Real Estate Investing.
What and interesting concept. It’s actually one of the greatest way to generate a good and steady passive income.
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Imagine the situation, you own an apartment/condo/house that you are not currently using. You rent it out. The tenant pays you each month a certain amount of money and you pretty much have nothing to do! Most of the time, everything goes smoothly and you don’t have to do much nor invest more money then the initial investment.
Also, if you think about it, your tenant will be paying, or at least helping you paying, your mortgage all the while your property keeps increasing in value. How awesome is that? You might think that it’s a fool’s dream but it isn’t.
Who wouldn’t love to buy a property having someone else pay for it and sell it for a profit 5 to 10 years later? I do! And you should to!
It’s one of the passive income ideas that most richer people tend to use. It’s a really incredible investment to use.
The more real estate you buy and rent, the greater the cash flow from the rent income. Using that cash flow, you can buy other property, that you can rent, and increase your cash flow which can be used to… You get the idea I am sure!
Now, why are people not investing in real estate if it’s that magic?
Mostly for these reasons:
- Lack of capital;
- Lack of opportunity; and
- Lack of knowledge.
Let’s be honest, it’s not always easy to get in the real estate investment game with a low capital, buying a half a millions building to rent it, but it is possible!
Types of Real Estate Investment
There are actually several ways to approach Real Estate Investing, each with it’s own specificity, requirement, involvement, risk and gain potential. Even before considering buying real estate or investing in it, you need to know what you want and where you wanna go. Let me explain. You should ask yourself:
- Do you want to buy a property to rent it or to sell it for a profit later?
- Do you want to buy residential (house/apartment/condos) properties or business building?
- Maybe you would like to rent a single room in your own property?
- Buy shares of a Real Estate Investment Trust (REIT) and treat your investment as you would any other stock?
- Invest in Real Estate Crowdfunding?
Once you have the answers to all those question, you will have a clearer idea on How you want to invest your money into Real Estate.
Real Estate Investment for Long Term Rental Income
When it comes to Real Estate Investing, this is the most common model, it’s the strategy that most people use to secure a long term passive income. It’s also one of the most used strategy by those labeled as Rich people.
Why?
Because it’s a great strategy!
Every month, you receive rent money from your tenant. As such, your income increases by that amount. And with that increased income/cash flow, you can invest more into your Real Estate Portfolio.
Benefits
One of the great benefit of long term real estate investing is that you protect yourself against short term volatility. And, even if the value of your new real estate property drop after you bought it, you will be safe and you won’t need to panic.
As long as someone is renting the property, you will have a form of income and that’s what is important. And, in time, the value of your property will increase eventually.
Another benefit is that your Real Estate Investment will make you money in 3 different ways that needs some explanation.
Amortization
When you buy some real estate property, chances are that you will not be able to buy it in one payment. And even if you could, it might not be advantageous, depending on mortgage rate and your return on investment of other investment vehicles.
As such, you will need to borrow money from the bank and have a mortgage for this real estate property. However, you don’t need to pay it, or not completely. Your tenant is here to help! Technically, the tenant rent should be sufficient to cover the mortgage and any additional expenses from holding the property (taxes, energy, water, etc). As such, the cost of the property will be amortized throughout the years until fully paid.
Depreciation
This one is not necessary obvious and can be difficult to grasp. Real estate depreciation is an income tax reduction that allows you to recover some of the cost of a rental property. As such, buy running a property management business, you can buy some real estate, put it to some use and get some tax benefit from it. Your company will go into debt, thus it will not be paying any income taxes. But, your income will increase due to the tax deductions.
Also, it’s a good idea to talk to your accountant, or to find one, he is the one that will be able to give you the numbers and to make sure that everything is in your favor.
Appreciation
Although it’s not totally guaranteed, there is a very high chance that the property value will increase with time. However, you need to do your homework correctly to evaluate your option and select properties that will grow in value through time.
Cons
One of the biggest risk with this real estate investment strategy is the tenant.
Indeed, you might have already heard about tenant kicked out because they were not paying their rent for months or even years. There are laws in multiple country protecting tenant more then owner. As such, you better understand the laws and prepare yourself in case.
Also, you are not protected against a tenant that could potentially “destroy” your investment by tearing down walls or doing it’s own renovation that are not up to standard. It might cost you a lot of money to fix it up.
Also, the barrier to entry can be quite high in some market.
In Canada for example you are required a minimum of 5%. And you need to purchase a special insurance if you can’t meet a 20% down payment. As such, for a 500000$ duplex you need a minimum of 25000$ plus insurance.
The last downside is you can stay without a tenant for a while. And that is bound to happen at the worst possible time, namely an economic downturn.
Short term sell Real Estate Investment
You like to work with your own hands?
