Starting A Property Investment Business – Many investors have a real estate position in their portfolio. But adding other real estate investments can help you diversify your portfolio and protect against stock market volatility. Let’s take a look at your options, the pros and cons of investing in real estate, and how you can get started.
Rental properties are the most effective option on this list. You buy a piece of residential real estate and rent it out to tenants. Many rental properties are rented out for 12-month periods, but short-term rentals are also becoming more popular through companies like Airbnb (NASDAQ:ABNB).
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As a property owner, you are the landlord. You are responsible for maintenance, cleaning between tenants, major repairs and paying property taxes. Depending on the terms of the lease, you may be on the hook for replacing appliances and paying for utilities.
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You make money from the rental income you receive from tenants from rental properties and from price appreciation if the property sells for more than you paid for it.
You can also avail tax exemptions. Under the passive activity loss rules, if your modified adjusted gross income is $100,000 or less, you can deduct up to $25,000 of losses from your rental properties from your ordinary income. Depreciation (a non-cash expense) and interest (whatever you pay), asset accounting shows a loss even though you are still making money.
When you buy a rental property, you may need a down payment of up to 25%. But if you charge enough rent to cover your mortgage payment, the remainder will be covered by your tenant, plus any cost estimates.
If you don’t want to deal with the headache of managing a rental property or can’t come up with a 25% down payment, real estate investment trusts (REITs) are an easy way to start investing in real estate. REITs are publicly traded trusts that own and manage rental properties. They may own medical office space, malls, industrial real estate and office or apartment buildings, to name a few.
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REITs have high dividend payouts because they pay out at least 90% of their net income to investors. If a REIT meets this requirement, it does not have to pay corporate tax.
In addition, while selling a rental property can take months of paperwork, REITs have the advantage of liquidity because they trade on stock exchanges.
Investing in a real estate investment group (REIG) is one way to position the profit potential of private rental properties, but at a premium to higher growth than REITs trade.
REIGs buy properties, manage them, and then sell portions of the properties to investors. A REIG buys something like an apartment building and investors can buy units in it.
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The operating company owns a portion of the rental and manages the property. This means the company will find new tenants and take care of all maintenance. Often, investors also pool some of the rent to pay off the loan and cover other obligations when some units are vacant.
Flipping houses is the most difficult and risky of these options, but it can also be the most rewarding. The two most common ways to flip houses are to buy, renovate and sell, or buy, wait and sell. In either case, cap your initial investment with a lower down payment and keep renovation costs down.
Let’s say you can buy a home for $250,000 or $50,000 with 20% down. You make another $50,000 in repairs and then list the house for $400,000. You use $400,000 to pay. Make a $100,000 profit on a $200,000 loan and $100,000 investment. That’s a great return if you can get it.
The problem is that you usually can’t. Housing markets aren’t notoriously volatile, but when they are volatile — as they should be — it can kill you in the flipping house game. Keeping renovation costs to a minimum may seem easy, but it can be nearly impossible if you don’t have direct construction experience.
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By 2021, material prices are through the roof, labor shortages are everywhere, and almost no homes will sell for cheap. This is the worst part of the cycle for house-flippers: everything is expensive and the market can change at any time.
If you choose to flip houses, be smart and find a way to get out when the market is too hot. It may seem counterintuitive, but it will save you in the long run.
Real Estate Limited Partnerships (RELPs) are a form of REIG. RELPs are structured similarly to hedge funds where there are limited partners (investors) and a general partner (manager). The general partner is usually the real estate business, which takes on all the responsibilities.
RELPs are more passive investments in real estate. Generally, a general partner forms a partnership and appoints investors as limited partners. Investors receive a K-1 to report income on their taxes, but they don’t have much influence on operations.
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RELPs can be very useful if you find a good common partner. But you are completely dependent on the general partner, who, without too much supervision, must manage the property and faithfully report the finances to you.
Real estate funds invest in REITs and real estate operating companies (REOCs). REOCs are like REITs, but they don’t have to pay dividends, so they grow much faster.
Real estate mutual funds or exchange traded funds (ETFs) are easy ways to invest in real estate. You also allow the manager or index to choose the best real estate investment while you collect dividends.
Even if you are a stock-only investor, consider using real estate funds to diversify while you leverage the liquidity profile.
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If you invest in a physical asset, you can control your investment. You can also have a completely passive investment that you don’t need to manage.
If you choose to flip houses or own rental properties, it can become a career in itself and consume a significant amount of free time.
Startup costs make initial investments difficult. You need to save enough for a down payment and cover cash flow shortfalls when vacancies occur.
Real estate investing can be intimidating at first. Not everyone has the time or ability to move house or become a renter. The good news is that there are options available for every level of investor, each suited to different goals, skill levels and time constraints. The most important thing is to start today and start compounding your investment now.
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Matthew DeLallo holds positions at Airbnb, Inc. Motley owns and recommends positions on Airbnb, Inc. Motley has a disclosure policy.
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Steps For Getting Started In Property Investing
If you’ve ever had a landlord, you probably wouldn’t dream of being one: Fielding calls about big bugs and clogged toilets doesn’t sound like the most glamorous job.
But if done right, real estate investing can be profitable — even now that we’ve moved into a high interest rate environment. Investing in real estate can help diversify your existing investment portfolio and also provide an additional income stream. And many of the best real estate investments don’t require a tenant to show up at every sign and call.
The trouble is, most new investors don’t know where or how to invest in real estate. Here are some great ways to make money in real estate, from low maintenance to high.
REITs allow you to invest in real estate without physical real estate. Often compared to mutual funds, they are companies that own commercial real estate such as office buildings, retail spaces, apartments and hotels. REITs pay high dividends, which makes them a common investment in retirement. Investors who do not need or want regular income can automatically reinvest those dividends to grow their investment further.
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Are REITs a good investment? They may be, but they are also diverse and complex. Some are traded on exchanges like stocks; Others are not publicly traded. Non-traded REITs are not easily sold and can be difficult to value, so the type of REIT you buy is a big factor in the amount of risk you take on. New investors usually have to comply
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