Real estate investing is satisfying and lucrative when done right. It can help you diversify your investment portfolio as well as generate additional income. Many real estate investments do not require you to deal directly with tenants. You can also buy a property by paying only a fraction of the total price and then paying off the balance and interest over time. Here are four options for investing in real estate.
Rental property
Investing in residential rental properties can be great, especially for individuals with renovation and DIY skills and the courage to deal with tenants.
Professionals
• Provides regular income
• Properties can appreciate
• You can use leverage to optimize capital
• Many of the costs are tax deductible
Disadvantages
• Tenant management can be tedious
• Vacancies can reduce income
• Tenants may damage property
House flipping
You can buy undervalued properties that need a bit of an upgrade, renovate them cheaply and then sell them for a profit. However, flipping a house comes with certain risks. First, your repair cost estimate must be accurate, which is no easy feat. Second, the longer the property is in your hands, the less money you're likely to make because you'll be paying the mortgage without generating any income.
Professionals
• Tie up your capital only for the short term
• Potential quick returns
Disadvantages
• A hot market can cool down unexpectedly
• Requires deep knowledge of the field
Real Estate Investment Trusts (REITs)
REITs are traded on major stock exchanges, much like stocks. A REIT is created when a trust/corporation uses investors' money to purchase and manage income-producing real estate. To maintain REIT status, 90 percent of the trust/corporation's taxable income must be paid out as dividends. REITs allow you to invest in non-residential properties such as office buildings and shopping centers that may not be possible to buy outright.
Professionals
• Highly liquid as they can be traded
• They are essentially dividend paying stocks
• Lands are usually long term cash producing leases
Disadvantages
• Does not offer the leverage typically available in traditional rental property investing
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