6 Ways To Invest In Real Estate

Whether you’re just dipping your toes in the water or looking to make this your livelihood, there are many different ways to invest in real estate. We’ll share six options, along with pros and cons, so you can choose the right one for you.

What Are The Different Types of Real Estate Investments?

First, before you decide how you’d like to invest, it’s important to consider what type of real estate to invest in. Physical real estate generally falls into three primary types. Let’s talk about how they’re different and how each one generates profit. Then, we’ll dive into six ways to invest in real estate.

Residential

This is a property where people live, such as a single-family home, townhouse, or condominium. Tenants typically sign 12-month leases. Residential real estate owners generate revenue either by collecting rent or through property appreciation. Alternatively, they can purchase residential property with the intention of making strategic improvements and selling quickly for a profit – often called flipping.

Keep in mind that multi-family real estate (like an apartment building), straddles the line between residential and commercial. The property’s value is based on its revenue potential, not just comparable properties in the local market. That means property owners have more control over appreciation. For example, by raising rent and/or reducing operating expenses, they can increase the property’s value.

Commercial

Commercial real estate can have many uses including industrial, retail, or office space. In some cases, they can be mixed-use, such as a plaza with restaurants, offices, and stores. Commercial properties tend to have longer leases and higher rent than residential properties. However, depending on their size and complexity, they can be more expensive and require more property management.

Like residential real estate, property owners make money by collecting rent and through property appreciation (often boosted by strategically increasing profit margins as noted above). Property owners may also have a long-term plan to sell the commercial property after increasing its value.

Raw Land

The last category of real estate is raw land. Most investors purchase land with the intention of developing residential or commercial property. This requires a firm handle on market potential and a solid plan for managing the financing, zoning, construction, and marketing of the project.

If the owner decides to lease the property, profits will come from rent payments and property appreciation. If they sell the property, profits will depend on how well the owner managed acquisition and development costs, and if they negotiated a good selling price.

Whether you’d like to invest in residential property, commercial property, or raw land, there are many different ways to invest in real estate. Your choice of investment strategy depends on how much you have to spend, what risk level you’re comfortable with, and how involved you want to be in day-to-day property management.

1. Buying Property to Rent or Sell

You can purchase real estate outright with your own capital or leverage the capital you have through financing. This has the benefit of giving you full control over the property’s management and a regular income stream that you don’t have to share. However, it requires more money upfront, administrative responsibilities (unless you outsource), and higher ongoing costs – not to mention more risk.

For example, if you’re renting out the property, high vacancies could make your income drop unexpectedly. If you’re flipping a property, expensive repairs or trouble finding a buyer will eat into your profit margin. You’re the owner, so all decisions and consequences fall to you.

2. Equity Financing

Another option is to offer capital to a property developer in exchange for equity. You could provide a one-time investment or ongoing payments to support the company through its early-growth stages. Depending on your stake, you’ll receive a percentage of the net profits and a portion of the profit if the company is sold.

It’s critical to partner with a property developer who has a track record of success and a strong business case showing the real estate venture will be profitable. This is especially important if you’re a silent partner, as you won’t have the ability to influence business operations.

3. Debt Financing

If you have significant capital, and you’re not looking for equity, you could also offer a private loan to a real estate developer. You’ll earn income from the loan’s interest.

While you won’t have the headaches of managing a property, you must do considerable due diligence. You don’t want the property owner to default on the loan. After all, you’re putting your money into someone else’s hands, so make sure the potential profit outweighs the risk. That usually means charging an interest rate well above a conventional lender.

4. Real Estate Investment Groups (REIGs)

Another hands-off arrangement is the real estate investment group (REIG). This is a company that purchases properties and then sells units to investors while handling all property management on their behalf. Once invested, you receive the monthly rent of your units, minus the management fee.

REIGs also have the benefit of a comparatively lower cost to get started. In addition, all the units pool a portion of the rent in case of vacancies, so you’ll receive some income even if you have empty units. Like all investment options, it’s crucial to do your research. Make sure the management company isn’t overcharging and does a good job of handling operations.

5. Real Estate Investment Trusts (REITs)

If you’re seeking a bit less financial risk than the options above, real estate investment trusts (REITs) may be more appealing. A REIT is a corporation that owns commercial real estate. You can purchase shares of the company on the public stock exchange.

The benefit of REITs is that you’re investing in commercial real estate without the risks of actually owning the property. They also provide at least 90% of their taxable income to shareholders each year, delivering consistent income. And, if you need cash, you can sell quickly through a brokerage.

6. Online Real Estate Platforms

Out of all the ways to invest in real estate, online crowdfunding platforms are the newest alternative. These websites connect investors looking to finance projects with real estate developers. You can invest in single projects or a portfolio, which provides greater diversification. In addition, sites like Fundrise and RealtyMogul have a lower financial entry point than most other real estate investment options.

However, keep in mind that you might be investing in REITs that aren’t publicly traded. That means they’re less liquid, so your money could be tied up for a while. Also, these platforms have management fees, so it’s smart to read the fine print.

What Is The Best Type of Real Estate Investment For You?

There’s no right or wrong way to approach real estate investing. As you can see, it depends on your long-term goals, willingness to take risks, and available funds.

If you want to be hands-on, purchasing real estate or financing a project in exchange for equity might be the way to go. On the other hand, debt financing and REIGs provide a consistent income stream without day-to-day management. For a more diversified approach, REITs and online real estate platforms give you the ability to make smaller investments in a broad range of projects.

Regardless of which option you choose, Insight Property Advisors can help you make well-informed decisions based on extensive market intelligence and analytics – backed by years of industry experience. Contact us to talk about your investment goals.