Real estate investing has historically outperformed stock market investing, but requires more capital and provides less liquidity. If you own a home you own real estate, but whether that makes you a real estate investor is a point of contention. Below are a few ways to invest in real estate.
Rental Property
Buy a place and rent it out – sounds simple, but if it was that easy everyone would be doing it. Capital, brains, and a bit of luck all play into having a successful rental property. Knowing the area also plays into a successful play – different properties will provide different return on investment (ROI). Some folks are unfortunately suckered into buying properties that have a negative ROI – make sure that these properties are in good locations that are safe. Take into account maintenance costs, taxes, insurance, and occupancy. Also keep in mind that cheaper properties won’t necessarily provide a better ROI, sometimes it’s worth paying more (a lot more) to gain a better return on investment. Also patience is sometimes required, as properties might not pay themselves off for decades.
Flipping
Flipping is a term used to describe buying a property that is ostensibly undervalued and immediately reselling it. I realized my grandparents were selling their home to a “flipper” just after they had agreed to it – older folks might be more susceptible to this activity as they are willing to take a first bid for their property that was listed under value. Although we all want to trust our real estate agent, it is not unthinkable that these folks will partner up with “flippers” in order to sell at a low price and gain commission with high frequency on these “flips”. It’s not illegal, and it carries its own risks – flipping is sort of like day trading stocks.
REITs
Property ownership is tangible, just like gold – but investment instruments called REITS allow for real estate investment without the personal responsibility of maintaining these properties and finding tenants.
REIT stands for real estate investment trust, and are classified into two groups:
- Equity REIT – A REIT that owns properties and pays back a portion of the rent through dividends. This portion must meet or exceed 90% of taxable income.
- Mortgage REIT – A REIT that provides mortgages for property and earns income through collection of mortgage payments.
There are also hybrids of the two.
See the Securities and Exchange Commission’s description of REITs here.