The land is the earth’s surface extending downward to the center of the earth and upward to infinity. It includes everything that is attached by nature such as boulders, trees, and water. And here, real estate is the land at, above, and below the earth’s surface. It includes everything whether natural or artificial permanently attached to it. Real estate investment is all about the investment made to generate income rather than using it for residential purposes. This article is going to talk about real estate investments for beginners, especially those looking to earn passive income from real estate investments.
What is real estate?
Real estate is a type of immovable asset that is in the form of land or a property that includes land and anything permanently attached to it, whether natural or man-made.
Property is the interests, benefits, and rights inherent in the ownership of the real estate. It includes all the buildings and structures attached to it whether artificial or natural.
Benefits of investing in real estate
There are some major benefits of investing in real estate that make it a unique investing option. Let us look into some:
- Real estate is tangible i.e. something that has physical existence. Physical property are immovable and non-removable making it a sustainable asset. Also, the total supply is fixed and cannot be extended.
- It is the only investment that has value appraisal even in adverse situations. It’s value keeps on increasing in the long run. As there is a finite amount of space available, the value will keep rising with the increase in population. Also, they don’t have any maturity period like in other investments such as fixed deposits.
- Real estates are capital assets which means they have a longevity of over one year. It is not intended for sale in the regular course of business.
- They are also accepted as collateral all over the world. It is a very common practice among banks and other financial institutes.
- Properties and real estate investments are inflation proof. Unlike FD or other cash investments, whose values dip with inflation, your money on land will only increase with the increase in inflation.
- Tax benefits. In most countries, buying properties have one form of tax benefit or the other. In India for example, buying farm land as investment gets a sizeable tax break. A tax benefit is also given for residential property purchases for salaried people .
Types of real estate investment
The main and most common types of real estates are:
1. Residential real estate
These are properties used for residential purposes like single-family homes, condos, cooperatives, duplexes, triplexes, townhouses, bungalows, etc. It can be a newly constructed property or a house to be resold by the owner.
2.Industrial real estate
A large-scale property of land used for building, manufacturing units, production, distribution, storage, and research and development are known as industrial real estate. Examples are factories, power plants, warehouses, etc.
3. Commercial Real Estate
Any property used for business purposes such as apartment complexes, gas stations, grocery stores, shopping malls, hotels, hospitals, etc. is commercial real estate.
Any vacant land or undeveloped property that can be used for various purposes such as agricultural activities is also included as a real estate asset.
5. Mixed-Use real estate
This is a high-end real estate project that has different types of properties mentioned. It is useful as it minimizes the risk of failure.
How to invest in real estate for beginners?
Investing in real estate requires a strategy such that the money you make in return covers the risk you take, taxes you pay, and the other costs of owning the real estate. Investors can buy a property using leverage. It will help them to pay a portion of the total cost upfront and then pay off the balance over time. These are irreversible investments.
There are several ways of investing in real estate:
Rental properties/ residential real estate
Residential rental properties can be an eye-catching investment option. These are homes that are purchased by an investor and inhabited by tenants on a lease or other type of rental agreement.
You can stay in them, ret them out, lease them, sublet them, put it up on AirBnB and more. Residential real estate can be single-family homes, condos, apartments, townhouses, duplexes, and so on. This is one of the most friendly investment options. It provides monthly cash flow, long-term appreciation, leverage using borrowed money, and also tax advantages.
Downsides to residential rental property
- The direct ownership of residential property comes with the responsibility to act as a landlord or engage a property management company, that takes the money further into the profit margin of the investment.
- To sell a struggling rental property you need to find a buyer or tenant who needs to have an interest in that property that, ironically, you don’t see any value or profit.
- Also, they have to cope up with vacant months and tenant disputes.
- Lastly, the tax treatment of residential rental property can change which might affect the attraction towards the investment.
A Real Estate Investment Trust is a company that manages and operates income-generating real estate by pooling capital from a number of investors. They lease space and collect rents on the properties, then distribute that income as dividends to shareholders. Initially, only rich individuals having large financial sources could afford commercial real estate in their portfolio. Through REITs, investors can now buy shares in large commercial sectors.
Generally, REITs can be sector-specific as well as have diversification such as office and retail properties. Properties in REITs include apartment complexes, data centers, healthcare facilities, hotels, office buildings, retail centers, warehouses, etc.
REITs generally trade under substantial volume and also have high liquidity, which makes it an exception as real estate are generally illiquid. The popular Embassy REIT that listed back in April’2019has a lot size of 400. So you can buy a minimum of 400 stocks and multiples of 400 thereon.
REITs are also further classified as Equity, Mortgage, Hybrid, Publicly traded, Public Non-traded, etc.
