Real estate presents investors with an excellent opportunity to acquire robust assets that can endure through market shifts. Volatility in the markets—whenever that strikes—-leads many investors to diversify their portfolios with harder assets, like real estate.
The problem is that buying into real estate using conventional strategies tends to have a high price tag.
Most people think investment means buying a property outright.
Buying additional properties for rental purposes can be lucrative but generally requires a great deal of seed money. Closing on real estate, managing the property, and other complications could make personal ownership an untenable strategy if you’re going it alone.
Other real estate investment opportunities vary in the amount needed to get involved. Let’s go through a wide range of different real estate investment strategies so you can determine what level you feel comfortable getting involved at.
Investing In Rental Properties
Let’s start with the most commonly understood method of real estate investment: operating rental properties.
While intensive, this method of real estate investment is nevertheless quite common. It’s just a matter of which level you want to get involved at. Property leasing may be an option for investors interested in owning rental properties.
How Does Running a Rental Investment Property Work?
You likely have some familiarity with landlords. Perhaps you’ve rented an apartment or house before. But few of us have acted as a landlord ourselves.
In short, you acquire a property and then rent out its usage with a tenant under contract. The contract stipulates the nature of the agreement between landlord and tenant: how much the tenant pays in rent, utility costs, and other fees are all laid out in the contract.
These properties generate cash flow for the real estate investors through the rent—your return on your investment is the income paid to you by your tenants.
It’s essential that you devote time and thought to your contract. Signing the paperwork to close on a property is one thing, but rental contracts require a great deal of consideration.
Breaches of contract by the tenant or landlord can lead to expensive legal fees.
What Factors Drive Rental Property Cost?
- Legal fees
- Maintenance costs
- Property taxes
- Mortgage payments
Many factors determine the amount of money you need to rent a property. You must take fees beyond the property costs into account.
Legal Fees
As a landlord, your income depends on you and your tenant following the agreed-upon contract. Before you consider getting into property rental, you should have an additional budget that deals with potential legal fees if, in a worst-case scenario, a breach of contract brings you to court.
Maintenance Costs
Maintaining the property is an ongoing expense that will determine the total cost of renting your property long term. Electrical work, plumbing, and other passive expenses of property ownership add up.
Many landlords factor these costs into the rent, but emergencies like broken pipes can strike at any moment and incur dramatic costs.
Property Taxes
Though your tenant may pay you to lease your property, landlords generally pay that property tax.
The amount you pay in property tax depends on your state and sometimes even your locality. Local ordinances may have additional property taxes you need to take into consideration.
The national rate for property tax is 1.07%. California, for example, tends to have an average effective property tax rate of around .07%. But in states like New Jersey, property tax can get as high as 2.2%
Mortgage Payments
Unless you pay for your rental property in full, you’ll have to factor in mortgage payments against the rental income you receive to understand how much money you need before investing in a property you want to rent.
How Much Do Rental Properties Cost?
What can one expect to pay for rental properties without all these additional costs in mind?
Property values continue to rise across the US.
That doesn’t mean you should stay away from real estate investments—only that to get into this particular kind of investment, you may need far more money to start with.
With such a wide range of properties that can be leased in this way, prices for these properties can vary to a large degree.
One of the most affordable rental properties you can own is a condo. The median price of a condo in March 2021 was 289,000 dollars. Depending on the city you intend to buy the property, that price can change drastically.
For example, the average cost of a Los Angeles county condo in November 2020 was around 530,000.
For a single-family home, the median cost was 334,500 last year. As prices for real estate continue to rise, down payments will only become more and more difficult to reach.
Commercial and industrial real estate is far more expensive than residential.
These types of real estate are typically calculated by the square foot, owing to their larger size. Los Angeles offices went for $44 per square foot last year, and industrial space for $11 a square foot. That may seem small, but the square footage adds up in those larger spaces.
How Much Money Should You Have to Invest in Rental Properties?
This method of real estate is high cost, both on your time and your money.
Investing in rental properties is not entirely out of reality, depending on the type of property you mean to buy. If you are looking to invest in a rental property, you should probably have 150,000 dollars or more set aside to make that investment.
Far more accessible real estate investment methods still allow you to seize on this market, like through REITs.
What are REITs?
