Various Options to Invest In Real Estate
Note: this is Chapter 5 of an entire guide on Why Real Estate Investing?
Commission-free firms have democratized traditional assets like stocks and bonds, and as a result, more people have been investing in traditional assets than ever before — especially skewed on the younger population.
Real estate, on the other hand, is known as an alternative asset that is typically difficult for the average person to invest in. Doorvest's mission is democratize real estate investing and bring it to the everyday investor. We specialize (and recommend) single-family homes — more on Doorvest at the bottom.
But there are a number of different real estate investment options that you can also consider in the following guide.
Types of Real Estate
To break it down, there are 4 primary categories of real estate:
Residential — Single-family homes (up to 4 units), townhomes, and condominiums
Undeveloped Land — Any unused land, or land solely for farming or ranching
Commercial — Multi-family homes (5+ units), offices, and restaurants
Industrial — Warehouses, factories, or powerplants
Most individual investors will be limited to residential and undeveloped land as these have lower barriers to entry. For context, commercial and industrial real estate typically requires group funding or multi-millionaires to finance making it unrealistic for most individual investors to invest in these categories by themselves. There are ways to get around it, and that'll be discussed below.
Residential and Undeveloped Land
In just these two categories, you have a number of options on methods to invest. You'll likely experience many real estate gurus telling you one is better than the other, but there are a pros and cons to each.
We'll be discussing:
Flipping
Wholesaling
Long-Term Rental properties (our favorite, but we're a bit biased)
Short-Term Rental Properties
Flipping
Flipping is the most involved real estate investment method. Basically, it's a full-time job. Investors who practice flipping must purchase a home, renovate it to improve its intrinsic value, and then sells it at a higher price.
This has slowly become a fan favorite because of TV shows like HGTV popularizing experts who do this often making over six-figures from a single deal.
But don't be fooled. These experts and professional flippers have teams of contractors and finances to back their purchases in a timely manner that you don't see on camera.
To do this successfully, you need to have:
A high credit score
Upfront capital for a downpayment
And access to an investment-focused real estate agent or broker
Wholesaling
Wholesaling is another extremely active form of real estate investment. Wholesalers can be seen as the supplier of the above "flippers." They find properties that need renovation, put it under contract, and then sell it to a flipper at a higher rate than market to profit the difference.
Again, this has become popular on many social media channels. Wholesaling is much more difficult than it seems as you'll need to build a strong network of flippers, real estate brokers, and real estate agents.
Wholesaling typically requires low upfront capital making it extremely attractive to new investors. You'll need to have an earnest money deposit, which is typically 1% of the value of the house, that is used to put a house under contract. Basically, you deposit 1% of the value in order to "save your spot" to purchase the house.
To do this successfully, you need to have:
A network of flippers, property brokers, and real estate agents
An earnest money deposit
Time to source deals
Long-Term Rental Properties
Single-family rental properties is what Doorvest specializes in. These properties allow owners to earn a steady cash flow monthly via rental payments from tenants plus appreciation. You can read more about how rental real estate earns money here.
In these deals, you'll need to source properties, renovate them to be in "rentable condition," find and screen tenants, and work a lawyer for lease agreements. After you become a landlord and get a signed tenant, your work becomes more managerial — you'll need to college rent, maintain the property, and ensure compliance with local and federal laws.
These typically also require some upfront investment capital to get started to put down money for a downpayment and renovations (if any).
P.S. Doorvest helps you purchase residential single-family homes and maintain them as long term rentals! Learn more here.
To do this successfully, you need to have:
Upfront capital for a downpayment and renovations
Counsel to ensure compliance and mitigate risk
Network of contractors
Property management company (if desired)
Short-Term Rental Properties
This is a rather new type of investment idea typically powered by companies like AirBnb. The process is similar to the long-term rental as above. The difference is that tenants rent out on a nightly basis and typically for short-term periods (less than one month).
If you were able to maintain a 100% rental rate, you would make more money than those with long-term rentals as you typically charge higher rates per day than over a whole month. This makes your income consistent or inconsistent depending on your property.
One benefit to these rentals is that you are contracted with a marketplace company like AirBnb that facilitates the compliance and logistics. These properties are also best placed in highly visited areas where a hotel may be found. This allows people to book your property as a (usually) cheaper alternative to hotel pricing.
Moreover, because of their effect on local economies, some states like New York and Los Angeles have created laws to restrict short-term rentals. The legal situation is rapidly changing, but it is a much more regulated real estate area that is less established.
To do this successfully, you need to have:
Upfront capital for downpayment, renovations, and furnishing
Counsel to ensure compliance and mitigate risk in a changing environment
Contract with AirBnb or similar company that will market or list your property
Undeveloped Land
Undeveloped land has rather low barriers to entry, but it is more difficult to make large investment gains. Moreover, undeveloped land often comes with a number of risks due to the need for speculation.
For example, the typical deal involves purchasing acres of land in unpopulated areas that you speculate will increase in value over time. This land may be close enough to a city to be bought by a developer who can build structures or it may be in the middle of nowhere where it may never appreciate.
Commercial and Industrial Land
Commercial and industrial land is more difficult to invest in as the barriers to entry are much higher. For context, the average apartment building requires over $20m dollars of upfront capital, which is basically unattainable for the rest of us.
But fear not! There are ways to pool your money with other individual investors and have professionals invest it for you (at a cost, of course).
Real Estate Investment Trust (REIT)
The REIT is the most basic way. It trades on the stock market similar to stocks. In fact, many people buy them not knowing they are not stocks.
Although they look like stocks and they trade like stocks, they face a number of legal limitations that make them different. Namely, they must pay 90% of their net profit to investors to legally continue operating. This means that the REIT must pay out dividends. Moreover, many of these REITs pay on a monthly basis rather than quarterly like most other stocks.
So how do they work?
Shareholders purchase "stock" in the REIT. The REIT operators take this money and purchase (or finance) real estate deals with a long term investment timeframe. Income generated is then distributed in the form of dividends to shareholders.
Typically REITs invest in commercial or industrial properties. However, there are some REITs that focus of various real estate types (i.e. apartments or shopping malls).
Private Equity or Private "REIT"
Unlike the REIT option, Private Equity (PE) or Private REITs have become a popular alternative. They operate in a similar manner by pooling investor's money for investments.
A key difference is that PE funds are typically reserved for more wealthy investors as access is usually only granted if they are accredited or institutional. Moreover, unlike a REIT which trades in an extremely liquid fashion, PE funds are typically extremely illiquid, so investors must be investing for a long period of time.
These funds have historically been able to "beat" the average investor's returns. And thus, they charge a premium for their asset management and services.
Conclusion
Gaining an idea of the type of investor you seek to be, the amount of time and capital investment you want to use, and the amount of risk you want to incur will allow you to choose one or more of the discussed options.
Each of them have their target investor, and each of them have their advantages and disadvantages.
For most beginners, sticking to residential properties will lower the amount of risk and capital required while still allowing for strong investment gains.
If you'd like to get started investing in residential real estate, Doorvest offers expert consultation, renovation, tenant placement, and property management all-in-one. Plus, we offer a 1-year of rent guarantee! Learn more here.
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