Real Estate Investing
When you think about real estate investing, the first thing that probably comes to mind is your home. Obviously, real estate investors have lots of other options when it comes to choosing investments, and they’re not all physical properties.
Real estate has become a popular investment vehicle over the last 50 years or so. Here’s a look at a few of the leading options for individual investors, along with the reasons to invest.
If you invest in rental properties, you become a landlord– so you need to consider if you’ll be comfortable in that role. As the landlord, you’ll be in charge of things like paying the mortgage, property taxes, and insurance, maintaining the property, finding renters, and handling any problems.
Unless you hire a property manager to manage the details, being a landlord is a hands-on investment. Depending on your circumstance, taking care of the property and the renters can be a 24/7 job– and one that’s not always pleasant. If you pick your properties and tenants carefully, however, you can lower the risk of having significant problems.
One way landlords earn money is by collecting rent. How much rent you can charge depends on where the rental is located. Still, it can be hard to determine the best rent because if you charge too much you’ll scare tenants away, and if you charge too little you’ll leave money on the table. A common strategy is to charge enough rent to cover expenses until the mortgage has been paid, at which time the majority of the rent becomes profit.
The other primary way that landlords earn money is with appreciation. If your property appreciates in value, you might be able to sell it at a profit (when the time comes) or borrow against the equity to make your next investment. While real estate does have a tendency to appreciate, there are no guarantees.
Like the day traders who are leagues away from buy-and-hold investors, real estate flippers are an entirely different breed from buy-and-rent landlords. Flippers purchase properties with the intention of holding them for a short period– usually no more than three to four months– and quickly selling them for a profit.
The are two primary approaches to flipping a property:
Repair and update: With this strategy, you buy a property that you believe will increase in value with certain repairs and updates. Ideally, you complete the work as quickly as possible and then sell at a price that exceeds your total investment (including the renovations).
Hold and resell: This kind of flipping works differently. Rather than purchasing a property and fixing it up, you purchase in a rapidly rising market, hold for a few months, and then sell at a profit.
With either kind of flipping, you run the risk that you will not be able to unload the property at a price that will turn a profit. This can present an obstacle because flippers don’t typically keep enough ready cash to pay mortgages on properties for the long term. Still, flipping can be a lucrative way to invest in real estate if it’s done properly.
Why Invest in Real Estate?
Real estate can enhance the risk-and-return profile of an investor’s portfolio, providing competitive risk-adjusted returns. Generally, the real estate market is one of low volatility, especially compared to equities and bonds.
Real estate is also appealing when compared to more traditional sources of income return. This asset class typically trades at a yield premium to U.S. Treasuries and is particularly attractive in an environment where Treasury rates are low.
The Bottom Line
Real estate can be a solid investment and one that has the potential to provide a steady income and increase wealth. Still, one downside of investing in real estate is illiquidity: the relative difficulty in converting an asset into cash and cash into an asset.
Unlike a stock or bond transaction, which can be completed in seconds, a real estate transaction can take months to close. Even with the help of a broker, simply getting the right counterparty can be a few weeks of work. Obviously, REITs and real estate mutual funds provide better liquidity and market pricing. But they come with the price of higher volatility and reduced diversification benefits, as they have a much higher correlation to the overall stock market than direct real estate investments.
As with any investment, keep your expectations realistic, and be sure to do your homework and research prior to making any decisions.
With Mission First Capital, you can start your investment journey alongside other military members and veterans! If you have questions or would like to talk about potential partnerships or investment opportunities, don’t hesitate to reach out. Give us a call at +1 (844) 632-3863 or visit our website MissionFirstCapital.com to learn more and let’s invest today!