Getting started is always the hardest, but it doesn’t need to be.
Some paths to real estate are easier than others. Let’s explore four different ways to get started in real estate and identify the best opportunities for you.
Different Types of Real Estate Investment
- Private ownership
- House flipping
- Rental properties
Private Ownership
Private ownership opportunities are generally the first real estate investment types investors recognize. A few key features define them.
- High equity
- Generally limited to residential and raw land properties
- Independent management
High Equity
Private ownership means investors hold as much equity in the real estate asset as possible. Investors that opt for private ownership opportunities are more or less going it alone, putting up their capital to ensure that they secure as much equity in the asset as possible.
Generally Limited To Residential and Raw Land Properties
Because investors are more or less going it alone with private ownership, the properties acquired tend to be residential or raw land assets.
While some commercial properties are priced within a range that individual investors can afford, most investors generally opt for residential properties and raw land—two of the most accessible and affordable property types available to individual investors.
Independent Management
The high degree of equity held in private ownership opportunities means that individual investors have an equally high degree of independence over their investment management.
How investors decide to earn an income with their property is entirely up to them.
House Flipping
An effective way to get a potentially high return in the short-term way with private property is house flipping.
House flipping is a strategy where investors acquire a property. Usually, a residential asset like a single-family home, a condo, or a multi-family home renovates the property, then sells the house for a profit.
Real estate is an asset class that can easily increase in value through improvement.
From a fully gutted house to renovated kitchen cabinets, the repairs made on a real estate asset add to its value; this is what draws private property owners to flip their properties.
Benefits of House Flipping
- Improvements add value
- Housing prices generally rise
- Returns can be large
Improvements Add Value
Undervalued, fixer-upper properties allow enterprising investors to make home repairs that may add more value to the property. House flippers can have more direct control of their value of assets by making improvements, which allows the investor a better opportunity to get a better return.
Housing Prices Generally Rise
With a few exceptions, the sales prices of homes in the United States have gone up every single year since 1965.
House flippers can generally rely on their assets to increase in value automatically. Even without renovations, the price of a house is extremely likely to increase yearly, ensuring that the asset can be sold for more than what it bought.
If you want to learn more about how housing has performed over the years, consult our educational material.
Returns Can Be Large
When all goes well, house flipping can be extremely lucrative. The average return for house flippers in Q3 of 2021 was 32.3%. Since the return goes to the individual investor, house flipping can earn a substantial income.
Drawbacks of House Flipping
- Very expensive
- High risk
- Lots of work
Very Expensive
The average sales price for houses sold last quarter was 507,800. That’s an extremely high financial threshold that house flippers need to overcome to get their foot in the door.
Even modest renovations can be extremely expensive. A simple kitchen renovation can cost well over 30,000 dollars. Returns can be high, but the amount of money required to sell a house at a profit eats into the value of that return.
High Risk
House flipping will net a good return in the short term when everything goes right.
However, even if one thing goes wrong, house flipping can stick the investor with a nightmarish financial burden. Repairs can add up fast; the property’s location can collapse in value; there are far more ways house flipping can go wrong than go right, making it an extremely risky way to invest large amounts of capital.
Lots of Work
Flipping a house is a lot of work for one person. Investors can cut expenses by making what repairs they can make themselves. But even if the property owner shells out the capital to hire contractors or outside work, coordinating the renovations, putting the house on the market, and closing on the property is a huge burden for one person to do on their own.
Rental Properties
Many private property owners earn an income on their real estate assets through rental payments.
Property owners, or landlords, will draw up a contract that outlines to the lessee the rent money to be paid for the property and other fees like water, electricity, and trash collection.
The rental income calculates the total ROI for a rental property earned subtracted from ownership costs like fees not included in the rental agreement or mortgage payments and property taxes.
Benefits of Rental Properties
- Tax breaks
- High cash flow
- Hedge against inflation
Tax Breaks
State and local governments will incentivize property owners to put quality properties on the market that abide by livability standards through tax breaks. Rental property owners can deduct significant expenses made on their assets through depreciation.
High Cash Flow
Because rental properties earn income through monthly payments, the cash flow for rental properties is consistently high. This reliable cash flow allows property owners to make more improvements on the property that adds to its value, make more investments, or increase their wealth with confidence.
