I know, I know, I constantly talk about primary homes and how they are NOT GREAT investments, but that is because they aren’t when you live in them (I am saying this based on investment return % after all fees. Buying is better than the alternatives out there, just not a great true investment).
However, real estate can be a fantastic investment that offers great tax benefits when it is not your primary home! Let’s look at 6 different ways you can build wealth with real estate.
1. Long Term Rentals
Because they are more passive than short-term rentals, many individuals love long-term rentals. But do not be fooled into believing that they require little work. You still have to find renters, do background checks, fix things up, make sure you get paid, etc.
You can purchase single-family residences, duplexes, condo’s, modest apartment buildings, etc. These are all fantastic investments when done well.
Pro’s = More passive than short term, house appreciation over time, rental income, high demand, tax benefits (depreciation, writing off expenses, etc.)
Con’s = Finding and dealing with renters, big expenses that come about, damage from renters, lower expected revenue than short term rentals
2. Short Term Rentals
You can do short-term rentals using sites like AirBNB, VRBO, etc. This is where you allow people to rent your place for anywhere between 2 hours and a month. These are often less passive because you have to have them cleaned on a weekly basis, find new tenants virtually every week, adjust prices dependent on the season, fix things up, etc.
Short-term rentals are a great way to make money, but you must realize that they need a lot of work. This is why some people decide to employ property managers, although doing so will reduce your income by 15% to 35%. When done properly, short term rentals can generate the most income.
Pro’s = Can change prices based on events, high expected returns, great deductions and tax benefits
Con’s = Have to find new renters very often, requires more work and time, have to furnish the place and put more money into it upfront, more maintenance costs, can’t have short term rentals everywhere (some require no shorter than 30 days).
3. House Flipping
Some people decide to use real estate as a short-term means of generating income. This is not always simple, despite how easy HGTV makes it seem. You must understand real estate, identify the best offers, and understand what work needs to be done to enhance value, among other things. But if you are skilled at it, it may be a fantastic instrument for increasing your wealth. Especially if you are able to complete the work yourself.
Pro’s = Can make a good profit, it is short term, You can use owner-occupied mortgage financing and put 3.5% down vs 20% for most investment properties, tax benefits.
Con’s = High risk as you could end up not making a profit if done incorrectly, hiring people will eat away at the profits, takes a lot of time and work, could be stuck with it for awhile if housing market isn’t doing well which could take away most of the profits.
4. Real Estate Investment Groups (REIG’s)
Similar to a tiny mutual fund, REIGs allow you to pool your funds and invest in real estate (these normally have a smaller group of people). People who don’t want to have to put any effort into buying properties like the ones above find this particularly appealing. In a typical real estate investment group, a business purchases or constructs a collection of apartment buildings or condominiums, and then permits investors to acquire them through the business to become members of the group.
Pro’s = Get to own real estate without the work, provides income and appreciation of the asset, has people with more knowledge than you handling and finding the properties, etc.
Con’s = The people who run the company could choose directions you do not agree with, has fees like mutual funds, you have little control, run risk of vacancies, etc.
5. Real Estate Investment Trusts (REIT’s)
For investors who desire portfolio exposure to real estate without engaging in a conventional real estate transaction, REITs are arguably the best choice. When a business (or trust) invests money from investors to buy and manage rental properties, a REIT is formed. Like any other stock, REITs can be bought and traded on the major exchanges. Since REITs are traded like ETFs, they are passive and more liquid than any of the others. When you want, you can withdraw your money. Equity REITs, which own buildings, and mortgage REITs, which finance real estate and dabble in mortgage-backed securities, are the two main categories you need to be aware of. Both allow you to access real estate, but they function very differently.
Pro’s = Give you easy access to real estate without much work required, the most liquid, similar to dividend-paying stocks,
Con’s = Little control, less tax benefits, etc
6. Online Real Estate Platform
With crowdfunding, there are so many innovative options for people to invest in larger residential or commercial deals than they could on their own. This enables you to invest in real estate with less money and obtain substantial properties. Online marketplaces bring together project financiers and developers of real estate. You can sometimes diversify your investments without spending a lot of money.
Pro’s = More options, not much work, less money required, etc.
Con’s = Fees for management, typically illiquid, etc.
These are the 6 main ways you can invest in real estate. It really all depends on the amount of work you want to put in, how much capital you have, and what interests you!