Investing in real estate can help you establish an extra stream of income and grow your money. It’s not all gain though; there are different risks of investing in real estate depending on how you approach the market.
There are several ways to invest in real estate but today we will highlight the three most popular ones along with their level of risk and potential reward.
What’s Ahead:
Rental property
Purchasing a rental property is one of the most common ways to invest in real estate. If you have extra money and property prices in your area are low or rent rates seem profitable, you may choose to purchase a home to flip or acquire a rental property to help generate a monthly income.
If you choose to rent out the home, you’ll need the rent amount to at least cover the mortgage for the home (if you have one), taxes, and any repairs or maintenance before you can take a profit for yourself. It’s important to stay within the average rent rate for your area that’s appropriate to the quality and features of the property. Inflation can certainly increase your cash flow over time and you can raise the rent every year if you choose to or whenever your expenses increase.
Potential risks
While owning a rental property leaves you in charge of many factors—like the location of your property, who you rent it out to and for how much—investing always poses some sort of risk.
In this case, the risk may involve taking on an additional mortgage and dealing with costly repairs and maintenance. The property may plummet in terms of value or you may have to evict a tenant or scurry to find a new one when your previous tenant leaves abruptly.
You’ll also need insurance and legal protection if a worst case scenario occurs and a tenant tries to sue you.
Most of these risks can be controlled. You can carefully screen tenants and create a detailed lease with the help of a lawyer. You can put more money down on the property upfront to gain equity more quickly and add to its value so it appreciates over time.
One way to reduce those risks is to use a service like Roofstock. Roofstock takes care of everything, including choosing tenants and managing the property. Sellers pay Roofstock a fee to list their properties, which keeps your fees as a property buyer low. You’ll only pay 0.5% of the contract price or $500, whichever is highest.
Some improvements and expenses associated with your property may be tax-deductible and you can deduct the interest you pay on a rental property on your taxes as well.
Real estate investment group
If you want to invest in a property but don’t want to be an actual landlord and deal with the hassles of maintenance and tenant issues, you may consider joining a real estate investment group. A real estate investment group involves many investors who buy properties through a company.
Whether you choose to buy a few condos or apartment units, the company will manage the properties and handle all maintenance, repairs, advertising for the unit, tenant issues, etc.
With this option, you have the opportunity to purchase a larger and possibly more lucrative investment in partnership with a large company. It’s a very hands-free option if you don’t want to be involved with having to rent out and maintain the property which can make it a more passive form of income.
Fundrise is one of the best-known names in real estate investing. They offer flexible investment minimums, so you can get started with just $1,000 (or more, if you’d like). You can invest in a variety of real estate projects, all you do is fund your account and Fundrise handles the rest.
Potential risks
On the other hand, you have less control over what happens to the property if you do want to be involved. The company who handles everything usually takes a percentage of the monthly rent, which could cut into your actual cash flow.
If you’re interested in this option, you’ll want to thoroughly research different types of real estate investment groups and determine their fee structure and service offerings before making your final decision.
Real estate investment trust
A real estate investment trust (REIT) involves a trust or corporation that purchases and operates properties with funds from individual investors. Similar to stocks, REITs are bought and sold on major exchanges and, by law, corporations are required to pay out at least 90 percent of their incomes as dividends. They can always pay out more than 90 percent but they can’t pay out less, so it gives investors plenty of certainty that they will receive high-yield payments.
If you’re looking to diversify your portfolio, REITs can also appear to be a good option. Since real estate values do not always directly connect to stock prices, it could be beneficial to have a healthy combination of both in case one market does slump at one time or another.
You won’t have to be involved with the hassles associated with being a landlord, but can still enjoy the benefits of the property appreciating over time.
REITs are also more liquid than other types of real estate investments because you can sell your shares instead of selling the actual property which often makes for a quicker and cleaner profit.
Streitwise offers REITs to both accredited and non-accredited investors with reasonable minimum investments. With a 9.5% average return (historically), investing with Streitwise is an excellent option for diversifying your portfolio.
Potential risks
On the flip side, there are plenty of REIT risks. REITs aren’t immune from some of the disadvantages of investing in real estate.
Plus, you might be subject to dealing with some of the cons of investing in general. Regular risks like vacancies at your property can cut into your cash flow along with increasing interest rates (not all REIT dividends qualify for 15 percent tax rates). If your property’s value does depreciate, share prices can also drop.
Summary
After carefully weighing the pros and cons of a few different real estate investment risk factors, it’s clear to see that there is risk and reward all throughout the market. Real estate investing can help increase and diversify your income as long as you are consistently bringing in profit each month.
Each option allows you to have a certain level of control over the situation but it also opens the door to some risk. Finding the right property and managing it well takes time, effort, and some money. Paying someone else to do it can cost even more. If you’re worried about tax liabilities and benefits, you may want to talk to a tax advisor to discuss your options and goals when it comes to real estate investing so you can make the best decision for your situation.