If you check out the investment strategies of millionaires and billionaires, there will be one common theme, real estate. While many people will have invested in their own home, taking on mortgage debt, it takes a different psyche to be a successful real estate investor. Many people assume it is difficult to “get started” when there are several options to consider.
Before we look at seven ways to get started in real estate investment, let’s remind ourselves of the primary benefits of investing in real estate.
Benefits of Real Estate Investment
As you will see below, there are three main benefits to consider when it comes to real estate investment: –
Investment in the right type of property in the right area can create long-term rental income streams. People can use their rental income to pay down investment debt, by investing in other properties. However, it can be a challenge to finding a balance between maximum rental income, and competitive rates. For the first time, those looking at real estate investors tend to focus on domestic properties, but options can also involve business real estate.
Even though rental income can be a significant and valuable income stream, many investors are more focused on capital appreciation. They tend to have an investment strategy that includes an exit route. Real estate investors looking for capital appreciation may take on existing properties or focus on new developments. Financing the building of new real estate means that for a while, before completion, there will be no rental income. The potential for long-term capital appreciation often offsets this.
Mixing Rental Income and Capital Appreciation
The obvious third benefit of investing in real estate is mixing rental income and potential for capital appreciation. This creates an income stream and the long-term potential for capital growth.
Seven Ways to Get Started in Real Estate Investment
There are numerous ways in which you can dive into real estate investment. These include direct and indirect investment via different methods and investment vehicles.
Individual Rental Properties
As we touched on above, many of those venturing into real estate investment often focus on rental properties for the first time. This type of investment creates a long-term income stream that can be helpful to cover living expenses, allowing individuals to focus on their long-term investment aspirations. There are some challenges which include:
Finding the right areaFinding the right propertyMaximising rental incomeRemaining competitive on rental rates
To secure traditional mortgage finance, you will need to have a secure income stream to support payments. Consequently, many people begin real estate investment while maintaining employment, often in an unconnected profession. However, further down the line, there may be the opportunity to leave traditional work and focus on your real estate investments.
Real Estate Investment Trusts (REITs)
Investment in REITs is similar to traditional investment in stocks and shares. You are not directly buying into real estate. Instead, you are purchasing a stake in a company that actively manages a portfolio of real estate and cash. REITs tend to be helpful for those who have limited experience and those who don’t have the time to take a hands-on approach. There are costs incurred when investing in REITs, property management costs, which will be deducted from gross rental income.
There are many different types of REIT covering a whole range of property sectors. These include REITs focused on rental income, capital appreciation, and a mixture of the two, other sectors and even different countries. The beauty of the REIT sector is the considerable depth of choice. This ensures many options for any real estate investor, however defensive or ambitious they wish to be.
Real Estate Investment Syndicates
Due to limited funds, many investors will be a little hamstrung as to the type of real estate in which they can invest. This has encouraged the formal and informal creation of real estate investment syndicates, often involving friends and family. The idea is simple; in isolation, limited funds have limited options available. Cumulatively, this can create significant investment power and more opportunities. One note of caution, many believe it is dangerous to mix business with pleasure, friends with investments.
In reality, whether you are good friends with the other syndicate members or relative strangers, it is crucial to have a formal agreement in place. This not only ensures everyone has a degree of legal protection, but it also avoids confusion and lets everybody know where they stand. For example, the process of identifying potential real estate investments can occur collectively or via the use of external professional real estate advisers. If everything is kept on a formal basis, this can help to avoid future disagreements!
Real Estate Crowdfunding
Those with an active interest in investment will no doubt have come across crowdfunding trading platforms in recent times. In effect, these are cost-effective platforms that bring together investors and developers (cutting out the middleman) with numerous benefits. As an investor, you can invest relatively small amounts across a range of different real estate, giving you a degree of diversification. As a developer, you have access to relatively cheap finance, with the process often significantly shorter than traditional banking finance.
You will also find that many property developments on crowdfunding platforms offer a secondary market. This allows a share in property projects to be bought and sold, although liquidity is unlikely to be anywhere near stock market levels. Consequently, the price you receive in the secondary market may not reflect the “real market” value. Nevertheless, real estate crowdfunding is an exciting opportunity for both novices and those with experience in real estate investment.
Lending Money to Real Estate Developers
While not necessarily an option for everybody, you may be able to lend money to real estate investors. This would attract an interest rate, creating an income stream, with the debt usually backed using the property as collateral. On paper, this seems like a relatively easy way to invest indirectly in real estate. However, you may need a license, and there is still a degree of risk, although owners should reflect on the interest charged.
While using real estate as collateral has apparent benefits, obtaining market value on a quick sale may be challenging. Consequently, even if on paper your debt is fully covered by the property collateral, this may not be the case in practice. This brings us to the Loan to Value (LTV) ratio. This ratio is a measure of finance against the property’s value. The lower the LTV, the larger the headroom between the overall debt and the property value and vice versa. The LTV ratio is a measure of the level of risk of each transaction.
Flipping Real Estate
If you watch any of the many real estate TV programs, we will forgive you for thinking that flipping real estate is easy. In many ways, these programs do a disservice to the art of flipping. This is the act of acquiring properties at competitive rates, often improving, and enhancing, and then reselling for a profit. There is no doubt that there is significant money to be made in this field. However, with anything, there are some issues to consider. These include:
Additional expensesDelay in selling propertyReduced priceDiscovery of additional issues
When acquiring properties to flip, you are often buying as seen. However, owners may experience unexpected issues, potentially expensive to fix, creating a delay in selling the property. If acquired using finance, these delays will crystallise additional interest charges, impacting profit margins.
Rent Out your Property
There is also the option of renting out a room in your home or even renting out your home on short-term lets. If there is local demand, you may be able to rent out a room in your property with a degree of regularity, often on long-term arrangements. Alternatively, if you live in a popular tourist area, you may be able to rent out your property during the season. Whether you live with friends and family in the short term or use rental income to rent another property are options to consider.
While many people are reluctant to invest in real estate because they believe they need significant funds or experience, this is not the case. As you can see above, there are numerous ways in which you can start your real estate investment journey on a relatively low budget. Just know once you begin your real estate investment career, it can become very addictive!
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