What Is Investment Real Estate?
When you make the decision to purchase a home, you are also making an investment. Your home builds equity, and over time, can appreciate in value, providing you with security for the future. So is choosing to purchase, or own a certain percentage of shares in a commercial property. (This is known as a REIT, or real estate investment trust—a real estate company that offers shares of their holdings to the public) Your second home, vacation home, rental property, etc—these are all types of investment real estate. While you live in your primary residence, your other properties also continue to build equity and appreciate in value, which is why investment real estate can be a smart way for investors to diversify their portfolio.
What Are Some Approaches Towards Investment Real Estate?
One of the most common approaches is to purchase an income-producing property such as a single-family home, an apartment building, an office, retail building, or farmland with the intent to rent the property or units within it. By having tenants, investors benefit from not only any appreciation over time, but also the rental cash flow. This also provides some inflation protection because as operating costs increase, rents can increase as well.
If you do decide to exercise this option, be sure to keep the following in mind:
Like most types of investments, real estate investing requires capital up front for property purchase, start-up costs, etc. Smart investors know that they must budget every cost that will be tacked on to the price, including closing costs and insurance. If the property is a fixer-upper, inspections should prove its structure is still sound, so make sure to add improvement estimates into the equation, including a cushion for unforeseen extras.
Plan Your Exit:
Having an exit strategy on the way out is just as essential as having one in the beginning. You may decide to sell the property early, or transfer the ownership of your property to someone else. Real Estate exit strategies, like the 1031 Exchange, are important things to consider and discuss with both your real estate agent and your experienced personal financial planner
Know What To Watch Out For:
Not to say that tenants are a problem, necessarily—after all, they will most likely be the key to greater real estate investment capital returns on your part. However, it is important to check tenants’ credit and their employment to make sure they can afford the monthly payments. Most commercial rental agencies have rules and guidelines about the amount of a tenant’s monthly income vs. the amount of rent that they can pay, and you should too. Tenants who are more financially stable are also more likely to remain tenants longer, and the longer a tenant stays the better. Every time a renter moves out and a new one moves in, it costs about two-and-a-half months’ worth of rent, in remodeling, maintenance, and repair costs—more if your less-than responsible tenants have caused any extensive damage to the property.
• Taking on too much, too soon:
It’s best to start small, perhaps with a duplex, to decide whether this type of investment works for you, Also, don’t go overboard on improvements. Major spending in areas that won’t provide a decent rate of return on investment cuts into your bottom line. Remember, you entered into the investment real estate strategy world to make money, not spend it unnecessarily. Of course, you will be expected to make improvements and renovations on occasion.
• Overlooking rules and regulations:
Rules abound in the housing sector, from federal fair housing regulations to laws that spell out how lead paint is to be disclosed. The fines for noncompliance can be hefty, so do your homework, and also be aware of a property’s building code issues. Failure to do so can result in substantial expenditures, and possible legal complications.
• Entering into a bad partnership:
Many investors partner with others to afford a purchase, but in this type of relationship, a communication breakdown or difference of opinion can spell disaster. Sometimes a partnership may consist of a novice and a seasoned real estate professional that has knowledge of the business. In circumstances, it benefits all involved, and especially the novice, to research the background of all potential investment partners before entering into any kind of legally binding agreement.
Owning Investment Real Estate with an REIT
For those who would like to enjoy the equity and value appreciation of a real estate investment, but want to avoid the costs, time, and potential problems associated with full property ownership, investing in an REIT may be the answer. A Real Estate Investment Trust or REIT (rhymes with “treat”) is a real estate company that offers shares of its commercial holdings to public investors. Instead of owning an entire commercial property, each investor owns a number of shares of stock in the property. As with all types of investments, REIT’s do have some disadvantages, and may not be right for everyone. Anyone who is interested in investing in any type of real estate or real estate holdings should first seek counsel from their real estate professional, as well as their personal financial planner, before making any types of decisions. Real estate, if managed properly, can produce substantial capital gains and generate security and cash flow, both for the investor, and for future generations to come.