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 There are lots of ways in which the average investor can participate in the real estate market ranging from the purchase of commercial office space to participation in real estate investment trusts (REITs). In this article we're going to discuss three specific ways to invest in real estate and later on we're going to provide some tips for those that are new to this area.
Real Estate Investment Trusts
A Real Estate Investment Trust, or REIT, owns and typically operates income producing real estate including multi-family dwellings, hotels, shopping centers and commercial office buildings. A board of directors decides on behalf of shareholders which investment properties are to be acquired.
This type of real estate investment opportunity provides the investor with several advantages:
- Since the shares of stock are publicly traded on major stock exchanges, they offer the investor liquidity.
- The trust usually invests in a portfolio of real estate properties, so they offer the investor diversification.
- If the trusts securities are registered with the SEC, then public disclosures are available to the investor.
- The trust is also professionally managed; therefore investors are not required to be experts in real estate appraisal.
Growth in earnings for real estate investment trusts usually come from several sources including increased revenues and lower operating costs, and increases to the occupancy rates for commercial offices. The trust can also increase earnings by making improvements to existing real estate investments, thereby increasing the marketing opportunity for that location.
Types of Real Estate Investment Trusts
The real estate investment industry offers many opportunities to investors. There are presently about 200 trusts registered with the Securities and Exchange Commission with assets of around $400 billion. With such a large opportunity to attract investors, the trust market has classified itself into three broad categories:
Mortgage Trusts
A mortgage trust focuses on lending money to real estate owners or operators through mortgages. Typically, loans are only made to existing properties since they are not of a speculative nature.
Equity Trusts
This type of real estate trust focuses on the purchase, development, leasing and services to tenants. The distinction here between equity trust investments and others is that this trust invests in properties with the intent to operate them, not sell the properties.
Hybrid REITs
Finally, we have a hybrid REITs which, as the name indicates, consists of a hybrid approach between equity and mortgage trusts. If you'd like to read more about this type of opportunity, check out our article dedicated to real estate investment trusts.
Real Estate Mutual Funds
The second opportunity that an investor has to participate in the real estate market is via real estate mutual funds. These funds are very similar to the "traditional" mutual fund concept except that they limit their investment targets to real estate companies.
By that we mean a real estate mutual fund might invest in the shares of a real estate management company or a builder of real estate properties. Investors can even find mutual funds that invest in REITs. Once again, we've got more information on this topic in our publication on real estate mutual funds.
Buying Real Estate
The third and final option an investor has it to buy and own real estate properties. With recent interest in the stock market fading, more and more investors are looking to real estate for higher returns on their investments.
If that's an opportunity that you're interested in, then there is a lot to learn. Buying and owning real estate can be rewarding, but it can also be a full time job. The following are just a small sampling of some things you need to understand before making your first investment.
Real Estate versus Stocks
Most new investors to the real estate market are those that are turning away from stocks. These investors need to understand that owning real estate is a bit more involved than owning stocks and the strategies can be very different.
For example, the latest trend in the real estate market is flipping houses. But limiting yourself to short term appreciation or fixer upper scenarios can be expensive. If you buy and hold real estate for the long term (10 plus years), the odds of making money are greatly increased. The point here is there can be a significant time commitment when investing in properties.
Conducting Research
If you thought researching stocks took time, then just wait until you start investing in real estate. Here we're talking about taking physical possession of something that requires maintenance and a renter / lease.
The more you know about a property and its potential for appreciation, the better your chances of really making money. Even in slow or declining markets knowledgeable investors can realize high returns. You just have to know what to look for in a property and that takes time.
Cash Flow
If you've been following the stock market for a number of years, then you should understand this one pretty quickly - watch your cash flows. Many companies that seemed to be growing quickly have fallen because they simply ran out of cash - and that's what pays the bills.
A lack of reserve cash can quickly put you in an uncomfortable situation when it comes to real estate. Without some money in reserve you might not be able to get the most out of a property when it comes to finding a tenant. If you're thinking about getting involved in rental properties, make sure you've got a good source of cash flow.
Learn to Negotiate
Finally, striking a good deal in the real estate market is more than just sending your stock broker a buy order. Negotiating a good deal is perhaps one of the most important aspects of buying real estate and when done right can literally save you thousands of dollars. If your background doesn't allow you to gain a lot of experience in this area, you might want to consider taking a course on negotiating skills.
About the Author - Real Estate Investment
Bill Sharlow is the Editor of Money-Zine.com. Copyright © 2004 - 2007 Money-Zine.com
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