Purchasing real estate is an investment strategy that can be very lucrative when done properly. Unlike the stock and bond investors, real estate owners can buy properties by paying a portion of the total cost up front, then paying off the balance, plus interest, over time.
A traditional mortgage usually requires a 20% down payment (although in some cases a 5% down payment is all it takes). A small down payment can really help flippers and landlords. If they need to, they can take out second mortgage on their properties to make down payments on additional properties.
Here are some ways in that investors can make money on real estate.
1. House Flipping
Flipping homes have shorter time periods that your capital and effort are tied up. Depending on the real estate market, there can be significant returns, even in short time frames.
Successful flipping requires a good market knowledge combined withs some luck. Hot markets can cool off quickly, leaving short-term flippers with losses or long-term headaches.
2. Become a Landlord
Owning rental properties can give you regular income while maximizing capital through leverage. There are several associated expenses that are tax-deductible, and losses can offset gains in your other investments. In an ideal situation, your properties will appreciate over the course of the mortgages, leaving landlords with a more valuable asset than they started with.
Unless you hire a good property management company, rental properties are know to be haunted with continual headaches. In some worst-case scenarios, bad tenants can damage property. Also, in certain rental market climates, a landlord must either endure vacancies or charge less rent in order to cover expenses until things change. Of course, once the mortgage is paid off, the majority of the rent is all profit.
3. Real Estate Investment Trusts (REITs)
REITs are essentially dividend-paying stocks whose core holdings comprise commercial real estate properties with long-term, cash-producing leases.
REITs are essentially stocks, so the leverage associated with traditional rental real estate does not apply.
4. Online Real Estate Investing
Online platforms connect investors looking for financing projects with real estate developers. In certain cases, you can diversify your investments for a relatively small amount of money.
The way that online real estate investing platforms actually work. In the past, you had to be an accredited investor to participate in these investments, but now that is not the case for may of these types of investments.
What’s the Bottom Line?
Whether the real estate investor uses properties to generate rental income, or to wait until the perfect selling opportunity arises, it’s achievable to build a robust investment plan by paying a relatively small part of a property’s total value up front. But as with any investment, there is profit and potential within real estate, whether the overall market is up or down.