Buying and owning real estate is an ment strategy that can be both satisfying and lucrative. Unlike and bond ors, prospective real estate owners can use leverage to buy a property by paying a portion of the total cost upfront, then paying off the balance, plus interest , over time.
While a traditional mortgage generally requires a 20% to 25% down payment, in some cases a 5% down payment is all it takes to purchase an entire property. This ability to control the asset the moment papers are signed emboldens both real estate flippers and landlords, who can, in turn, take out second mortgages on their homes in order to make down payments on additional properties. Here are five key ways ors can make money on real estate.
- Aspiring real estate owners can buy a property using leverage, paying a portion of its total cost upfront, then paying off the balance over time.
- One of the primary ways in which ors can make money in real estate is to become a landlord of a rental property.
- People who are flippers, buying up undervalued real estate, fixing it up, and selling it, can also earn income.
- Real estate ment groups are a more hands-off way to make money in real estate.
- Real estate ment trusts (REITs) are basically dividend-paying s.
5 Simple Ways To purchase In Real Estate
1. Rental Properties
Owning rental properties can be a great opportunity for individuals with do-it-yourself (DIY) and renovation skills, and have the patience to manage tenants. However, this strategy does require substantial capital to finance up-front maintenance costs and to cover vacant months.
Provides regular income and properties can appreciate
Maximizes capital through leverage
Many tax-deductible associated expenses
Can be tedious managing tenants
Potentially damage property from tenants
Reduced income from potential vacancies
According to U.S. Census Bureau data, sales prices of new homes (a rough indicator for real estate values) consistently increased in value from 1940 to 2006, before dipping during the financial crisis. Subsequently, sales prices resumed their ascent, even surpassing pre-crisis levels. It remains to be seen what the longterm effects of the coronavirus pandemic will be on real estate values.
Source: Survey of Construction, U.S. Census Bureau
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).
2. Real Estate purchasement Groups (REIGs)
Real estate ment groups (REIGs) are ideal for people who want to own rental real estate without the hassles of running it. purchaseing in REIGs requires a capital cushion and access to financing.
REIGs are like small mutual funds that in rental properties. In a typical real estate ment group, a company buys or builds a set of apartment blocks or condos, then allows ors to purchase them through the company, thereby joining the group.
A single or can own one or multiple units of self-contained living space, but the company operating the ment group collectively manages all of the units, handling maintenance, advertising vacancies, and interviewing tenants. In exchange for conducting these management tasks, the company takes a percentage of the monthly rent.
A standard real estate ment group lease is in the or’s name, and all of the units pool a portion of the rent to guard against occasional vacancies. To this end, you'll receive some income even if your unit is empty. As long as the vacancy rate for the pooled units doesn’t spike too high, there should be enough to cover costs.
More hands-off than owning rentals
Provides income and appreciation
Similar fees as mutual funds
Susceptible to unscrupulous managers
3. House Flipping
House flipping is for people with significant experience in real estate valuation, marketing, and renovation. House flipping requires capital and the ability to do, or oversee, repairs as needed.
This is the proverbial "wild side" of real estate ing . Just as day is different from buy-and-hold ors , real estate flippers are distinct from buy-and-rent landlords. Case in point—real estate flippers often look to profitably sell the undervalued properties they buy in less than six months.
Pure property flippers often don't in improving properties. Therefore, the ment must already have the intrinsic value needed to turn a profit without any alterations, or they'll eliminate the property from contention.
Flippers who are unable to swiftly unload a property may find themselves in trouble because they typically don’t keep enough uncommitted cash on hand to pay the mortgage on a property over the long term. This can lead to continued, snowballing losses.
There is another kind of flipper who makes money by buying reasonably priced properties and adding value by renovating them. This can be a longer-term ment, where ors can only afford to take on one or two properties at a time.
Ties up capital for a shorter time period
Can offer quick returns
Requires a deeper market knowledge
Hot markets cooling unexpectedly
4. Real Estate purchasement Trusts (REITs)
A real estate ment trust (REIT) is best for ors who want portfolio exposure to real estate without a traditional real estate transaction.
A REIT is created when a corporation (or trust) uses ors’ money to purchase and operate income properties. REITs are bought and sold on the major exchanges, like any other .
A corporation must payout 90% of its taxable profits in the form of dividends in order to maintain its REIT status. By doing this, REITs avoid paying corporate income tax, whereas a regular company would be taxed on its profits and then have to decide whether or not to distribute its after-tax profits as dividends.
Like regular dividend-paying s, REITs are a solid ment for ors who desire regular income. In comparison to the aforementioned types of real estate ment, REITs afford ors entry into nonresidential ments, such as malls or office buildings, that are generally not feasible for individual ors to purchase directly.
More important, REITs are highly liquid because they are exchange-d. In other words, you won’t need a realtor and a title transfer to help you cash out your ment. In practice, REITs are a more formalized version of a real estate ment group.
Finally, when looking at REITs, ors should distinguish between equity REITs that own buildings, and mortgage REITs that provide financing for real estate and dabble in mortgage-backed securities (MBS). Both offer exposure to real estate, but the nature of the exposure is different. An equity REIT is more traditional, in that it represents ownership in real estate, whereas the mortgage REITs focus on the income from mortgage financing of real estate.
Essentially dividend-paying s
Core holdings tend to be long-term, cash-producing leases
Leverage associated with traditional rental real estate does not apply
5. Online Real Estate Platforms
Real estate ing platforms are for those that want to join others in ing in a bigger commercial or residential deal. The ment is done via online real estate platforms, also known as real estate crowdfunding . It still requires ing capital, although less than what's required to purchase properties outright.
Online platforms connect ors who are looking to finance projects with real estate developers. In some cases, you can diversify your ments with not much money.
Can in single projects or portfolio of projects
Tends to be illliquid with lockup periods
The Bottom Line
Whether real estate ors use their properties to generate rental income, or to bide their time until the perfect selling opportunity arises, it's possible to build out a robust ment program by paying a relatively small part of a property's total value upfront. And as with any ment, there is profit and potential within real estate, whether the overall market is up or down.