You are good at fixing a house?
You love your hardware store?
House flipping is for you!
This Real Estate Investment strategy is straightforward and the short term potential gain is amazing.
However, you need to be really good with your craft and you need to know how to increase the value of a house while investing the minimum. If you can do that, go ahead great profit is waiting for you.
Benefits
Obviously, the biggest benefit of this Real Estate Investment strategy is the large gain in a short time frame.
Cons
Since this real estate investment strategy as a high gain potential, there is also a high risk potential. And, if you have already done some work on a property, you know that the risk of finding “some extra” work when you tear down the place to upgrade it.
Also, if you buy the property at an auction, to get the lowest possible price, you will not have the chance to inspect it and your complete project could be a total disaster and a total loss of money.
And, you need to consider that it also has a steep barrier to entry.
Indeed, you will need a certain amount of capital for this real estate investment strategy to work. Not only do you need to do a down payment for the house, but also for the material and tools you will need to fix and upgrade the property.
Also, you might need to hold onto the house for a while if you can’t get rid of it quickly on the market.
All in all, if you have the knowledge and craftsmanship to do it, house flipping is a potentially high reward strategy.
However, with high rewards comes greater risks.
Crowdfunding of Real Estate Investment
Crowdfunding.
You have probably heard that before, it’s when people group together to fund a project. How does it apply to real estate investment?
Simple.
There are online platforms that allows group of people to get together to fund the purchase of a property.
Benefits
You can select the project that you want to invest in. You are the one deciding if it’s worth it or not.
Also, you don’t have to worry about any administrative task nor the operation of the property, everything is handle through the platform. As such, if you don’t want to deal with the administration and other tasks involved by investing in real estate, you have a winning strategy.
You just need to set your real estate investment money with the crowdfunding platform and sit back while money is pouring into your high interest bank account.
Another great benefit is the liquidity of the assets.
As such, it is easy and quick to buy and sell the share into your Real Estate Investment, pretty much like stocks. And, the barrier to entry is much smaller, you are buying parts of a property. As such, you don’t need to ditch out the full amount of the property value.
Cons
There are not much downside to this real estate investment strategy. However, it’s to be noted that you are not really the owner of the property. You own a share of that property but you have no power over the fate of that property. It can be a problem for those that like to be in control.
All in all, Crowdfunding is a good way to start when you are new to real estate investing and that the money you want to invest is actually low. And, you have the opportunity to learn more about real estate while you can spread the risk over several properties.
Real Estate Investment Thrust
A Real Estate Investment Trust is a company that owns and operated rental properties in different markets, be it office, residential, commercial or industrial space.
Some of those REIT are publicly traded and you can buy Units on the stock market.
Benefit
This is the easiest real estate strategy that you can try. Also, the barrier of entry is as low as a single REIT unit. As such, it has the lowest price of them all.
Also, a REIT unit is a very liquid investment asset, you can quickly and easily buy and sell them.
Another benefit is that you don’t need to know anything on how to maintain and fix a property, everything is taking care of by the REIT.
A side Benefit to the Dividend Investor in you is that a REIT fits really nicely into a Dividend Income Strategy.
Cons
You are not actually owning any property. You are only owning some part of a company that owns the properties. And keep in mind that it’s even less involved an more indirect than crowdfunding. Also, you are only getting a percentage of the actual rental money minus all the fees that are required to run the REIT.
Since it’s a low risk investment, compared to flipping a house let’s say, the reward is substantially smaller. However, if you are in for the long term it might pay off greatly.
If you already have some investing knowledge (otherwise go here), this is a good solution to start your investment in Real Estate.
Rent you own place.
You might not know but you already have a piece of real estate in your hand.
Even if you don’t necessarily own it, your apartment/house/condo can be put to some use to generate income.
If you have a spare room at your place you could potentially rent it to someone. Ever heard of Airbnb?
You can use it pretty much anytime when your place is empty or when you have a spare room. And, it can help you pay your vacation if you rent it while you are away!
Benefit
You can make money with space you don’t use! Also, you can make money while you are in vacation or on a work related trip.
And, registering as a host is free, you are the one in control.
As such, you are the one setting the rules that your guest will need to follow, you also fix the price and the availability.
Con
There are location where Airbnb is not authorized. As such, always verify with your landlord/community/condo association if you can use Airbnb.
Also, there are horror stories, it’s always possible that you will end up with a guests that are party animals and will tear the place apart.
However, it’s very rare and you shouldn’t be stopped by that to make some extra money.
The End
As you can see, it is possible to profit from a Real Estate Investment. Also, there are more than one strategy to make money with Real Estate.
There is a solution for everyone.
Even if you don’t have a lot of money, it is possible for you to get into the Real Estate Investment World
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