Rental Properties · Real Estate Investment Groups · Real Estate Investment Funds If you invest in rental properties, you become a landlord, so you should consider whether you will be comfortable in that role. As a landlord, you will be responsible for things like paying the mortgage, property taxes and insurance, maintaining the property, finding tenants and resolving any issues. A real estate investment trust (REIT) is created when a corporation (or trust) is formed to use investors' money to buy, operate and sell income-generating properties. REITs are bought and sold on major exchanges, as are stocks and exchange-traded funds (ETFs).
To qualify as a REIT, the entity must pay 90% of its taxable profits in the form of dividends to shareholders. By doing this, REITs avoid paying corporate income tax, while a regular company would tax on its profits, which would affect the returns it could distribute to its shareholders. Like stocks that pay regular dividends, REITs are appropriate for investors who want regular income, although they also offer the opportunity for appreciation. REITs invest in a variety of properties, such as shopping malls (about a quarter of all REITs specialize in these), healthcare facilities, mortgages, and office buildings.
Compared to other types of real estate investments, REITs have the advantage of being highly liquid. Real estate investment groups (REIGs) are like small mutual funds for rental properties. If you want to own a rental property but don't want the hassle of owning, a real estate investment group may be the solution for you. Real estate mutual funds invest mainly in REITs and real estate operating companies.
They provide the ability to gain a diversified exposure to real estate with a relatively small amount of capital. Depending on their diversification strategy and objectives, they offer investors a much wider selection of assets than can be achieved by purchasing individual REITs. Like REITs, these funds are quite liquid. Another important advantage for retail investors is the analytical and research information provided by the fund.
This may include details on the assets acquired and management's perspective on the viability and performance of specific real estate investments and as an asset class. More speculative investors can invest in a family of real estate mutual funds, tactically overweighting certain types of properties or regions to maximize return. Because it is backed by bricks and mortars, direct real estate also entails fewer agent-agent conflicts, or the extent to which the investor's interest depends on the integrity and competence of managers and debtors. Even the most indirect forms of investment come with some protection.
REITs, for example, require that a minimum percentage of profits (90%) be paid as dividends. Unlike a stock or bond transaction, which can be completed in seconds, a real estate transaction can take months to close. Even with the help of a broker, simply finding the right counterparty can be a couple of weeks of work. Of course, REITs and real estate mutual funds offer better liquidity and market prices.
But they are priced by higher volatility and lower diversification benefits, as they have a much greater correlation with the stock market in general than direct real estate investments. One of the quickest ways to get started in real estate is through wholesale. This unique strategy involves securing a property below market value and then assigning a final buyer to purchase the contract. Wholesalers never own the property and instead make money by adding a fee to the final contract.
The idea of changing houses offers a completely different view of the property. Rather than a long-term effort to manage tenants and add properties to your portfolio, it's supposed to be temporary. Multifamily Real Estate Presents Investors with Greater Rental Opportunity. Anything four units or less is generally considered a private residence, and you could receive a tax or special benefit exemption and funding if you live in one of the units, an owner-occupied rental property.
That said, a duplex, triplex or quadruple is a great investment for beginners. You can live in one unit and rent the other three, keeping a close eye on the property and having enough income to hand over the administration to a third party, if you wish. External investors are then sought to provide financing for the real estate project, in exchange for part of the property as limited partners. Investors can then buy shares in REIT and benefit from the profitability of real estate without owning physical property.
Investing in real estate may seem expensive at first, but it's one of the most proven ways to build wealth. If you are interested in adding some books to your current reading list, there are numerous titles on real estate investment. For many aspiring investors, the closest they've come to a real estate deal is watching reality TV. With proper planning, a real estate business plan can serve as a fundamental learning tool for beginners in real estate investing.
To manage risk and protect yourself, consider investing real estate through special types of legal entities rather than on your own behalf. This book describes how you can turn this parallel hustle for beginners into a full-fledged real estate business. It covers tips for finding good real estate deals, financing options, mistakes to avoid and step-by-step strategies to follow to succeed in real estate. In addition, one of the newest forms of real estate investment, which allows people to participate in deals without investing a lot of capital, is real estate crowdfunding.
Like all investment decisions, the best real estate investments are the ones that best serve you, the investor. Be sure to also check out the included infographic on the main characteristics of a successful real estate investor. For example, many large real estate companies are listed on the stock exchange, and you can simply buy shares in such companies, real estate brokers, real estate development companies, construction companies, etc. Tiffany Alexy didn't intend to become a real estate investor when she bought her first rental property at age 21.Passive real estate investing can be good for those who want a more practical approach to real estate investing.