Invest in Property

With the housing bubble and subsequent crash fresh in everyone's mind, investing in real estate may seem like a huge risk. However, many people believe that investment properties are an important part of a diversified portfolio. With proper planning and care, these investments can become valuable assets that can earn large returns or provide you with a steady source of income. There are a number of ways to get into the property investing game, and each comes with different pros and cons.

Steps

Investing in REITs

1. Determine if REITs are right for you. A real estate investment trust (REIT) is essentially a share of stock in a real estate venture. REITs serve to pool the money of investors for the purpose buying, selling, developing and managing real estate properties. By law, these trusts are required to have more than 100 investors, meaning that investors can input a only a small amount but be invested in an expensive property. This means that if you want to invest in real estate without the risk or initial investment of more traditional forms of property investment, an REIT is your best option.
   • In addition, this provides you with low "liquidity risk," meaning that you can easily sell off your shares if you need to.
   • The REIT manager is required to pay 90 percent of trust income directly to trust shareholders as dividends, making REITs very attractive to investors seeking consistent income from investments.
   • Real estate investment trusts allow for investment in commercial property as well as residential.
2. Learn about the different types of REITs. REITs can be classified in different ways, usually by the assets or geographical areas that they invest in. Before purchasing an REIT, you should research the investments that it is involved in and consider the future performance of these markets. While there are many types of REITs, they can generally be classified in the following ways:
   • By investment type. First, equity REITs invest in large real estate properties and distribute earned rent or profits to investors. Next, mortgage REITs invest in mortgages by loaning out money or by buying existing mortgages or mortgage-backed securities. These funds are more sensitive to interest rate changes than other types. Finally, hybrid REITs invest in both mortgages and properties.
   • By geographical area. REITs were invented in the United States but have since become more common in the rest of the World. Some REITs in the US focus on particular states or regions, and others focus on international properties and investments.
   • By property type. Some equity REITs invest only in certain types of properties. These can anything from rental condos to shopping malls.
3. Assess the risks of buying REITs. As with any investment, there are certain risk involved with purchasing REITs. First, there is always the risk of REIT default, in which the fund providing your dividend payments fails and leaves you with a sunk investment and no dividend payouts. However, there are other risk associated with non-exchange traded REITs. These securities, which are traded outside of major stock exchanges, may be illiquid, lack price transparency, or be managed with conflicts of interest. All of these can potentially lower your returns.
   • In addition, there are certain fraudulent REITs that are not registered with the Securities and Exchange Commission (SEC). To check if a REIT is registered, you can search the SEC's EDGAR system at http://www.sec.gov/edgar/searchedgar/companysearch.html.
4. Purchase shares of REITs. REITs, like any other security, can be bought and sold on public exchanges. However, shares of REITs are also bought up by mutual funds and traded as part of Exchange Traded Funds (ETFs). All of these investment vehicles can be bought and traded by contacting your stockbroker or investment professional, or by using an online trading platform.
   • While REIT's can provide a consistent income flow, they are the only option on this list that cannot be purchased using leverage (investing using loaned money). This limits your potential return somewhat. However, it also reduces risk.

