When you are interested in investing in real estate, you should know the ups and downs of each option. There are different options when it comes to investment, especially in real estate. Real estate investment is meant to build capital or to increase your cash.
When you are able to sell the property and its value has increased, you are able to boost the capital. Moreover, real estate also offers tax breaks, competitive (risk adjusted) returns, equity building, and cash flows. However, with the various options of investment types, things can be overwhelming and confusing. Which investment type you should choose?
Real Estate Investment Trusts or REITs
When you are investing in real estate, real estate investment trusts (or most popularly known as REITs), you are basically investing your money into a company that manages real estate to produce income.
Your money would be used to purchase or manage the property (more likely it’s going to be more than just one type) and then you will get dividend. In short, you are basically buying a SHARE of the company responsible for handling and managing different types of property for the exchange of the dividends (or the profits).
So, what are the benefits of this investment?
- You don’t have to deal with fussy or complicated entry. REITs are basically open and available to all kinds of investors, provided they have enough cash and brokerage account. It’s great for retail investors with limited capital.
- You can enjoy portfolio diversification. When you are investing in real estate, especially in REITs, you are guaranteed of diversified investment portfolio. Things like traditional investments in stock markets (such as ETFs or mutual funds) to particular (real estate) assets like healthcare REITs or office REITs can be achieved and managed through this particular investment.
- You can enjoy dividend payments. REITs must pay a minimum of 90% of the profits and income as dividends. It’s laid out by the IRS and its regulation. If you want to get high dividend yields, then REITs would be the perfect option to do so.
Real Estate Syndication
People tend to think that Real Estate Syndication (or mostly known as RES) to have similar performance and concept as the REITs because they are both about investing in real estate. In reality, though, both of them are completely different.
They have different concept, although many people think they share similar traits. If you take a look at both of them in a glimpse, they may look the same, but some of their basic ideas are just different.
On the contrary to REITs, RES refers to the time when real estate investors would collect their money together (or also known as pool the money) to buy real estate. Because it’s a part of investment plan, you can expect to get some good returns. The market itself is quite lucrative and promising.
What are the benefits of RES, anyway?
- Minimum amount of investment. Other types of investments may require a certain minimum cash amount, which can actually be exorbitant. If you have limited funds, however, this investment type would be the best option.
- Lower volatility risk. It’s possible for the real estate value to fall, which may risk your investment. It’s a good thing that RES has lower investment risk, and yet, you can enjoy long term investment, even for decades. Even when the real estate values fall, you don’t need to immediately sell the property. Simply wait until the market recovers.
- Tax advantage. There are several tax advantages to benefit from (you can enjoy tax deduction), such as mortgage interest, depreciation, operating repairs and expenses, and property tax.
- Portfolio diversification. Investors can enjoy portfolio diversification so it can boost the liquidity. Moreover, you won’t have to worry about any legal agreements that can be complicated because it involves multiple partners.
RES vs REITs
So, when you are investing in real estate, which one should you choose? And what is the difference, anyway?
Number of Assets
You are investing in the COMPANY having properties portfolio in various (and multiple) markets with REITs. Every REIT would focus on certain classes of assets, such as shopping malls, elderly care, buildings, etc.
So, when you are investing in shopping mall REIT, the company owns and manages a lot of shopping malls. You don’t know in which particular shopping mall the company has because you ‘only’ buy the company’s share. You are doing the so-called ’blind fund’ – you don’t know the particular property you are investing into.
With RES, on the other hand, you and other investors are joining forces, collecting your money, and buying a single property. You know the property: where it is located, the structure, how many units it has, the financial perks that property offers, and the business plan. you know EXACTLY which property you buy. See the difference now, don’t you?
Ownership
As it was mentioned before, in REITs, you buy the share of the company. You don’t actually own the property. You simply have a share of the company responsible for managing properties. It’s completely different with RES. You are directly investing within a specific property – together with other investors. It means that you have a direct ownership of a particular property.
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Conclusion
These are the basic differences between REITs and RES. Once you grasp the idea and the concept, you can decide in which investment you want to have. Some people may focus on REITs only, while some prefer the RES. Some, however, may choose both. Feel free to choose whichever suits your investment plan.
Self Directed IRA
Another option of investing in real estate is the self directed IRA. People generally have IRA to be prepared for retirement. IRA itself refers to an account (which is typically set within a financial institution) allowing individuals to save money for their retirement. The advantage of having the IRA is its tax deferred basis or tax-free growth.
