There are several opportunities for the real estate investor, if you want to invest in real estate. You can always invest in a REIT (Real Estate Investment Trust) by buying shares of a portfolio of properties. This is almost like buying stock or buying into an investment fund. It is completely different than buying real estate directly. The value in your real estate fund has three layers of value. There is the real estate itself, the management and the cash flow which is based on the fund. It is totally different than buying real estate but where else but in American can you go out and buy a percentage of a skyscraper. If you add a REIT to your stock portfolio it can diversify and complement your stock and bond funds.
Understanding how the REIT operates and how the fund is designed and how value is extracted from the holdings is very important. The performance of the fund is basically based on how the real estate managers occasionally sell properties for any cash flow and gains which can turn out to be difficult at times because of the difference in scenarios from the typical performance drivers from stocks and bonds.
Then again there is the direct ownership whereby you buy a house or apartment building and you rent it out. This type of investment is not a passive buy. Renting will bring on a whole new set of problems in that you have to worry about tenants paying on time and making sure that it is maintained and livable. When buying a rental there are many things you should consider especially if you are buying a small apartment building for rentals. You must absolutely make sure you pick one that has a positive cash flow and has no hidden defects that will cost you an arm and a leg to repair sometime in the future.When you are buying for investment purposes you must not take any advice from real estate agents because they will want you to buy because once the transaction is completed, they get their commission and are out of the picture.
Being a home owner does not qualify an investor to manage rentals. There are several factors that landlords must consider from complying with fair housing rental regulations, to insurance, to building code compliance and of course safety issues. Your time will be paramount when it comes to property management and budget issues. Other issues can certainly occur and is not a simple asset even though it is a physical asset it usually turns out more complicated than people think. A good way to learn how to navigate being a landlord is to buy a duplex or small apartment building and living in one unit.
Rents have been on an upturn for years but with market changes it looks like they have been leveling off with construction of new rental properties and the proliferation of more rental units into the market. Do the needed research before jumping into this market.
There is however more help on calculating costs and returns when buying rental investment properties. There are multiple software tools and spreadsheets available that will help in the whole process from buying through the entire rental process. Cash flow factors include not only the actual costs but predictable expenses that may come up. These figures will also help potential renters and will help in the marketing of the units. For example take the heat and water being included in the rent. If you include heat and water in the monthly rent you may think that this little incentive will attract renters. However, heat and water varies if you have one renter as opposed to three roommates renting that one unit. The more water and heat they use the less money you will make.
The other real estate investment is house flipping. This is the riskiest way to make money in real estate because it is very difficult to predict how the real estate market changes from one week to the next. There are several factors to consider when trying to invest in this business. Not only that, there are so many unpredictables involved in flipping and it is very easy to lose a bunch of money in one transaction.
The very first thing you should know is that this type of investment is very expensive. You must have the cash and it takes time for the entire process from acquisition, to renovation to the final sale. So the first problem you may run into is that you may not have enough money. Down payments, interest payments if you are financing the purchase, taxes, utilities and the usual expenses from holding the property for a few months until it sells. And in the end there is capital gains taxes that need to be paid.
If you could buy the property and sell it the very next day, you would be in heaven. But renovating and flipping takes time and money. There has to be time for renovation and if there are any unforeseen expenses that will add more time and money. There are inspections and costs associated with that process. It is a stressful process and of course there are Realtor costs unless you wear a few hats which cuts into your time researching and finding other properties'
If you are a building professional, carpenter or plumber you may be able to do this as a side job. With the knowledge and skills to fix houses during regular downtime while on paid winter leave. Paying professionals to do the renovation will most likely leave you very little profit.
To be a successful investor in flipping houses you must be an expert at picking the right properties in the right locations. You have to buy low and sell at the going rate for that location with the knowledge to understand what needs to get repaired in order to sell at a reasonable profit. You will also need to understand when to cut your losses and get out before you lose your shirt.
Other factors that may come into play when investing in flipping are that you must wait for the right property and patience is paramount. Your trusted partners must be savvy real estate professionals teamed with reliable contractors in order to make money. Before you get involved in this endeavor of flipping houses do your research and like most investments make sure you have time money, patience, skill and it will not be easy. Good luck investment hunting.