How to Start Investing in Real Estate
You know that you want to invest in real estate, but you are not sure what kind of investment you want to pursue. You have come to the right place! To start, there are two major approaches when tiptoeing into the real state investment arena.
Buying Shares in a Real Estate Investment Trust (REIT)
Participating in a REIT investment is like buying stock or buying into a fund. The necessity to understand how the real estate fund is designed and how its managers intend to pull value from the holdings are is crucial. The idea of having a tangible investment is simply not the case when it comes to investing in REITs or buying into a fund. Choosing this investment stream, one can buy shares of REITs and real estate based funds, but it is important to keep in mind that the performance of the funds is reliant on cash flow and profits from selling properties. Please see the article titled, “Real Estate Investing in 2017 and Three Reasons to Act Now” for more information regarding Real Estate Investment Trusts (REIT).
Similarly, trust deed investing takes the idea of making your money grow without the need to purchase an actual property. This type of investing allows the investor to participate in the returns without having to deal with the labor and/or maintenance it takes to actually manage the property. This is how it works: think of it as loaning someone money that is secured by a real property i.e. a mortgage where the investor is the bank. The investor has the potential to earn interest, and if failure to repay the loan occurs, the investor can sell the property to recover the investment.
Direct ownership is a fantastic investment option if one properly vets the market to find a good deal. Take for instance an apartment building that produces positive cash flow and has no hidden defects that will warrant expensive future repairs; a situation like this would be a great opportunity for someone looking to pursue a direct ownership real estate investment. If only it were that simple.
We live in a world where tenants do not always pay on time, pipes burst, and buildings lack the ability to maintain themselves. If the proper research is not conducted prior to engaging in a direct ownership investment, this can lead to steep property management costs which decreases the maximum potential return. There are many factors to consider when pursing a direct ownership investment. Some of these factors include: variables of appeal, since direct ownership is a tangible investment that you can touch and see, the property needs to attract renters. Another factor is utilities, you make more from one person occupying a unit compared with three people occupying a unit.
Regardless of the type of real estate investment you choose, one thing is certain: the need to conduct the proper research prior to committing. Investing in REITs or Trust Deed Investing can be an excellent way to earn interest on your money without ever having to purchase a physical property. Heading down the direct ownership route, this investment option could be lucrative and promising if factors such as location, appeal, and ratio of tenants to unit are where they need to be to minimize property management costs.