Real estate is an imperishable asset, ever-increasing in value with time. Even at a very small scale, real estate remains to be a proven method for building cash flow and wealth. With well-chosen assets, real estate investors can enjoy excellent returns, value appreciation, leverage, and diversification of their investment portfolio. For those who are worried about the current recession, there are stricter regulations to protect the housing market now, unlike the crashes experienced before. Due to the low correlation that real estate has with other asset classes, adding real estate to your investment portfolio can lower its volatility and provide a higher return per unit risk. One of the disadvantages of real estate investments, however, is the massive starting capital it demands.
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If you are a beginner to real estate investments, it is always good to be knowledgeable about the options available to you and their risks. Here are some of the most popular types of real estate investment along with their pros and cons.
Real Property Investments
This is the simplest and perhaps the oldest form of real estate investment. You buy a property as an investment and generate your income through the rental payments from your tenant. The moment you buy your preferred property, you will have full control over your investment, and you will get a steady stream of cash flow in the form of your monthly rent payments. Investing in real property also comes with many tax benefits and deductions as well. Even at a time of a recession, the demand for low/mid-priced rental properties will remain steady.
There are several common risks involved with real property investments. To make short term profits, your rental fee should cover all costs associated with property ownership. This includes mortgage, taxes, utilities, and ongoing maintenance costs. Many investment property owners make the mistake of having the rental fee cover only the mortgage payment. Moreover, even with background checks, there is the risk of tenants that do not make payments on time or damage the property. There is also the risk of market decline which can leave you with a mortgage that is higher than the property’s worth.
Real Estate Limited Partnerships (LPs)
A Real Estate LP is a group of investors who pool their money to purchase, develop, or manage commercial real estate properties. You can buy securities as an investor in them. Real Estate LPs have a general partner who uses the money from investors to buy undeveloped land or property with the potential to develop it and sell at a profit. You get limited liability and a flexible management structure that handles development and manage the entity with this method.
Risks involved with investing in real estate LPs include lack of liquidity since they are typically long term investments such as development projects. There can be delays, denials, and other issues with government permits and zoning approvals which can prolong the duration of development and risk of a capital call. There is also no solid guarantee that you will get a high ROI because of unexpected market fluctuations.
Mortgage Investment Entities (MIEs)
Mortgage Investment Entities have investors pool money together to lend to people as mortgages. They target those who are not able to get a mortgage through banks or credit unions or borrowers who want faster approvals and more flexible mortgage terms. This investment method has seen significant growth over recent years with steady higher yields. They also come with several risks including lack of liquidity, declining investment value, and high-risk borrowers who fail to make their payments.
Real Estate Investment Trusts (REITs)
REITs own, develop, and operate properties that produce a steady stream of income for their investors. They invest in a variety of property types including apartment buildings, offices, warehouses, shopping malls, retail centers, and more. They are typically total return investments that provide substantial and steady dividend yields. REITs have the potential for long-term capital appreciation with transparency.
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Original article courtesy of Newsweek.com