Real estate is a popular form of investment for many reasons. For instance, it’s an excellent way to diversify your assets and enjoy significant tax advantages. Since real estate is a tangible asset, the longer you hold on to a property, the more its value will tend to improve over time. If you buy a home, for example, it’s value will increase over the years, and you’ll also build equity. For these and other reasons, real estate is usually considered a safe financial bet.
Still, it’s never a good idea to own property in your own name. You will be far better off with a real estate LLC as it will protect your personal assets from risk. Since a limited liability company is a distinct and separate legal entity, transferring the title from your name to the company protects the property if you’re ever targeted in a lawsuit.
There are, of course, many ways to make money from real estate, but three fairly straightforward ways are to invest in Real Estate Investment Trusts (REIT), buy a rental property, or flip homes.
Investing in Real Estate Investment Trusts (REIT)
If you’re interested in real estate, but don’t want to take a hands-on approach to finding property, buying it, fixing it up, and then renting or selling it, you can invest in real estate via the stock market. A REIT is an investment fund set up to invest in the real estate market. There are, in fact, different types. You can, for example, invest in an equity REIT or a mortgage REIT. There is also a REIT that is a mix of both, which is appropriately called a hybrid REIT.
The advantages of REIT investments are that they provide both savings and taxation benefits. It’s a sort of armchair real estate investment; you can enjoy the benefits of the real estate market without getting actively involved in the day-to-day details. You’ll find that all three types of REITs offer a high yield because you’ll get paid on the strength of the interest others are paying for their mortgage.
Speak to your broker to capitalize on a REIT.
Buying Rental Property
When most people talk about investing in real estate, they usually refer to buying a rental property. This type of investment is particularly popular with people who want to earn income during their retirement years.
In order to earn surplus monthly cash flow, you need to do the math. The cost of the purchase–which includes property tax payment, home insurance fees, and monthly mortgage fees–should be lower than the rent that you’re able to charge for the particular type of housing in a given neighborhood.
There are a number of strategies to get the math to work out. One way is to put a substantial amount of money down to lower your monthly mortgage payments. Another way is to buy property in an area where the rent is high. In a large city, for example, this may be in an urban area close to the downtown district or tech center.
Purchasing Homes to Flip
“Flipping homes” is a colloquial expression to describe buying a distressed property at a bargain price, spending the time and money to fix it up, and then selling it at a higher price. The basic idea is to do this a number of times rather than hoping to make a significant profit from any single home.
Naturally, this type of real estate has its risks. You might end up paying too much in repair costs to be able to earn enough from the sale of the home or it may take a long time to sell a home for the price you’re asking.
With that in mind, here are some tips to become a successful flipper:
- Only get into house flipping when the real estate market is on the rise.
- Be a bargain hunter, buying homes well under market value.
- Avoid buying homes that require extensive renovation. The worse the condition of the house, the longer it will take to flip it and the more it will cost in labor and materials.
- Assemble your own construction crew rather than outsourcing the work to a construction company. This will allow you to control the pace of work and avoid paying marked up labor and material costs.
- Do your best to research bargain-priced homes that will be easy to sell after you have fixed them up.
In conclusion, real estate is an excellent way to build your wealth. Although historically, the market does tend to improve over time, you have to take some precautions to do well in real estate–like reducing risk by using an LLC, not overpaying on a property you plan to rent, and not overpaying on construction costs when flipping houses.