You can invest in publicly-traded REITs as well as REIT mutual funds and REIT exchange-traded funds (ETFs) by purchasing shares through a broker or take the help of financial advisors.
Flipping a house is described as purchasing a property and holding or using it for only a short period of time before selling it again for a quick profit. Real estate flipping is done in two ways.
First, the real estate investors target those properties that are high in appreciation in the market and resell them with little or no additional investment in the property physically. The second type is a quick fix flip where the real estate investor uses his idea to improve the undervalued properties according to the buyer’s desire. They renovate and make some other changes, known as reno flip.
In reno flip, the investor makes an additional capital infusion into the investment that should increase the property value more than the combined cost of the purchase, the renovations, the carrying cost during the renovation, and the closing costs.
Crowdfunding is a method for raising money for businesses and an easier way to access such ventures for investors. It utilizes the Internet and social media outlets, such as Facebook, Twitter, and LinkedIn, to reach an audience of potential investors.
The idea behind crowdfunding is that many people are willing to invest a small amount, and when they do, large sums of money can be raised quite quickly. Crowdfunding offers companies access to capital that they might never be able to raise. Crowdfunding offers investors the ability to become shareholders in a company or in a real estate property. One of the benefits of real estate crowdfunding for non-accredited investors is the low minimum investment amounts that are typically required.
Also, real estate crowdfunding can help investors reduce the risk that’s associated with an equity portfolio. In other words, real estate crowdfunding helps investors to diversify the risk in their investment portfolios by not having all of their funds in the equity market.
A real estate investment group (REIG) refers to an entity that focuses the majority of its business on investing in real estate. In search of profits, real estate investment groups may choose to buy, renovate, sell, or finance properties.
Think of them as something like a mutual fund of property investments. Real estate investment groups commonly buyout a property and sell units to investors while taking responsibility for the administration and maintenance of the property.
Real estate investment groups focus the majority of their business on real estate, but they are not necessarily subject to any specific real estate entity status. As such, they have the flexibility to structure their business in several ways, and they have the flexibility to make real estate investments as desired.
Real estate investment groups focus the majority of their business on real estate, but they are not necessarily subject to any specific real estate entity status. As such, they have the flexibility to structure their business in several ways, and they have the flexibility to make real estate investments as desired. Also, real estate investment groups can offer property financing, flip properties, lease properties to clients or property management companies for a portion of rental income, or sell units of a property while maintaining overarching control.
An REIG may choose to invest in apartment buildings, rental homes, commercial buildings, or commercial units. It may earn income from mortgage lending, rental properties, or property management fees. REIGs often appeal to high-net-worth-investors who look to invest directly in real estate but not assume full property management responsibilities.
Investing REIG partners typically must put up more cash as an initial investment than other real estate investment opportunities; however, they typically see greater returns owing to leverage and efficient management.
Tips for investing in real estate
Real estate comes with certain risks and beginners should keep in mind certain points before investing in real estate. It is very much possible for someone who has no prior experience in real estate to get carried away by the lure of profits.
Remember to calculate your finances in order to confirm that you meet certain goals. If you are a beginner it is a good idea to take a loan from a bank keeping in mind the interest and other crucial factors. As properties and lad are quite expensive, for beginners who wish to invest in real estate, utilizing leverage is important. At the same time the last thing you want is to end up paying a lot in interest and upkeep cost that is over and above your expected return.
Knowing the market rate can help you track local trends, ensuring that you don’t get scammed into paying a higher amount than what a property deserves. Researching market rates and working out developments could help you extrapolate the returns you could expect in the future.
Research the property
With a number of projects coming up, it can be confusing to choose the right real estate, for sellers are typically known for sweet-talking buyers. The amenities on offer, the history of the construction company, the materials used, the area a property is located in all play a role in determining the returns you get on your investment. Failing to research before buying could see you regret later, negating your investment.
The papers of a property are perhaps the most important factor one should consider, for it is possible for someone who is not acquainted with the real estate industry to get scammed into buying a property with fake papers. Buying a property without clear titles can lead to long-drawn court cases or litigations, which essentially nullify the investment. All property papers should be checked by legal experts to authenticate them, for failure to do this could see you purchasing a property that could be mired in controversy.
Ensure you engage the services of a lawyer well versed in property investments to survey the property, verify the documents, check encumbrance etc.
Buying a property is a time-consuming affair, with most genuine property transactions taking a few days to be complete. While a number of real estate firms offer to complete formalities overnight, the fact remains that exhibiting patience can help you land a good deal. Jumping the gun can see you pay more for the property, or purchase one which doesn’t live up to your expectations.
Calculate the risk
Real estate investments are typically safer than other investments, but that doesn’t mean they are totally risk-free. Legal hurdles and property disputes are extremely common in India and one should ensure that the property they are interested in is clear.