When it comes to buying real estate, the first thing that typically comes to mind is a home. And although real estate has been the most popular investment market over the past 50 years, buying and owning a new property is actually a lot more complicated than investing in bonds and equities.
If you’re new to this industry, below is a guide to help you make the right investment decisions:
Basic Rental Properties
This investment requires buying a new property and then renting it out to tenants. The owner will be responsible for the taxes, mortgage payments, and maintenance costs involved in the property. One of the biggest differences of a rental property with other investments is the amount of work and time you need to spend on it. If you don't have the luxury of time, consider hiring a property manager.
Real Estate Trading
Real estate trading involves buying properties with the purpose of holding them for a short time period, usually a maximum of four months, and then selling the property for profit. This is a popular technique in the United States real estate market, and is known as “flipping.”
But this investment also comes with risks. It can be devastating if the property flipper is unable to sell the property, since these investors generally don’t have enough cash to pay for the mortgage of such property long-term.
Real Estate Investment Groups
Real estate investment groups consist of investors who want to own a rental property, but don’t want to go through the hassle of becoming a landlord. This is common in several big cities in the United States, including New York, where investors don’t have the time needed to manage their properties.
An investor can own one or more units within a self-contained building, but the company that operates the investment group will manage the units, handle the advertising of the property, and provide for the maintenance of the property. They will also hire lawyers in the event of a legal dispute with the tenants.
Real Estate Limited Partnerships
Real Estate Limited Partnerships or RELP are similar to the real estate investment groups. They are an entity established to buy and hold a number of properties for a certain number of years.
A real estate development firm or an experienced property manager will serve as the general partner. They will seek outside investors who will serve as limited partners and provide financing for the project in exchange for a share of ownership. RELPs give investors the opportunity to finance the renovation or construction of buildings, without being involved with the management of the properties themselves.
The Bottom Line
When it comes to portfolio investing, real estate is often considered to be the best alternative. This means that real estate is used as a supplementary investment when building a portfolio of bonds, stocks, and other securities. Yet, it can serve as a counterbalance to other investments and a great source of income, as well.