A good real estate investment can be lucrative in addition to helping diversify an existing investment portfolio. The capital markets come with a wide array of real estate products that provide excellent exposure to some of the best real estate properties. As some people invest in real estate to have a home for themselves, others use this opportunity to create an additional income stream.
Real estate will always be an excellent long-term investment option, as most investments tend to increase in value over time. However, one must make sure they invest in the best real estate products or properties, if they are to enjoy long-term passive income.
Below are some of the best ways to invest in Real Estate.
Real Estate Investment Trusts REITs
Real Estate Investment Trusts are becoming increasingly popular for income-focused investors. Often compared to Mutual Funds, REITs are essentially corporation that allows investors to own a wide array of properties ranging from office buildings to retail spaces as well as apartments and hotels. However, with REITs, investors are relieved of the burden of managing and maintaining the properties.
REITs pay high dividends, as they are required by law to pay about 90% of their total income to investors. Consequently, REITs are ideal real estate investment products for investors who want a regular passive income but don’t want to contend with the hassles of managing properties.
Real Estate Investment Groups
Just like REITs, Real Estate Investment Groups are for people who wish to own rental estate but without the hassles of running them. Real estate investment groups operate like mutual funds whereby managers buy or build apartment blocks or condos and then allow investors to purchase them.
Even on purchasing the condos or apartment units, the investors would not have to manage the units. Instead, the real estate investment group manages and maintains the units and pass down any rental income generated upon the deduction of management fees.
Real estate investment Group stand out in part because they allow investors to receive some income even when the units are empty, not occupied. This is made possible by the fact that the group pools a portion of the rental income, which is occasionally used to cater to occasional vacancies.
Real Estate Trading
Real Estate Trading is another way to benefit from developments in the real estate industry. Just as is the case with day traders, real estate traders often look to benefit from selling undervalued properties within three to four months
Operating as property flippers, real estate traders don’t invest in improving properties but on selling properties to benefit from the price difference. Real estate trading is ideal for investors who want quick money when market conditions are good for buying and offloading properties in the market.
Benefits of Investing In Real Estate
There are a few reasons to invest in real estate.
Attractive Passive Income
Real estate investments stand out in part because of the stable and consistent passive income always on offer in the form of rental income. The positive cash flow always on offer can allow one to live a comfortable life, let alone provide additional capital to invest in more real estate.
Mack Dudayev, founder of Chance Realty and Real Estate Investor has this to add: “In most forms of real estate investing, your income has the potential to be passive. It’s one of the best ways to create a long term sustainable income for yourself. It’s one of the few industries that has a high quantity of millionaires.”
In most cases, the rental income is tax-free, a benefit that most investments don’t come with. Similarly, rental properties will always generate income with minimum work put into them. Therefore, they act as ideal investment tools for growing wealth for retirement.
Tax Benefits
The tax benefits on offer is another reason to invest in real estate compared to other securities. Unlike other investments, cash flow received from rentals is not subject to self-employment tax as the government offers tax benefits as well as a lower tax rate for long-term profits. Likewise, real estate investments can provide tax benefits through depreciation.
Portfolio Diversification
Real estate investments act as effective diversification tools for investment portfolios. Unlike other investments, real estate has a low and negative correlation to other major asset classes in the capital markets.
What this means is that the addition of a real estate security to an investment portfolio can lower portfolio volatility while providing a higher return per unit of risk. The tangibility aspect of real estate properties also offers investors a sense of stability during bear markets and in times of wild swings in the market.
Hedge Against Inflation
Real estate investments have proven to be effective investments for hedging against high inflation in the market. Whenever the prices of goods and services rise in the market, so does rental charges, allowing investors to generate more rental income. Conversely, real estate investors are always protected from immediate and long term effects of inflation
Disadvantages of Real Estate Investments
For every upside, there is a downside.
Higher Transaction Costs
Unlike other investments such as stocks, real estate investments tend to come with higher transaction costs. Higher costs can lower, significantly, the value of an investment making it difficult to generate the desired profits.
Low Liquidity
While most investments in the capital markets are liquid, real estate investments tend to be illiquid. The ability to buy and sell real estate properties is not possible. That said, potential real estate investors should be ready to own property for months or years before offloading.
Higher Maintenance and Management Fees
Real estate investments can come with high management and maintenance fees that can lower rental income significantly. Higher fees stem from the fact that properties must be rehabbed, maintained’ and managed to maintain higher occupancy rates.
In addition, real estate trading or REITS investments require in-depth market knowledge as markets can cool unexpectedly, leading to short-term losses.
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