Real Estate Investing: 5 Options to Get You Started
04 05 2017
Real estate has long been a popular investment, and while it carries a certain degree of risk, it has an upside potential that is very appealing to many investors. In a healthy market, there are many different types of real estate investing and lending opportunities out there to consider - this can be overwhelming.
With our world constantly evolving, don't forget to consider the environmental factors that could have an impact on your investment decisions. The Federal Reserve may opt to raise short-term rates again this year, but even so, they're still low enough to significantly impact the real estate market. Meanwhile, real estate markets vary throughout the country.
There are a number of options available to you; just need to decide which ones are best for your portfolio and your pocket. While it's always best to meet with your financial advisor prior to making any decisions, here are a few options to keep in mind should you ultimately enter the real estate investing sphere.
1. Foreclosure Investments
Foreclosure investing is one way to buy relatively cheap real estate that offers true value, both on the purchase and long term. A foreclosure is a process outlined by a mortgage agreement in which the lien holder takes ownership in a property due to a variety of possible reasons, but usually the lack of payment on a loan. A foreclosure investment is a strategy of investing capital into a public sale of a mortgaged property following a foreclosure of the loan secured by that property.
There are three basic approaches to buying foreclosures, depending on the stage of the foreclosure process. One can buy a property during pre-foreclosure, at the courthouse steps or a foreclosure auction, or buying from the lender after the foreclosure sale. When you buy from the lender after the foreclosure, it's called real estate owned, or REOs. This is the least risky way to buy foreclosures since REOs are somewhat like a regular sale. It's important to note that the foreclosure process differs in each state, so it's always important to check the processes within your state and do your research so you understand how it works.
2. Real Estate Investment Groups
For those looking to invest in real estate but who don't want to deal with managing a property, real estate investment groups, or REIGs, are often an attractive option. A real estate investment group is a business or organization that purchases a collection of properties and then sells them to investors as rentals. For a monthly percentage fee, the managing company handles maintenance, advertising, and a variety of other day-to-day tasks. If your unit is empty, the collective draws from the program fees to pay you, so you're still able to make your mortgage payments.
Some investors may choose to invest with a real estate investment group rather than buying properties on their own because they can reap most of the financial rewards of owning properties without having to invest the time and money needed to manage them.
A real estate investment trust, normally called by its acronym of REIT, is similar to a real estate investment group in that it involves others and is less work-intensive. However, in a REIT your capital is put into a pool, so you may not actually own a property, despite your investment. Often REITs contain many types of property, including non-residential units like office buildings or malls.
REITs are traded on an exchange, and income is paid in the form of dividends. To keep their REIT status, a REIT must spend 90% of its income on dividends.
For those individuals who are looking to putting some money, and potentially some sweat, into their investments, flipping houses is often a suitable opportunity. Flipping is when you purchase a home with the intent to sell it short-term for a higher price. Flippers will typically put in the time and capital to make repairs or improvements to add additional value to the property, however, many simply hold the property before selling. For those who do make improvements, the length of the hold is often longer.
To hedge against the potential for a lengthy sale process, many take on only one property at a time. Flipping houses isn't for everyone, as unanticipated situations and expenses may arise during the process that can result in a great loss.
5. Rental Properties
You're probably already familiar with rental properties, as many people live in or have used them at some point in their lives. A property owner rents the property either short-term (normally as a vacation home) or long-term (as a family home). The owner is responsible for the mortgage as well as all the home maintenance, and the renter pays a monthly amount. In addition to rent, rental property owners may potentially earn income a second time when they sell the property, if it's gone up in value.
While the returns can be phenomenal, rental properties aren't for everyone. Dealing with tenants can be difficult, and a bad tenant could cause serious damage to your property that could diminish or wipe out the value of your investment. Unlike some other investment types, rental properties require you take on the responsibility of a landlord (or hire someone to do it for you). You should make sure you're ready for the risk and commitment.
Check with Your Financial Planner or Advisor.
As with any investment, it's important that you understand the risks associated with your investment. It's always helpful to talk with an expert about your investment options. Ask your financial advisor questions, do your research, and make sure you're checking in with them periodically to go over your portfolio.
Return to News