How can I make equity investments in real estate?
The term equity refers to one's ownership. In real estate, equity is the value of the owned real property, less anything that is owed on the property. For example, a homeowner may have a house valued at $300,000 but have an outstanding mortgage loan balance of $225,000. The homeowner, therefore, has $75,000 in equity. There are several ways investors can profit from real estate equity. First, there are two sides of the market: public equity and private equity. Deciding which way to invest depends on the investor's available capital, time horizon and risk tolerance.
Investors can also gain exposure to real estate equity through equity real estate investment trusts (REITs) that invest in a collection of properties. With REITs, an investor does not have to actually own a property that must be maintained. These portfolios of commercial properties, such as malls and office buildings, pay high dividends to shareholders, which are generated by rental income from the properties. REITs are much more liquid investments than owning real property in the traditional sense because they trade like a stock.
Derivatives of real estate investments called swaps can also be used to profit from equity in real estate. With these investments, two parties simply swap interests in properties they own for a contracted period of time and at a contracted premium rate. They allow real estate investors to tactically change exposure in different sectors of the market for short periods of time. These investments carry more risk, as they are very illiquid.