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The traditional IRAs are based within (traditional) investments, such as mutual funds, bonds, or stocks. With self-directed IRA (or popularly known as SDIRA), on the other hand, you can have alternative assets, like precious metals, private placements, private equity, and real estate.
Also known as Real Estate IRA, you basically use your (individual) retirement account to buy any type of real estate you want. It means that you are free to buy commercial properties, raw land, and also rental properties.
You can even do investing in real estate through mortgage note issuing or REITs. This investment type can be done through an LLC, a non recourse loan, partnered funds, or direct purchase.
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Fix and Flip
Another investment type to consider is house flipping. Some people may call it fix and flip. House flipping refers to buying a distressed, even crappy, house and then fixing it up so you can increase the value before selling it out.
The idea is to buy low and sell high. It’s not for everyone, mind you. But it would be perfect for those having the knacks for home improvement and décor, and really creative to pull things off.
The biggest advantage of this action is to expect huge profits. Some people spend $200,000 for buying and fixing the house, and then they can sell it for around $380,000. With almost the double profit, it seems lucrative and promising. It’s true that big profit potential is one of the main attractions to this type of investment.
Moreover, you can make the decision based on your needs or preference. You are free to choose the location you want, what kind of property to flip, and others. However, you should also know that you need to have the money upfront – for buying the property and then renovating it.
Not to mention that not everyone is able to make the transformation and come up with breathtaking effect. And let’s not forget that there are other factors to consider, such as the time period to do the task, the deadline for the open house and marketing, and such things alike. Like it was mentioned before, this one may be lucrative, but it’s not for everyone.
House Hacking
Whereas house flipping is the action to buy an outdated house and transform it into something gorgeous before selling it out, house hacking is about making use of your property to generate income.
You see, when you are investing in real estate through house hacking system, it means that you buy a house (typically a two-unit up to four-unit house). You take one unit for your home and live in it, and then you rent out the rest. So, if you buy a four-unit house, you live in a unit and rent out the remaining three units.
For some people, this kind of investment is great and ideal for their situation. You can take tenants and collect their rent. You can use the rent for your mortgage, and you can basically live in the property rent-free – or pretty close to such a condition. Naturally, there are some basic benefits this kind of investment:
- You can get extra income. Depending on how you manage the extra income, you can actually pay off your mortgage and other expenses. You can even make other types of investments, if you want to.
- The possibility of tax benefits is apparent. There is a possibility that you can enjoy tax deductions, like depreciation expense or repair cost on the property’s part being rented out.
- You are able to build equity quickly. There is a possibility that you can have more money into the mortgage, allowing you to build equity quickly.
Be advised that house hacking may not be for everyone. For those wanting to live in peace or be separated from others, this method may not be the best. You will have to share a space or property. Even if you live in a different and separate unit (such as a bungalow), you still have to share the property and the premise.
Rental Property Management
In the event you have a rental property (which means that you act out as the landlord or the land owner), you need some solid helps to help run and manage it. It’s still possible to have a one-man-show if you only have one apartment, one room, or one property to rent out. However, if you have several properties (or even several rooms), managing it can be a nightmare.
That’s why there is the so-called property management software to help you deal with such an issue. Sure, you will have to spend extra to use the service, but it’s worth it. You can also save up your precious time and energy, and have a more effective arrangement.
Depending on the type or the provider, this kind of software can help you manage the rent payment, generate and deliver notices, and so much more. You can consider hiring a professional property management service, but they generally cost more than the software.
Don’t forget about making solid lease agreements that will lay out the details of the regulations of using the property, the rights and obligations of both the landlord and the tenant, and things that can and mustn’t be done during the tenancy.
Regulations about the rental payment and its collection should also be included. If you don’t know how to start, you can always consult a professional real estate lawyer that can help you make the draft.
If you don’t want to spend extra, hit the search engine and find free rental agreement template or draft that you can download for free. Don’t forget that you should check your state and local regulations, rules, and laws.
The Final Take
All of these investment types sound promising, right? But you need to remember that each option has its own perks and flaws. Don’t only focus on the rainbows and unicorns, but you should also be prepared for the downsides.
If you don’t really know what kind of investment to make, it’s high time to ask for a help. Hire a professional investment expert that can look into your financial state and provide suggestions of which investment to take.
All of these financial (and investment) lingos can be confusing and even overwhelming. That’s why having a professional opinion and advice can really help. If you are thinking about investing in real estate, at least have someone trusted accompany you and give you the right direction.