Pooling Your Capital with Other Investors

1. Find out if investing in an REIG is right for you. Like a REIT, a real estate investment group (REIG) pools the money of two or more people to purchase, develop, manage and sell properties. In many cases, the properties bought are apartments or a similar property type, and investors own one or multiple units within the building. Typically, this will involve a much larger initial investment than simply buying into a REIT, but a smaller one than buying a property yourself. It also lacks many of the inherent risks of property trading because the risk is shared among many investors.
   • Because these groups are generally much smaller than real estate investment trusts, members can aid in managing properties and gather tips and advice from other seasoned investors. This allows for more personal interaction with your investment.
   • This involvement is not consistent throughout all REIGs. In some cases, the company that manages the REIG will do all of the advertising, management, and maintenance for investors. This allows investors to make money without any additional effort.
2. Research potential REIGs. REIGs function much like mutual funds, and also have the fees that go with them. Be sure to investigate any potential REIG investment before committing your money to determine that their fee structure is fair. Also, look for indications of past success (or failure) that might allow you to determine whether or not the REIG is a safe investment.
   • Attend a model club meeting. BetterInvesting, an organization that provides investment education, holds free model REIG meetings in cities across the United States. These meetings explain what REIGs specifically do, inform you about local REIGs, and allow you to network with other like-minded locals. Go to www.betterinvesting.org and search for local chapters near you to find a model meeting.
3. Consider a RELP. A real estate limited partnership (RELP) is yet another way you can throw in with other investors. In this organization, you will invest in a particular real estate project along with a property manager or a real estate development firm. In exchange for financing the property, you will be given a share of ownership, however your investment will largely be passive and you will have little say in the management.
   • An advantage of a RELP is that you also have limited liability. If the project fails, you are only liable for the amount of your contributions to the partnership.
   • The RELP is not taxed and all losses and profits are passed on to the owners.
   • A RELP is different in that it exists for a predetermined amount of time. Once the project is complete and/or the business goal is satisfied, then RELP will dissolve.
4. Commit your capital. When you've found the right organization for you, consider how much capital you can contribute. When you have your number, you are ready to make an investment. However, investing in an REIG is not as easy as buying a share of stock or investing in a mutual fund. To invest, contact your chosen real estate investment group and express your interest in investing. Some REIGs require that you have real estate investment experience before joining.
   • Investments with real estate investment groups are not as liquid as in a REIT. Instead, one or more properties must sell before a member can withdraw money from the group.
5. Start your own REIG. If you can't find an REIG you'd like to invest with or if there aren't any active REIGs in your area, you can start your own. While this isn't easy and can be time-consuming, this is a good way to ensure that your money is being investment exactly where you want it to be. To start, you'll have to find some co-investors and draw up a business plan, complete with by-laws and strategies. To operate, you'll need a method for accounting for your investments and profits and a legally-formed LLC or partnership.

Trading Properties

1. Know the risks of property trading. Property trading, quite simply, is purchasing a property with the expectation that you can sell it a short time later for a higher price. This type of investing is commonly known as "flipping" properties. In this type of investing, the "flipper" is exposed to a tremendous amount of risk. This is because they actually own these properties and, if they fail to sell, will be stuck with the taxes and rent costs associated with keeping the properties. Be sure that you understand these risks before jumping into property trading.
   • There are two types of property trading: one involves upgrading or refurbishing the properties to resell them and the other simply involves price speculation (hoping that the price will increase) without any changes being made to the property.
2. Earn money by "flipping" houses. This type of property trading involves buying properties that are then improved to add value before selling them. These upgrades can be as simple as making small repairs or be full-scale renovations. Because of the work involved, this type of investing is usually more of a full-time job than a side investment.
   • When "flipping" a property, choose a house, apartment complex, duplex or commercial building with outdated features and needed upgrades.
   • Negotiate a reasonably low price with the seller for an "as-is" property, and install the upgrades needed to increase the property's value.
   • While you can hire a contractor for the work you need done, do-it-yourself repairs will result in a higher profit margin. Attempt to sell the home yourself before enlisting the help of a real estate agent, as agent fees could significantly eat into your return.
   • A downside to this method is that, barring a situation where you have other contractors working for you, it limits you to developing only one property at a time.
3. "Flip" a property without renovating it. This functions exactly the same way as flipping a property after refurbishing it, except that you'll have to rely on the market to increase its value for you. You'll have to look for brief windows of time where the seller of a property has priced it below the market rate for a certain area or look for areas where you think prices will rapidly increase. This requires foresight and risk-tolerance, even more so than refurbishing houses.
4. Take advantage of the tax benefits of property trading. If you have earned equity from investment properties, there is a legal method reinvesting that money into another property without paying taxes on it. This is known as a 1031 exchange and allows you to sell out of the first property and reinvest your gains in a second property without recognizing it as a taxable sale. And because there is no limit to the number of times you can do this, you could defer your taxes indefinitely this way (until you eventually cash out and are subject to capital gains tax).
   • This benefit is only applicable to investment properties (not your personal residence) and must be transferred between "like-kind" properties that are similar. This "like-kind" phrase is broad, but investigate the tax code before trying this yourself.

