Investing in Real Estate Part 2

If you want to own a rental property, but do not want to be a landlord, a real estate investment group may be the solution for you. A company will buy or build a set of apartment blocks or condos and then allow investors to buy them through the company. A single investor can own one or multiple units, but the company operating the investment group collectively manages all the units – taking care of the maintenance, advertising vacant units, and interviewing tenants. In exchange for this management, the company will take a percentage of the monthly rent.

Typically the lease is in the investor’s name and all of the units pool a portion of the rent to guard against occasional vacancies, meaning that you will receive enough to pay the mortgage even if your unit is empty. The quality of an investment group depends on the company offering it. It is usually a safe way to get into real estate investment, but some groups CAN be vulnerable to fees that affect the mutual fund industry. It is important that you look into these potential fees beforehand.

Real Estate Trading

Real estate trading is very different from buying-and-renting. Real estate traders buy properties with the purpose of holding them for a short period of time (three to four months). Afterwards, they hope to sell them for a profit. This technique is also called flipping properties and is based on buying properties that are either significantly undervalued or are in a very hot market.

Property flippers usually do not put any money into a house for improvements – the investment ha to have the intrinsic value to turn a profit without alteration or they won’t consider it. Flipping in this manner is a short-term cash investment. If a property flipper gets caught in a situation where he or she can’t unload a property, it can be devastating because these investors generally don’t keep enough ready cash to pay the mortgage on a property for the long term. This can lead to continued losses for a real estate trader who is unable to offload the property in a bad market.

Other property flippers may also buy reasonably priced properties and add value by renovating them. This is a longer-term investment (depending on the types of improvements). This form of investment is time intensive and may only allow investors to take on one property at a time.

Real Estate Investment Trust

A real estate investment trust or REIT is created when a corporation (or trust) uses investors’ money to purchase and operate income properties. REITs are bought and sold on the major exchanges just like any other stock. A corporation must pay out 90% of its taxable profits in the form of dividends to keep its status as an REIT. By doing this, REITs avoid paying corporate income tax, whereas a regular company would be taxed its profits and then have to decide whether or not to distribute its after-tax profits as dividends.

Leverage

Investing in real estate gives an investor one tool that is not available to stock market investors: leverage. If you want to buy a stock, you have to pay the full value of the stock at the time you place the buy order. Even if you are buying on margin, the amount you can borrow is still much less than with real estate. Most “conventional” mortgages require a 25% down. However, depending on where you live, there are many types of mortgages that require as little as 5%. This means that you can control the whole property and the equity it holds by only paying a fraction of the total value. Of course, your mortgage will eventually pay the total value of the house at the time you purchased it, buy you control it the minute the papers are signed.

This is what emboldens real estate flippers and landlords alike. They can take out a second mortgage on their homes and put down payments on two or three other properties. Whether they rent these out so that tenants pay the mortgage or they wait for an opportunity to sell for a profit, they control these assets despite having only paid for a small part of the total value.

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