Last year, gains in the US housing market were the biggest they had been in fifteen years. The market is booming, and real estate remains one of the most solid investments you can make. But do you know where to begin?
With so much choice on offer, it can be baffling. Read on as we answer the question “What is real estate investment?” and help get you started.
What Is Real Estate Investment?
Real estate investments can take many more forms than simply buying a rental property. Some methods let you invest in a more indirect way. Below are a few of the main investment types you may want to think about:
REITs
Real estate investment trusts (REITs) are companies that make profits in real estate. You buy shares in them as you would with stocks, making them a very liquid asset. They have many legal stipulations they need to follow to be classified as a REIT, which often result in a healthy dividend for investors.
The profit comes from a number of different avenues depending on the company. Some may develop a property and sell it on. Others may operate large-scale commercial operations and take rental income from them.
Investment Properties
One of the most common methods of real estate investment is with investment properties. These are buildings bought to either bring you income through rental or through appreciation. Some people decide to buy properties alone, while others may pool together and share the cost and financial burden.
There are a number of other ways to make money from investment properties. Creating holiday homes, flipping houses and building to rent are a few examples.
Mortgage Bonds
Lenders can pool mortgages to sell off to real estate investors. Real estate assets secure the bonds, so if the lenders default, the property can be sold to recoup the loan. Other than this, profit is made on the interest made from the loans themselves and given back to investors.
Tax Lien Investing
If a property owner fails to pay their taxes, then a tax lien certificate is created. These certificates can be purchased by traders in an auction. They then take responsibility for the tax, paying the outstanding bill.
Revenue comes from what happens after this. If the homeowner pays their taxes, then you get your initial investment plus the interest rate you bid for at the auction. If the homeowner does not pay, you can begin the foreclosure process and collect your investment.
Strategies for Investment
There are a number of different real estate investment strategies you can pursue. Begin by deciding if you are looking for long or short-term gains. While strategies are numerous, we have picked out two of the most popular ones below.
Fix and Flip
Fix and flip works on the premise of buying real estate at a low price. You then set a time scale and budget in which you repair and renovate the property. At the end of it, you sell the property for an increased sum, making a profit.
This method is not easy, though the more experience you get, the easier it becomes. You will also make contacts the more properties you flip, which will make the process easier.
Time is the most crucial aspect of a fix and flip project. You would be surprised how long projects take. You must be prepared to put in the time and hours.
Another consideration is if you will do the work yourself or hire tradesmen. This can cut into your budget, particularly when you are hiring specialists. For this reason, many people who make a success of fix and flip also have some knowledge of building and related trades.
One strategy some fix and flip buyers use is the brrrr strategy. It is a hybrid of the method and buying to rent. It involves refinancing a property for its increased value once you have renovated it.
Buy and Hold
Buy and hold is a popular long-term strategy for a real estate investor. Generally, it requires less work than fix and flip, spread out over a longer period of time. You buy a property and waiting for it to appreciate while collecting rental income on the way.
Property management is the main drain on your time here. You will need to chase rents, find tenants and screen them, then arrange routine maintenance and repairs. If this is done alongside a full-time job, it can be taxing and often gets easier when you have enough properties to do it full-time.
Tips for Starting Out
When starting out, the choices on offer for a real estate investor can be baffling. By knowing what your goals are, you can figure out what the best investment for you is. Combine this with research and knowledge on the markets, and you should find something that suits you.
Start by assessing your risk tolerance. Are you prepared to place money on volatile markets, or are you willing to wait a long time for slower, more secure gain over a longer period?
Many people invest in a diversified portfolio to mitigate the risk. If one market falls, others will be there to pick up the slack. Diversification can happen across multiple sectors and industries, or you may wish to diversify within real estate itself.
If you are investing in your own properties, then concentrate on a particular area or market. This will make your life a whole lot easier. When you are visiting and repairing properties, it pays to have them close to each other.
Getting Started
Now you can answer the question “What is real estate investment?” then you can get started. Pick the type of investment and decide if you will use a strategy. Make sure you diversify your investments so you don’t suffer losses and start making a profit.
If you enjoyed this article, we have many more to help. From real estate to repairs, we can help advise your investments in the coming years!
