As one of the oldest types of investment, real estate investment should undoubtedly be considered to be added inside an investment portfolio, as it can improve its risk-return profile. This type of investment is associated with exceptional benefits such as diversification, Cashflow, liquidity (REITs and real estate mutual funds), tax and competitive risk adjusted returns. Due to the fact that real estate investing, has different forms of transactions and investments and usually smaller volatility than bond or equity markets it presents an opportunity for companies or individuals to gain solid returns on investments, but there is more to this brand of investing than simply signing on the dotted line and owning a property.
Historically, the idea of real estate and owning land and shelter came about after the human race as a whole went from hunter-gatherers to an agrarian society, where individuals began growing and harvesting food on pieces of land they staked as their own. Over the course of thousands of years, real estate grew to where it is today, where almost every piece of land in the world is bought, paid for, and owned by someone.
The evolution of real estate investments has gone a long way until today. The most well-known forms of real estate investments are the following:
A Real Estate Investment Trust (REIT) is when a corporation or group of investors put together their money in a pool to invest in a large property or series of properties. One of the positive characteristics about a REIT is the fact that it allows stock market investors to be involved in real estate without directly purchasing a property or having to manage it. An important fact about REITs is that this type of real estate investment gives the opportunity to individual investors to also invest into non-residential properties such as large office buildings or malls. REITs are mainly traded on major stock exchanges just like stocks. As securities, they resemble dividend paying stocks, with very attractive dividend yields and liquidity characteristics. The three major kind of REITs are equity REITs, Mortgage REITs and Hybrid REITs. Each type has its own merits with different revenue making and self-funding avenues.
Real Estate Mutual Funds
Real estate mutual funds invest predominantly in REITs and stocks of real estate related companies. Their key characteristic is their good diversification levels relative to the invested capital levels. The diversification takes place among different types of real estate investments strategies and geographies. As investors have different objectives and expectations, real estate mutual funds provide at reasonable cost access to a large range of assets like different types of large commercial real estate enterprises. Moreover, investors have all the standard benefits that come with professional mutual fund managers like having detailed access and analysis to the investment strategy that is followed and the different types of selected assets.
Rental of Properties
A popular real estate investment involves purchasing a property with the intention of renting it out to a tenant and eventually turning a profit. Typically, the amount of rent on a unit like this is based off the monthly costs of utilities and mortgage amount so that the tenant is essentially paying off the mortgage for the owner, but some may charge an additional amount so that they will have a monthly net profit amount. The hope is also that once the home is paid off by the tenants, the property will have gained value and the owner will own a property that he or she can sell for a higher price given the fact that there is an upward trend in the market.
While this seems like a fail-safe idea, it’s important to realize that it could backfire in several ways on the investor. The property could end up needing expensive repairs and replacements of costly equipment, or there is always the chance that you will not be able to find renters to live in the space. Additionally, renting to irresponsible tenants makes the home vulnerable to disrepair.
Investing in real estate to rent out requires a commitment to the property for many years. Throughout the life of the mortgage, you’ll likely have to respond to problems that tenants come across with the property when parts of the home need to be repaired. Unlike many other types of investments, buying real estate and renting it out requires hard work and dedication on the owner’s side, which may not appeal to an individual who is already busy. For this reason, an individual investor could choose between REITs, Real Estate Mutual Funds or Real Estate Investment Groups.
Real Estate Investment Groups
For real estate investors who want to rent a property to tenants but don’t want to worry about maintenance, repairs, and operation, real estate investment groups is an excellent option. These groups are made up of a property management company who builds a community of apartments and sells individual units to investors. While the investor paid for the property, they are not responsible for handling maintenance requests, only the company which operates the group. One positive to this real estate investing style is that there will often be a clause in the contract that safeguards an investor’s monthly income from the property, regardless of whether someone is renting the unit or not.
Apart from the various investments in real estate, there is also the trading of real estate properties. Professionals in real estate trading will identify undervalued properties on the market with the expectation of a forthcoming price appreciation potential. The hope is that the investor will be able to buy the property, turn it around and sell it for a quick profit. Due to the fact that time horizon plays a critical role when engaging in the trading of real estate, it is recommended that only those with extensive knowledge and background in real estate attempt this style of investing.
Within the trading category, there are two different kinds of real estate traders. There are those that just try to take advantage of low prices and sell it without making any changes to the property itself, and those who also invest in renovations so they can attain an even more profitable return.