Real Estate Investing
When you think about buying real estate, the first thing that probably comes to mind is your home. But physical property can play a part in a portfolio too, especially as a hedge against the stock market. However, while real estate has become a popular investment vehicle over the last 50 years, buying and owning brick and mortar is a lot more complicated than investing in equities and bonds. In this article, we'll examine the leading options for individual investors, listed in approximate order of how direct a real estate investment they are, and reasons to invest.
Basic Rental Properties
This is an investment as old as the practice of land ownership. A person will buy a property and rent it out to a tenant. The owner, the landlord, is responsible for paying the mortgage, taxes and maintenance of the property.
Ideally, the landlord charges enough rent to cover all of the aforementioned costs. A landlord may also charge more in order to produce a monthly profit, but the most common strategy is to be patient and only charge enough rent to cover expenses until the mortgage has been paid, at which time the majority of the rent becomes profit. Furthermore, the property may also have appreciated in value over the course of the mortgage, leaving the landlord with a more valuable asset. According to the U.S. Census Bureau, real estate in this country has consistently increased in value from 1940 to 2006. While there was a dip during the subprime mortgage meltdown of 2008 to 2010, it has now rebounded and has been increasing overall.
The Flip Side: Real Estate Trading
This is the wild side of real estate investment. Like the day traders who are leagues away from a buy-and-hold investor, the real estate traders are an entirely different breed from the buy-and-rent landlords. Real estate traders buy properties with the intention of holding them for a short period of time, often no more than three to four months, whereupon they hope to sell them for a profit with the help of some Real Link plans. This technique is also called flipping and is based on buying properties that are either significantly undervalued or are in a very hot area.
Real Estate Investment Groups
Real estate investment groups are sort of like small mutual funds for rental properties. If you want to own a rental property, but don't want the hassle of being a landlord, a real estate investment group may be the solution for you.
Real Estate Limited Partnerships
A real estate limited partnership (RELP) is similar to a real estate investment group: It is an entity formed to purchase and hold a portfolio of properties, or sometimes just one property – only it is in existence for a finite number of years. An experienced property manager or real estate development firm serves as the general partner. Outside investors are then sought to provide financing for the real estate project, in exchange for a share of ownership as limited partners. They may receive periodic distributions from income generated by the RELP's properties, but the real payoff comes when the properties are sold – hopefully, at a sizeable profit – and the RELP dissolves down the road.