Real Estate Investing
When you think about real estate investing, the first thing that most likely comes to mind is your home. Obviously, real estate investors have many 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 choices 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, taking care of the property, finding tenants, and dealing with any problems.
Unless you employ a property manager to manage the details, being a landlord is a hands-on investment. Depending on your situation, managing the property as well as the tenants can be a 24/7 job– and one that’s not always enjoyable. If you choose your properties and tenants carefully, however, you can lower the risk of having major 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 difficult to determine the best rent because if you charge too much you’ll chase renters away, and if you charge too little you’ll leave money on the table. A typical strategy is to charge enough rent to cover costs until the mortgage has been paid, at which time most of the rent becomes profit.
The other primary way that landlords make money is through 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 a completely different breed from buy-and-rent landlords. Flippers purchase properties with the intention of holding them for a short period– typically 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 approach, you buy a property that you believe will increase in value with certain repairs and updates. Ideally, you finish the work as quickly as possible and then sell at a price that exceeds your total investment (including the renovations).
Hold and resell. This type of flipping works differently. Instead of buying a property and fixing it up, you buy in a rapidly rising market, hold for a few months, and then sell at a profit.
With either type 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 a challenge because flippers do not generally 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 improve the risk-and-return profile of an investor’s portfolio, offering competitive risk-adjusted returns. In general, the real estate market is one of low volatility, especially compared to equities and bonds.
Real estate is also attractive 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 desirable in an environment where Treasury rates are low.
The Bottom Line
Real estate can be a sound investment, and one that has the potential to provide a steady income and build wealth. Still, one drawback 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 offer better liquidity and market pricing. However, they come at 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 also make 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!