Hedge Against Inflation
Rental properties are immune to rising prices. While prices rise, rental costs rise with them and offset losses. Property owners can withstand inflation and, if anything, find a means to continue earning an income by rising rental prices.
Keep up to date on how inflation affects the real estate market with our press updates.
Drawbacks of Rental Properties
- Very demanding
- Lots of red tapes
- Tenants can be risky
Very Demanding
Running a rental property is like running a business. It requires almost constant attention daily. The property requires constant upkeep, dealing with tenants can be time-consuming, and finding and screening tenants can be a drawn-out process.
Lots of Red Tape
Housing is a highly regulated real estate sector. Those regulations can be even more strict depending on where your property is located. These regulations add a high degree of stress and liability to property management, which may be more than real estate investors bargain for.
Tenants Can Be Risky
While uncommon, nightmare tenants can be a serious burden on property owners. Whether it’s a trip to civil court over breach of contract or going through the awful process of evicting a delinquent tenant, rental property owners never really know what to expect out of their tenants, which puts the return from the property at risk.
REITs
Real estate investment trusts were created in the 1960s to allow everyday investors to participate in the real estate market without the intensive involvement that comes with property ownership.
REITs function like corporations; only they make their earnings through income-generating real estate assets. REITs are like mutual funds, but for real estate assets, investors can buy publicly traded shares of a given REIT like any other security on the exchange.
Benefits of REITs
- High liquidity
- Stable returns
- Low financial threshold
High Liquidity
REITs offer real estate investors a high liquidity opportunity that property owners can’t. Liquidating a real estate property can take months at a time. REIT shares, on the other hand, can be traded within days.
Stable Returns
REITs must follow strict standards. For example, REITs must pay out 90% of their yearly taxable income at a minimum. That means that investors can reliably count on the fact the REITs must pay out on their earnings.
Low Financial Threshold
Investors can buy into REITs for as little as 100 dollars. Furthermore, REITs allow investors to buy into high-value real estate assets they wouldn’t be unable to. Through REITs, investors can invest in commercial and industrial properties down to niche markets like apartment buildings in a specific location, like North Carolina.
Drawbacks of REITs
- Weak growth
- High correlation to stocks
- Less control over performance
Weak Growth
While REITs find a commendable degree of stability due to their legal obligations to investors, this means their growth is hindered. Because REITs must pay out 90% of their income annually, the trust does not have the liquid capital available to grow as fast as other investment types.
High Correlation to Stocks
While real estate is often valued for its low correlation to other markets, REITs correlate highly to the stock market for a real estate asset class. When stocks go down, REITs are likely to go down as well, meaning they don’t have the same security as other real estate investments in a bad economy.
Less Control Over Performance
There is little opportunity for investors to have a direct impact on the value of their assets. Whereas other real estate investments present the opportunity for value-driving improvements, REIT investors are at the whim of whatever the trust’s board decides.
Private Equity Real Estate Funds
Private equity real estate funds serve as a middle path between private ownership and REITs.
Like REITs, these funds used pooled capital from investors to acquire high-value real estate assets that would otherwise be inaccessible to individuals. They are different in that they are not publicly traded; these private funds are more selective, only allowing accredited investors to buy-in.
All in all, private equity funds give real estate investors one of the best opportunities to buy into the market. Here’s why.
Great Returns
Private equity funds have one of the best returns on a real estate investment. As of 2020, the average return from private equity funds was 14.2%. With property prices continuing to rise, that return may increase.
Explosive Growth
Private equity funds aren’t hindered by the same restrictions that hold back REITs. The pooled capital fueling them allows funds to move faster in more competitive markets and grow faster than REITs.
Managed by the Best
Private equity funds attract the brightest, most capable financial minds. Private firms incentivize talented investors to boost performance because they pay out better than REITs—everybody gets a better return.
Your Two Easy Opportunities
Real estate management is a lot of work for a lot of risks. Your easiest opportunities for real estate investment or either REITs or private equity funds—these are hands-off options that leave property management to the professionals.
Getting started with the professionals at Christina today.
Sources:
Average Sales Price of Houses Sold for the United States | Economic Research
A Guide to Flipping Houses for Profit | SmartAsset