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23 March, 2018
Investing in real estate has been considered one of the oldest forms of investing. Everyone desires to have a home, and investing in real estate is the biggest financial decision that a person makes. Investing in real estate has been around for ages, and is considered one of the five basic asset classes that every investor should consider in his/her portfolio.
Investing in real estate offers tax benefits, as well as diversification benefits to buyers or investors. Here are some of the basics of real estate investing which can bring in excellent returns.
First, let’s answer the most basic question. What is real estate investing?
Real estate investing comes under a broad category of operating, investing, and financial activities which revolve around making money from investments and gains in tangible property or cash flows.
Appreciation in property prices: This is when the property increases in value, which may be due to a change in the real estate market. With the increase in demand for property in your area, there may be an increase in prices which can result in gains. You can also make upgrades in your property and make it more attractive to potential buyers or renters. However, it is important to understand property trends, as real estate appreciation can be a very tricky game.
Rent or Cash Flow Income: Buying a real estate property like an apartment building and earning a second income by renting it, constitutes this type of real estate investment. Cash flow income can be generated from office buildings, apartment buildings, rental houses, etc. and can become a source of a second income.
Income related to Real Estate: This income is generated by brokers and other industry specialists who make money by taking a commission from the sale or purchase of a property. This also includes real estate management companies, which get a set percentage of rents in exchange for running the day-to-day operations of a property.
Ancillary Real Estate Investment Income: This can be a huge source of profit for companies. Ancillary real estate investment income can come from putting vending machines in office buildings or laundry facilities in low-rent apartments. Such mini-businesses within a bigger real estate investment make it possible for you to earn money out of a semi-captive collection of customers.
The simplest and the purest form of real estate investing are from cash flow generated from rents rather than appreciation. Investing in real estate occurs when the investor buys a tangible property like a raw farmland or an office building, industrial warehouse, an apartment, etc. This property is later given out on rent to a tenant for an agreed amount of money. The tenant can use the property according to the terms of the agreement with certain restrictions that are given by the state and local laws which are mentioned in the rental agreement.
Rental income is one of the biggest cash flows for investors and has an advantage over investing in stocks and bonds. The ownership of tangible property and fixed monthly income is a big draw for investors.
Some of the popular ways of real estate investing are:
Residential real estate investing
This includes investing in real estate like apartments or houses which can be given on rent. These properties are given out to tenants for a fixed rent and lease which usually runs for 11 or 12 months.
Commercial real estate investing
Commercial real estate investments majorly consist of investment in office buildings. For such properties, the lease agreement is for a longer period of time and can vary from 1 year to 10 years or more.
Investing in Industrial real estate
Warehouses and distribution centres, manufacturing facilities, storage units, and assembly plants, fall under this category.
Investing in Retail real estate
A number of investors like to own properties like shopping centres, strip malls, or traditional malls. These properties could be leased out to tenants like retail shops, hair salons, restaurants, etc. In these kinds of properties, the rental rates are very high and could also include a percentage of a store's retail sales.
Investing in mixed-use real estate
This kind of property has multiple uses including a multi-story building which has retail and restaurants on lower floors and offices on the next few floors. It can also have residential apartments on the remaining floors.
Another popular way that has emerged for investing in property is via REIT’s or real estate investment trust. Investors can purchase REITs, which are meant to encourage smaller investors to invest in real estate projects. REITs can be purchased through a brokerage account and gains in these are relatively secured. Large corporations also invest in REIT’s as they don’t have to incur a federal income tax on their corporate earnings, if they follow a few rules, including a requirement to distribute 90% of their profits to shareholders as dividends.
These are, then, some of the ways that you can invest in real estate! Investing in real estate market can really provide lucrative gains and can be the best investment decision you ever made!