Investing in Real Estate – What You Should Know

Alice Tuffery, writer

Published at 29/07/2019, Updated on 04/05/2022 , Reading time: 5 min

Investing in Real Estate – What You Should Know — Photo © investing-real-estate.jpg

Putting your money into real estate can be a lucrative career option if you’ve got the capital and know-how to invest wisely.

Property is classed as an “alternative asset”, as the processes involved are thought to be more complex than those in “standard assets”, i.e. stocks and bonds. However, real estate does offer several benefits that cannot be accessed when investing in standard assets. These include the potential for property to increase in value and tax advantages.

Many investors prefer real estate to stocks and bonds because they are able to use leverage to make a profit. In other words, they can invest borrowed money in order to see a return faster. Many mortgages require just five percent of the building’s value as a down payment, which means you can purchase a property for a relatively small sum of money. Then, all you need to do is use the money you make from renting it out or selling it on to pay off the mortgage and any interest it’s accrued over time.

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3 Main Ways to Get Money from Investing

Most real estate investors are interested in making money in one of three ways. The first is through interest on loans. If this is the kind of capital you want to generate, you’ll need to lend money to a property developer. They will then use this money to finance new real estate, whilst paying you back. The loan will develop interest over time, and this is the profit you’ll make.

The second method is known as “appreciation”, which works on the basis that property increases in value over time. To make money in this way, you’ll need to get involved in real estate trading (also known as “flipping”). This process involves buying an ostensibly underpriced property and selling it on at a higher price. Some investors will make changes to the property, renovating or modernising it to increase its value.

This is also called “wholesaling”, but wholesalers usually find properties that require renovation and sell them on to “property flippers” who actually carry out the work. Once wholesalers have bought and sold real estate to make a profit, the property flippers who bought it must sell it on again for an even higher price. This is why it’s vital to be sure that the property has potential.

To successfully sell on a property at a higher price than you bought it for, you must have a good knowledge of real estate valuation and the local market. You’ll need to be confident in your ability to identify a high-performing area and suitable property. You should look out for “up and coming” areas, or regions that are benefitting from a regeneration project.

This is usually a short-term investment because the longer the property is in the hands of the investor, the more money they stand to lose. The third type of property investment demonstrates how money can be made over a longer period.

This involves making money through rent. Many investors purchase a residential, commercial or industrial unit and rent it out. By becoming a landlord, you can secure consistent income without having to rely on in-depth knowledge of real estate.

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Alternative Real Estate Investment Methods

Of course, these three methods aren’t the only way to make a profit. Let’s look at some of the alternative investment opportunities.

• Real estate investment groups – These organisations construct or purchase a selection of properties and sell them to investors, who rent it out. The organisation maintains control of the buildings, handling maintenance and repairs, and the investors send a fraction of their rental income back to the organisation. This is a fantastic option for prospective landlords who want to make money through lettings but don’t have the time or inclination to manage the property themselves.

• Real estate investment trusts (REITs) – This is an organisation that manages properties that generate capital. They give investors the opportunity to buy shares in real estate portfolios and benefit from the income created by a range of different properties.

• Private equity funds – Multiple investors combine their money to increase the purchasing power of the fund. One person is appointed as its manager, and they are responsible for actively handling the investments that are made. This means the other investors can benefit from profitable transactions without having to spend their time carrying out research and handling investments themselves.

Active Real Estate Investing

If you are an active investor, you’ll spend a lot of time managing your investment activity. The stakes and pressure levels are high in active investing, and you only have a short amount of time to make your profit. You’ll need extensive knowledge of real estate processes and your local market, as well as financial acumen, the ability to negotiate successfully and a hands-on attitude.

If you’re involved in real estate trading or flipping (buying a property to sell it on), you must be sure that the combination of your property, your budget and the housing market has the ability to create a profit. This is a huge responsibility.

Passive Real Estate Investing

If active real estate investing is a “hands-on” approach to investment, passive investing is a “hands-off” one. Passive investors rely on the knowledge and expertise of others when making transactions. They hand over their money to other professionals to invest it on their behalf. In these situations, it is the professionals that perform in-depth research, identify lucrative opportunities and handle all investment activity. It involves a much lower level of involvement from the investors themselves.