There are many ways the average investor can participate in the real estate market. This can range from the purchase of commercial office space to shares in real estate investment trusts (REITs). In this article, we're going to discuss three different ways to invest in real estate.
A Real Estate Investment Trust, or REIT, owns and 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 opportunity provides the investor with several advantages:
Growth in earnings for real estate investment trusts usually come from several sources including increased revenues and lower operating costs, as well as higher occupancy rates for commercial offices. The trust can also grow earnings by improving existing real estate investments, thereby increasing the marketing opportunity for that location.
The real estate industry offers many opportunities to investors. There are roughly 190 trusts registered with the SEC with assets of around $986 billion (2016). With such a large opportunity to attract investors, the trust market has classified itself into three broad categories:
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.
This type of trust focuses on purchase, development, leasing, and services to tenants. The distinction between equity trust investments and other REITs is this trust invests in properties with the intent to operate, not sell the properties.
Finally, there are hybrid REITs which, as the name indicates, consists of a hybrid approach between equity and mortgage trusts. This topic is discussed in more detail in our article: Real Estate Investment Trusts.
The second opportunity an investor has to participate in the real estate market is through a mutual fund. These funds are very similar to the "traditional" mutual fund concept except that they limit their investment targets to real estate companies.
This means a real estate mutual fund might invest in the shares of a management company or a builder of residential and commercial properties. Investors can even find mutual funds that invest in REITs. Once again, there is more information on this topic in our article: Real Estate Mutual Funds.
The third, and final, option an investor has is to buy real estate properties. With interest in the stock market fading, more investors are looking to real estate for higher returns on their investments. Buying and owning real estate can be rewarding, but it can also be a full time job. The following are just a few of the important factors to understand before making an investment.
Investors new to the real estate market are frequently individuals turning away from stocks. Unfortunately, real estate is more time consuming 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 investments to short term appreciation opportunities, or fixer-upper scenarios, can be expensive. When buying and holding real estate in the long term (10 plus years), the odds of making money increase significantly. Unfortunately, there can be a substantial time commitment when investing in properties.
Owning real estate means taking physical possession of something that requires maintenance and a renter or lease. As more information is obtained on a property, the chance of success increases. Even in slow or declining markets, knowledgeable investors can realize high returns. The investor has to know what to look for in a property, and that research takes time.
Many companies that grew quickly have fallen because they simply ran out of cash, and that's what pays the bills. A lack of cash reserves can quickly put an investor in an uncomfortable situation when it comes to real estate.
Without money in reserve, it's not possible to maintain and repair properties. When a property is in a state of disrepair, it will be difficult to attract and retain tenants. The lack of rental income puts a greater strain on cash flow. This scenario can quickly spin out of control and lead to large losses.
Finally, striking a good deal in the real estate market is more than just sending a 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 the investor thousands of dollars. If the investor's background doesn't allow them to gain a lot of experience in this area, then a course on negotiating skills is worth considering.
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