Snapping Up Investment Properties: Strategies For Savvy Home Buyers

Investing in real estate is a popular way to diversify your portfolio. One of the most common ways to do this is by buying a rental property, such as a single-family home, a duplex, or an apartment. This can be a lucrative way to earn income, but it requires a commitment of time and money.

Before investing in a rental property, it's important to consider the costs involved, including the down payment, maintenance, and repairs. It's also crucial to understand the legal requirements and tenant-landlord relationships.

Another option for investing in real estate is through Real Estate Investment Trusts (REITs). REITs are companies that own commercial real estate, such as office buildings, retail spaces, apartments, and hotels. They tend to pay high dividends, making them attractive for investors seeking regular income.

Online real estate platforms and investment groups are also options for those interested in investing in real estate. These allow multiple investors to pool their money and invest in larger commercial or residential deals.

When considering how to invest in real estate, it's important to evaluate your financial stability, the potential return on investment, and the time commitment required for managing the property.

Rental Properties

Advantages of Rental Properties

• Regular income and potential appreciation.
• Can be maximized through leverage.
• Many expenses are tax-deductible.

Disadvantages of Rental Properties

• Managing tenants can be tedious.
• Unexpected costs can eat into income.
• Unpredictable vacancies can reduce income.

Tips for Investing in Rental Properties

• Choose a location with low property taxes, good schools, and walkable amenities like restaurants and parks.
• Look for areas with low crime rates, easy access to public transportation, and a growing job market, indicating a larger pool of renters.
• Consider using an online real estate platform or a real estate investment group (REIG) to find investment opportunities.
• Be prepared for the time and financial commitment required to choose the right property, prepare it, and find reliable tenants.
• Set aside 1% of the property's value for repairs and maintenance.
• Understand landlord-tenant laws, including security deposits, lease requirements, eviction rules, and fair housing laws.
• Consider purchasing landlord insurance to cover property damage, lost rental income, and liability protection.

Real Estate Investment Groups (REIGs)

In a typical REIG, a company buys or builds a set of apartment blocks or condos, and a single investor can own one or multiple units of self-contained living space. The company operating the investment group then collectively manages all the units, handling maintenance, advertising vacancies, and interviewing tenants. In exchange for conducting these management tasks, the company takes a percentage of the monthly rent.

A standard REIG lease is in the investor's name, and all the units pool a portion of the rent to cover vacancies, meaning you'll receive some income even if your unit is empty. REIGs are more hands-off than owning rentals, providing income and appreciation. However, they are susceptible to unscrupulous managers, and fees can be similar to those associated with mutual funds.

REIGs are well-suited to those who want to invest in real estate but don't want to manage properties themselves. They are also attractive to investors who want to gain a stake in real estate but don't have the capital to purchase properties outright. REIGs allow investors to buy one or more properties through an operating company, which then collectively manages all the units and markets them.

REIGs can be structured in various ways, but most are organized as partnerships that pass through income reported on K-1 tax documents. They are not subject to the same rules as Real Estate Investment Trusts (REITs) and can engage in property financing, flipping properties, leasing properties, or selling units while maintaining management control.

When considering joining a REIG, it's important to evaluate the group's track record, transparency, and regulatory compliance. It's also crucial to assess the experience and expertise of the management team and review the group's financial statements to assess its financial stability and performance.

Flipping Houses

Rule #1: Assess Your Cash Situation

First, determine your financial resources and how much money you have to invest. If you don't have enough cash, consider finding investors or joint venture partners to contribute. Splitting the profits with partners is a great way to build momentum and gain experience.

Rule #2: Build a Team

Start building a professional house-flipping team to help you find, fix, and sell the property. This team can include real estate brokers, contractors, architects, insurance specialists, accountants, and money lenders. Their expertise will help you reach your goals faster and navigate any problems that arise.

Rule #3: Find a Good House to Flip

Look for a property in a well-researched geographic area that interests you. Ideally, you want to buy a house at a low price that requires minimal repairs, so you can quickly sell it at a higher price and make a profit. Supervise the repairs personally to ensure they are done properly and within budget. Remember, your profit depends on the total cost of the house, including repairs.

Rule #4: Speed Equals Profit

Time is money when it comes to flipping houses. The faster you can make improvements and sell, the better your profits will be. Stay on top of your contractors to ensure the job is done on budget and on time. A fast sale, especially in an appreciating market, will maximize your returns.

Bonus Tips:

• Consider finding an experienced partner, especially if you have capital or time but lack expertise in real estate valuation, marketing, or renovation.
• Be aware of the risks involved. Flipping houses is a risky investment due to its capital intensity and cash flow dependency.
• Treat it as a learning curve. Experience is the greatest teacher, so be prepared to learn from your mistakes.

Happy house flipping!

Real Estate Investment Trusts (REITs)

REITs are required to meet certain standards set by the IRS. They must return a minimum of 90% of taxable income to shareholders as dividends each year, and they must invest at least 75% of total assets in real estate or cash. They also need to receive at least 75% of their gross income from real estate.

There are different types of REITs, providing investors with access to residential, commercial and specialty real estate. Equity REITs, for example, operate like a landlord, collecting rent and providing upkeep. Mortgage REITs, on the other hand, don't own the underlying property, but instead own debt securities backed by the property.

REITs can be a good investment, but they can also be varied and complex. They can provide added diversification, potentially higher total returns, and lower overall risk. They are a good way to balance out stocks, bonds and cash. However, they can be sensitive to interest rates, and there are property-specific risks associated with different types of REITs. For example, hotel REITs often perform poorly during economic downturns.

When investing in REITs, it is important to analyse the company's financial health, looking at its net asset value and debt-to-equity ratio. It is also important to consider the industry in which the REIT operates, and the strength of its tenants.

REITs can be purchased through an investment or brokerage account, and you can also buy into a fund with interests in multiple REITs.

Online Real Estate Platforms

Diversification and Accessibility

Due Diligence and Research

When considering online real estate platforms, it is essential to conduct thorough research. Some platforms cater specifically to accredited investors, who have a higher income or net worth. Additionally, the quality and transparency of platforms can vary, so it is important to review fees, investment selection, and management practices. Reputable platforms will provide detailed information about their investment opportunities, including financial details and market insights.

Risk and Illiquidity

While online real estate platforms offer the potential for high returns, they also carry risks. Real estate crowdfunding can be riskier than other forms of investing as some projects may have been unable to secure traditional financing. Additionally, these investments tend to be illiquid, with lock-up periods that can last several years. It is crucial to carefully review the terms and conditions of any investment opportunity.

Examples of Reputable Platforms

According to Investopedia, some of the best real estate crowdfunding platforms include Fundrise, which offers low fees and a low minimum investment of $10, and EquityMultiple, which provides a diverse range of investment opportunities. Other notable platforms mentioned include YieldStreet, CrowdStreet, RealtyMogul, and Arrived. These platforms differ in their investment requirements, fees, and target investor profiles, so it is important to review and select the one that aligns with your investment goals and risk tolerance.

Frequently asked questions