Real estate investment trusts provide investors an accessible option for real estate investment, which doesn’t require the same amount of capital as rental property ownership.
REITs are companies that secure financing or outright own a range of income-earning properties across sectors.
Created in the 1960s, they function as securities that use real estate earnings from rental properties or mortgage interest, allowing everyday investors to get involved in real estate investment.
Some REITS feature more residential properties, others commercial or industrial. They allow investors to invest in these high-value real estate properties by operating similarly to a mutual fund, but for real estate.
REITs are publicly traded, meaning you can buy into them like any other stock or bond on the market. Buying shares in a REIT allows you to invest in the income-earning properties in your portfolio.
How Does a REIT Work?
The properties owned or financed by a REIT generate their earnings through rental income, like any rental property. Like a publicly-traded company’s earnings, the REIT’s earnings are returned as dividends to the shareholders.
The rental income of the REIT’s assets serves as the basis for the investor’s returns without the added burden of the legal fees, property management, and so on.
In order to operate, REITs must abide by a strict set of standards.
REITs need 100 or more shareholders—and five or fewer individuals cannot own 50% or more of the trust’s shares. This encourages a diverse range of investors while always preventing fraudulent behavior.
REITs need to be taxed like a corporation, with a board of trustees leading operations. At least 90% of their taxable income must be paid out as dividends to the shareholders.
As far as the assets that generate their income, 75% must be from accumulated mortgage interest, rental income, or sales of the assets. 75% of their investments must be cash, U.S Treasuries, or real estate.
How Much Money Do You Need to Invest in a REIT?
REITs are a very accessible way to get into real estate. Even 1,000 dollars can make for a worthwhile investment into a good REIT.
Investing in a REIT returns you a respectable dividend, no matter what level you get in at. They have the benefit of high liquidity. Liquidity describes the ease with which an asset can be turned into liquid capital.
The illiquidity of property ownership can sometimes be a drawback, as those funds tied up in the property will be harder to retrieve; you must find a buyer and close on the property, which can take a long time.
Publicly traded REITs can be bought and sold with great ease compared to other real estate investment methods. But because they are more strongly correlated to other markets, they have higher volatility, making them risky.
What Are Private Equity Real Estate Funds?
Private equity real estate funds strike a balance between rental property ownership and REITs.
Like REITs, these funds allow investors to buy into high-value real estate assets they would not be able to access individually. Unlike REITs, private equity funds are not publicly traded.
Because they aren’t publicly traded, private equity funds retain the security from market trends outside real estate – they’re relatively insulated from the stock market’s volatility, for example.
One of the most significant benefits of real estate investments using private funds is their reliable performance outside general market trends.
How Do Private Equity Funds Work?
Private equity real estate funds must be selective with their investors—only accredited investors can participate in them.
The fund uses pooled investment funds to acquire income-earning properties—usually in the commercial and residential sectors. Anything from office buildings to storefronts, condos, industrial spaces, and homes make up the real estate assets in a private equity fund.
Funds like these have strong potential for high-level returns. Private equity fund assets are consistently appreciating because real estate consistently increases in value.
Demand for real estate has been predicted to remain strong as more and more young people enter the market. Investing in a private equity fund can help you seize on this opportune time for real estate without the high cost.
How Much Money Do You Need To Invest in a Private Equity Fund?
Because funds require accredited investors, they set a certain financial threshold to invest with them.
But when it comes to the amount you need to invest, it all can come down to a discussion with the fund managers themselves.
At Christina, we encourage anyone interested to reach out to us to see how they can get started in real estate investment.
We’ve been in real estate investment for over four decades. In that span of time, we’ve assembled a reliable pool of assets that allows us to continue outperforming competing funds in the most lucrative market in the country, Los Angeles county.
Invest in the Best Real Estate With Christina
The Westside region of Los Angeles has some of the hottest real estates in the country. Neighborhoods like Beverly Hills, Brentwood, Santa Monica, and Malibu are a few of the ultra-prime markets where we’ve found our niche.
Learn more about our proven strategy here.
Sources:
Property Tax – California | H&R Block
Highest & Lowest Property Tax States | Mortgage Calculator
How Much Is A Condo, And Are They Worth The Price? | Quicken Loans
United States Commercial Property Prices 2020: Per Square Foot | News Offices