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By Matt Guenther
Special to the Financial Independence Hub
Real estate investment is the process of buying properties as an asset. The goal is to generate income rather than use it for living purposes. Typical examples of real estate investments are: office building, a commercial plot, a house for rental purposes, or an office building for running and managing businesses.
In this post by Cash for Homes Arizona, we look at different types of real estate investments and best ways to invest in them.
Different Categories of Real Estate
Real estate investments have three main categories: residential, industrial, and commercial. Each one then further has sub-categories.
Commercial Real Estate
- Office
- Retail
- Industrial
Residential Real Estate
- House flipping
- Vacation rentals
- Section 8 rentals
- Single-family rental homes
- Small multi-family homes
Industrial Real Estate
- Land for mining
- Residential development
- Commercial development
How to obtain Real Estate Investment Financing
Hard Money
It’s called hard money for the reason that the lenders would use some kind of hard assets such as property as collateral to secure the loan. These loans are typically short-term so mostly borrowers who plan on house flipping generally seek it.
As a rule of thumb, hard money covers anywhere between 70 and 80% of the property’s purchase value before it goes through any kind of renovation or construction work.
That is why it’s important that the property is worth more than the loan’s value and that in case you default, the property should be able to liquidate the cost of the loan.
Attention must be paid to the fact that hard-money lenders generally charge high interest rates, so choose wisely.
Microloans
Microloans are mostly meant to help small businesses: typically startups that need capital to fuel initial growth. Because they are ‘microloans,’ the amount up for a loan is typically smaller than what you would get via a traditional financing route from banks. Because the amount disbursed is generally lower, terms of qualifications are usually less strict in terms of credit score, etc.
Therefore, microloans are ideal for those who have limited borrowing capacities. But it’s important to consider the overhead costs involved with microloans. Also, interest rates can be higher than those imposed by standard loan programs.
Real Estate Crowdfunding
Crowdfunding is a relatively new concept that allows people to raise money from the general public for any cause they support and believe in. While popular sites like Kickstarter and GoFundMe will allow you to raise money for any cause, some sites are designed for real estate crowd funding only. Sites like Feather The Nest and Hatch My House allow raising of funds for homebuyers and investors.
Best ways to invest in Real Estate
REITs (Real Estate Investment Trusts)
You can think of REITs as companies that own, operate, and derive money from the management of real estate assets. Most REITs are tradeable on stock exchanges so if you want you can also buy stocks of one of the companies online. Real estate ETFs and real estate mutual funds are also in this category.
Note that not all stocks related to real estate are classified as REITs. Also, some of these may only be accessible to eligible investors.
Use an Online Real Estate Investing Platform
There are many real estate investment platforms available for those who want to join hands with others who want to be part of a big commercial or residential property deal. Most investments are done online through real estate platforms. The capital investment requirement is less than is needed to complete the purchase.
The upside of online real estate platforms is that interested investors can diversify their portfolios by investing in multiple projects. It also has room for geographic diversification.
The downside is that the management fees can be high sometimes with overhead costs. Also, liquidation can be difficult due to high due to lockup periods.
Rent out a room on platforms like Airbnb
Today to rent out a property you don’t need to buy one separately.
Today with platforms like Airbnb you can rent out even one of the rooms in your own homes. You can think of it as a side hustle. If you vacate your house for days or weeks, you can always rent out empty rooms/space. You could also use a spare room for this purpose.
One special thing about this arrangement is that if you rent it out for less than two weeks, you enjoy tax exemption [in the U.S.]
If this arrangement fits, renting out your home or room during summer vacation or holidays could be one way to earn some extra tax-free money to offset your travel expenses.
Purchase a Rental Property
If you possess renovation and Do-it-yourself skills, investing in a rental property may be the right option for you. Also, if you have the patience to deal with and manage tenants and also collect rent; you can have great success with buying and managing a rental property.
The downside is it requires more upfront money and substantial capital investments to fund the costs and also to cover the maintenance during vacant months.
Bottom Line
Real estate investments are one of the most promising kinds of investment. They are also one of those assets that will seldom fail to provide you with steady income (if handled properly).
