The Basics of Real Estate Investment: Real Estate 101
Owning a real estate property is something that everybody wants in their investment books. Nowadays, the procedure of purchasing real estate has become quite easier too; one can buy the property by paying a percentage of the total amount and paying the rest of the amount, including interest, over a fixed time. What actually is real estate investment and why is it so popular in spite of being an expensive affair? Real estate is an alternative asset which could garner lucrative returns if approached correctly. It could be a reliable way of income generation, whether it’s over the long term or short term. A good real estate investment could beautify your portfolio with advantages like appreciation potential, portfolio diversification, and tax advantages.
Although this investment option is brimming with positives, it still could be confusing and intimidating to some. So, in this article, we will discuss the fundamentals of real estate investment and break it down in simple steps so that you can reap maximum benefits from your hard-earned money.
What is a real estate investment?
Real Estate investment could be described as purchasing, ownership, sale or lease of land for the purpose of earning money. The major four categories of real estate are:
1. Land Real Estate
An undeveloped property with no structures in it could be classified as land real estate. Landowners could use the land for the purpose of agriculture, development or further sale of the said land after a certain time.
2. Residential Real Estate
Houses and condominiums falls under the umbrella of residential real estate. House could be further divided as single-family homes or multi-family homes but homes larger than four units are considered commercial property.
3. Commercial Real Estate
If it is going to be used for business, it is a commercial real estate which envelopes office space, retail space, land, restaurants, farmland or multi-family homes.
4. Industrial Real Estate
The properties serving industrial businesses are considered industrial real estate, for example, shipping and storage warehouses, factories, and power plants.
How can real estate investments earn money?
Real Estate investment could generate incomes mainly through three ways:
- Loan Interest Payments
1. Loan Interest Payments
A real estate loan is when an investor lends money to the real estate developer and earns interest on the principal amount of loan. It arranges for regular cash flow for the investor. Depending upon the number of investors, the loan could be classified into junior debt, senior debt and mezzanine debt. This classification sharply defines an investor’s right, in case the property seeks foreclosure due to the default of a loan.
Leasing the property is one of the most popular ways of creating money from real estate investment. It also provides regular cash flow for the investor or owner of the property. The owner could rent the property independently or hire a property management company to do so on his behalf. Depending on the same factor, an owner could retain the generated rent or share it with a third party.
Appreciation could be defined as the increase in the value of property over time and this is one of the most lucrative options for the owner to earn big bucks on the property. The appreciation is the potential gain an investor could bag at the time he purchases the property. It does not provide a regular cash flow but amounts for a single-time large income.
How to invest in real estate?
A perfect real estate investment weighs several factors like amounts of money, and varying degrees of time commitment, capital, investment horizons, risk, and return potential. No one can make an error-free prediction of so many factors on a single property. Hence, the real estate investment could fall under two major categories: active and passive investments.
1. Active Real Estate Investment
If you are a real estate expert, this one is tailor-made for you. Depending upon the number and nature of investments, an active investor could work as real estate investors part-time or full-time. To ensure the maximum success of a property, an active investor work with as few owners as possible, so that a bit of responsibility could be shared in maintaining the property leading to the expected return on investments.
a) Property Flipping
In a traditional house flip, an investor purchases the property, make desired changes and renovate the property and then sell it at a higher price. This is a short-term investment and one of the most active ways to do so. It is up to the investor to make any changes or not. He may renovate and sell or wait for a bit longer when he could gain the returns when the value of the house goes up, this way he doesn’t need to spend on any repairs or renovation.
b) Rental Properties
Rental properties do well in long-term investment perspective. Any type of property can be a rental property. The property owner earns regular cash on a monthly basis and this provides for a reliable income stream for investors.
2. Passive Real Estate Investment
Passive real estate investment does not discriminate on the grounds of real estate knowledge. It is for everyone. Passive real estate investors provide capital to the experts or professionals who invest on their behalf.
a) Private Equity Fund
It is an investment model under which investors pool their money and make it a single investment. It is preferred if an investor has knowledge about financial risk factors and potential gains to turn an investment into a profitable one.
b) Real Estate Investment Trust
REITs are the perfect way to involve ordinary investors in real estate investment. REIT is a company that makes debt or equity investments in commercial real estate. The potential investor buy shares of the company and earn income from its debt and equity investments in the form of dividends.
Now when you know all the basics about real estate investment, when are you making the move to invest and earn potential income?