I want to talk about the importance of buying property as a financial investment not solely as the home in which you reside. There are a few options in which you can invest in real estate that can help you cash flow and stabilize your income. We are going to discuss owning property, real estate investment groups, real estate trading, and real estate investment trusts.
I have been managing rental properties for over twenty years and although there are many responsibilities with owning and leasing property, there are also great rewards. As the landlord/owner I am responsible for paying the mortgage, taxes and costs of maintaining the property. Ideally, the landlord charges enough rent to cover all of the aforementioned costs. A landlord may also charge more in order to produce a monthly profit, but the most common strategy is to be patient and only charge enough rent to cover expenses until the mortgage has been paid, at which time the majority of the rent becomes profit. Additionally, property may also have appreciated in value over the course of the mortgage (according to the U.S. Census Bureau, real estate has consistently increased in value since 1940), leaving the landlord with a more valuable asset.
Like all things however there may be a down side, at times you may find yourself with a bad tenant who damages the property or, worse still, end up having no tenant at all. This leaves you with a negative monthly cash flow, meaning that you might have to scramble to cover your mortgage payments. There is also the matter of finding the right property (previously written articles will give you some advice on finding the right property that works for you) you will want to pick an area where vacancy rates are low (due to demand) and choose a place that people will want to rent. Also, buying property may also consume more of your time overall as opposed to other options such as real estate investment groups or stocks. If you don’t mind taking care of your investment , the profit will be to your advantage. Remember, you can always higher a property manager if the works becomes too overwhelming and your find yourself in over your head.
Now I want to cover real estate investment groups, or real estate syndications. These groups are similar to small mutual funds for rental properties. If you want to own rental property, but don’t want the hassle of being a landlord, a real estate investment group may be the solution for you. The real estate syndicator will buy or build apartment or commercial space and then allow investors to buy a portion of the project from them. A single investor owns a percentage of the project, but the company operating the investment group collectively manages all the units – taking care of maintenance, advertising vacant units and interviewing tenants. In exchange for this management, the company charges a management fee.
Real estate trading is when traders buy properties with the intention of holding them for a short period of time (often no more than three to four months), whereupon they hope to sell them for a profit. This technique is also called flipping properties (one of my personal favorites) and is based on buying properties that are either significantly undervalued or are in a very hot market.
Lastly, we are going to discuss real estate investment trusts (REIT) are created when a corporation (or trust) uses investors’ money to purchase and operate income properties. REITs are bought and sold on the major exchanges just like any other stock. A corporation must pay out 90% of its taxable profits in the form of dividends to keep its status as an REIT. By doing this, REITs avoid paying corporate income tax, whereas a regular company would be taxed its profits and then have to decide whether or not to distribute its after-tax profits as dividends. In comparison to the aforementioned types of real estate investment, REITs allow investors into non-residential investments (malls, office buildings, etc.) and are highly liquid – in other words, you won’t need a realtor to help you cash out your investment.
To conclude, any of these options can be profitable to your financial income. See which one works for you.