In this article, we’re going to take a look at several strategies for investing (successfully) in real estate, for those getting started in the business. Real estate can be a great way to broaden your investment portfolio and secure your financial future, but often times, the high entry cost can be intimidating for many people. Don’t let this put you off though, because there’s a lot to be gained in real estate.
Why Invest in Real Estate?
The main goal for investing in real estate is to make money. And you can do this in three different ways: collecting rent, collecting loan interest, and selling property for more than what you paid for it.
Simply put, real estate is the business of using land and/or property to make money. There are different forms of real estate investing, such as residential and commercial property, crowd-funding platforms, and REITs. The presumption that being in real estate means you have to become a landlord and therefore deal with difficult tenants is a bit misinformed. While this does represent a common real estate investment, it is by no means your only option.
To explain this, let’s first look at the different types of real estate investing, and what they represent as potential money-earning ventures. Four basic types of real estate investments are available to you; and these are,
Investing in land can be a decent way to get into real estate. It typically doesn’t cost much money when compared to property investments; however, the profits tend to be low as well. Land investing is basically when you purchase land for leasing, or just sit on it for a while and wait for the land to appreciate in value.
- Commercial real estate
Commercial real estate is typically defined as businesses, or a building with more than four units used as apartments. So, if for instance, you wanted to start a restaurant, that too would be considered commercial real estate. If you own an apartment complex with 30 units, or four units, that too, would be considered commercial estate. On the other hand, if your apartment complex has only three units or less, it is described as residential real estate.
- Residential real estate
This is what many people think of when they think about real estate investing. Residential real estate involves purchasing a residence, either a single or multi-family unit, and renting it out. It is much easier to get into this business because there are fewer city codes and tax regulations to adhere to.
- Industrial real estate
Industrial real estate is a lot like commercial real estate, except on a much larger scale. Think large factories, warehouses, power plants, or other similar structure. This is not the type of thing you get into if you’re just starting out in real estate. Most people involved in industrial real estate tend to have years of experience in the industry, and deep pockets. The purchase price alone will put off a lot of potential investors. You probably need millions of dollars to get into industrial real estate, and the paperwork is more complicated than that of residential or commercial real estate.
Strategies to Invest In Real Estate
Decide early on whether you want to become a passive or active investor. Basically, an active investor takes a more hands-on approach to their investment, becoming involved in the day-to-day operations. On the other hand, a passive investor just supplies money and hires other people to manage the details. Keep in mind that to be successful in real estate, don’t think about if you want to be an active investor, but rather, how active you need to be.
Active investing may bring higher yields over time, but passive investing also gives you time to focus on other ventures, provided you’re ready to cover the management fees. Individuals who are extremely busy and don’t want to take on the responsibilities in real estate may consider getting into passive real estate for the freedom it offers. Here are some strategies for successful investing:
- Sole proprietorship – this allows you to fully own your property.
- Partnership – you go into business with a friend or two and use your money to purchase real estate investments.
- Syndication – combine your money with other investors to get into commercial or industrial real estate. This will likely make you a silent investor, which means you won’t be able to control much of your investment.
- Real Estate Investment Trust (TEITs)- it works like an ETF or stock, where the trust owns a lot of properties and may sell shares to investors.
- Crowdfunding – this is an internet-based platform that operates a lot like a syndication.
Some real estate investors prefer to go the sole-proprietorship route where they own a limited number of properties. However, a lot of the more successful investors tend to dabble in more than one type of real estate and will have their money spread around into various property types as a way to diversify their portfolio.