Becoming a Landlord

1. Research what is needed to be a landlord. Before getting involved in managing properties as a landlord, you should be familiar with what will be required of you in this position. The specific requirements vary between states and localities, but in general a landlord is required to maintain the habitability of their properties. This includes managing repairs and utilities for your tenants. Be sure to research how much time this generally takes and be sure that you have enough time of your own to commit to it.
   • Becoming a landlord is, in many cases, the most involved form of property investment. Unlike with the other forms of investing, you will be responsible for the actions and to some extent the wellbeing of your tenants. You will also have to take care of any problems your property experiences and have to collect rent each month to pay your our expenses (mortgage, tax, and utilities). Overall, being a landlord is much more work than other investment opportunities.
2. Purchase or build apartments, homes, duplexes, or shopping centers. The next step to becoming a landlord is to find a property to manage. Try searching for foreclosure properties with low price tags and low maintenance requirements. Avoid purchasing property in poor condition unless you can do the repairs yourself. Remember, you still have to find tenants for the property.
   • While some repairs such as new flooring or paint are expected when purchasing a rental property, others such as a new roof or foundation repair could eliminate the possibility of making a high return on your investment.
3. Look into purchasing more property. If your first property purchase is providing you with consistent returns, you may be ready to use these gains to purchase another property and increase your income stream. You may have learned lessons about the real estate market or the landlord business in your experience this far, so try to use that when you think about expanding further. Especially in tough markets, earning rent from multiple properties can allow you to turn a small margin (the difference between income and expenses) into large income stream.
4. Consider hiring a property manager. If you receiving consistent returns on your rental property or are the landlord of multiple properties, you should think about hiring a manager to take care of your properties for you. If you can manage to still make a good profit this way, it can be an effective way to lower the hassle of being a landlord yourself while still enjoying the payout.

Tips

• Look for property that has been neglected. A good candidate is a place with cracks in its concrete walkways, broken fences, faded paint, outdated fixtures or inadequate landscaping. These properties can be easy to fix up and increase in value.
• If you can find a property that is vacant as much as half the time, you may be able to buy it at a bargain price and fix it up. A property that is almost always vacant may have problems beyond your ability to fix. (It may be a bad neighborhood, for instance.)
• You can remodel a kitchen cheaply by finding a company that makes wood cabinets and installing them yourself or hiring a handyman to do so. Hiring a remodeling company to do the work is a more expensive proposition.
• Calculate the price of the building per square foot (asking price / square footage). Compare the cost with that of other properties you're considering. This helps you avoid buying an overpriced property (or having the bank turn down your request for a mortgage).
• When flipping a property, get a professional inspection beforehand. You'll want to know the approximate cost of repairs and the estimated property value after the repairs are done. This will help you avoid losing money on your investment, as well as limit the number of surprise expenses in the property-development process.
• Paint, landscaping, cleaning and replacing broken fixtures will usually boost the value of the property at little cost.

Warnings

• Beware of city codes that could impose higher expenses during property upgrades. While a property may pass an inspection, it may not necessarily meet a city's requirements for residential or commercial usage. Check with local building and zoning authorities.

Related Articles

• Get Rich
• Invest
• Invest in Stocks
• Buy Commercial Real Estate
• Buy Raw Land

Sources and Citations

See also

• Invest in Mutual Funds
• Buy Exchange Traded Funds
• Hedge in Investments
• Invest when Retired
• Find Help With Investing
• Make Money in Commodities
• Calculate Annuity Payments
• Calculate Annual Salary
• Invest
• Get Rich

Read more ...

What links here

• Start Investing