Ah, real estate investing. There are few things like it. Over the past few years Real estate investing has become quite a popular trend and it doesn’t seem to be slowing. For both passive and professional investors it is one of the most widely used investment vehicle. But it is such a broad term. What is real estate investing, why is it so profitable, and why doesn’t everyone do it? We’ll talk all about these and, more importantly, the different types of real estate investing you can use.
Real estate investing has been a popular investment vehicle for a long time now. A lot of its popularity comes from its difference from the stock market. In the stock market you buy and sell shares of a company and if the company tanks, you lose your money. However, in real estate, even if the home burns down, or if there is an earthquake, most of the time you will still have the asset; you may lose a bit of money, but you don’t lose all of it— you still have some sort of asset.
Another reason it is so popular is its usual appreciative nature. Now, real estate doesn’t always raise in value, but, after a few years, it can and it is a more stable (less risky) investment. The following are a few different ways that you can invest in real estate listed from most risky to least risky.
WARNING: THIS ARTICLE IS MEANT FOR EDUCATIONAL PURPOSES ONLY AND NOT AS FINANCIAL ADVICE. SPEAK WITH AN INVESTING CONSULTANT BEFORE MAKING ANY INVESTMENT DECISIONS.
Flipping is an interesting term that really has two meanings. What we normally think of when we hear the phrase ‘to flip a house’ is someone who buys a derelict piece of property, fixes it up, and sells it for a profit. This is a completely viable option, but it is fraught with complications and can be quite risky. However, whether or not you will make a profit is based on the market, the area, the quality of the remodel, and much more. Not to mention there is a lot of work that you have to put into it. Of course, you can hire a contractor to do the add-ons, repairs, and renovations, but then that will cut into your profits. So, flipping a house, in the traditional sense, is quite risky.
Now, the other meaning of the term ‘to flip a house’ is when someone buys a house, holds on to it for a short period of time (we are talking only a few months) and then sells it again without doing repairs. This is another risky tactic, but it involves less investment than the previous ‘flipping’ tactic. Again, we cannot stress how much of a speculative investment this is so it should only be attempted by a professional.
Wholesaling is a bit less risky than flipping, but it is still on the high risk scale. You see when you do a wholesale transaction in real estate you are buying a house, turning around, and listing it immediately for a higher price. This works best for someone who has the time to monitor the market and the money to make snap decisions. If one notices that there is a good home that has just been listed, one that the person knows will sell quickly, they can buy it quickly and relist it before anyone notices. Now, this isn’t the only way you can do a wholesale, there are different tactics. However, you really need to know what you are doing before you go through with it.
Buying homes to convert into rental units is probably in the middle of the risk scale and it is one of the only options that continually pays you instead of putting payment off for some lump sum in the future. All you need to do is go looking for a good 2 to 4 bedroom home (or a duplex), that is in good condition, outfit it however is needed and hire a property management company. It is that simple. After that point, depending on if you have a good property management company working for you or not, you won’t have to do anything. Most good quality property management companies will find you good tenants, take care of repairs, and collect rent each month. It is a great arrangement.
Buy, hold, and hope
Buy, hold, and hope is the oldest investment strategy in the book, and frankly it doesn’t always work out. Essentially, this strategy is purely speculative. A prospective investor buys a hunk of land that they think could be sold for much more than it is priced at, buys it, and holds on to it for years until they are ready to sell; you know, when the price gets higher. However, for some poor folks, the price never goes higher. The real estate market is a fickle thing and can be hard to master. Now, this strategy has worked for people in the past, but, like we said, it is purely long term speculation.
Buying a vacation home is a dream of a lot of people, but, unfortunately, it isn’t in the cards for a lot of us. However, renting one for a week or so is. And that is where you, the savvy real estate investor comes in. All you need to do is find yourself a great vacation home in some scenic location (Idaho is full of great places for vacation homes) and then market it for rent. Just be sure to either hire a manager or do a really good job of being on top of scheduling and cleaning and things.
REITs are a fascinating thing. They are great for the investor that doesn’t want to bother looking for property themself. REITs are much like mutual funds but for real estate. Investors put money into the collective fund and the managers look for and invest in properties. So, the only difference between REITs (or Real Estate Investment Trusts) and mutual funds is that the trust buys real estate, not shares in a company.
Well look at that, there are a lot more ways to invest in real estate than you thought. Now, of course there are more than these, but these are a good start for the new investor. Again, we cannot stress enough that you should always talk to a financial consultant or advisor before investing in any sort of real estate.
If you need help finding real estate, or a financial advisor to help you out, then contact us at the Hughes Group. We will be glad to help you in any way that we can.