensive property that needs a little modernization, renovate it inexpensively, and then resell it at a profit. However, house flipping comes with some risks. First, your estimate of repair costs must be accurate, which is not easy to do. Second, the longer the property is in your hands, the less money you are likely to make because you will be making mortgage payments without generating income.
Pluses
• Ties up your capital only in the short term
• Potential quick profitability
Cons
• A hot market can cool down unexpectedly
• Requires deep industry knowledge
Real Estate Investment Trusts (REITs)
REITs are traded on major exchanges just like stocks. A REIT is when a trust/corporation uses investors’ money to buy and manage income-producing properties. To maintain REIT status, 90 percent of the trust/corporation’s taxable income must be paid out as dividends. REITs can allow you to invest in non-residential real estate, such as office buildings and shopping centers, that may not be possible to purchase outright.
Pluses
• Highly liquid because they can be traded
• Essentially, these are dividend-paying stocks
• Holdings are usually leased out on a long-term, cash-generating basis
Cons
• Does not provide the leverage typically available with traditional rental property investing
Online platforms
These online platforms connect investors with developers who need capital for their real estate projects through equity or debt.
Pluses
• You have the option of investing in one project or a series of diverse projects
• Geographic diversification
Cons
• Typically illiquid and speculative
• Management fees
Conclusion
The four real estate investment options available to investors include rental properties, home flips, REITS, and online platforms. At the end of the day, the ideal real estate investment opportunities are those that align with your investment goals.