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5 Simple Ways To Invest In Real Estate

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Investing in Real Estate

Buying real estate is about more than just finding a place to call home. Investing in real estate has become increasingly popular over the last 50 years and has is now a common investment vehicle. Although the real estate market has plenty of opportunities for making big gains, buying and owning real estate is a lot more complicated than investing in stocks and bonds. In this article, we'll go beyond buying a home and introduce you to real estate as an investment.

1. Basic Rental Property

This is an investment as old as the practice of landownership. A person will buy a property and rent it out to a tenant. The owner, or landlord, is responsible for paying the mortgage, taxes and costs of maintaining the property. Ideally, the landlord charges enough rent to cover all of the aforementioned costs. A landlord may also charge more in order to produce a monthly profit, but the most common strategy is to be patient and only charge enough rent to cover expenses until the mortgage has been paid, at which time the majority of the rent becomes profit. Furthermore, the property may also have appreciated in value over the course of the mortgage, leaving the landlord with a more valuable asset. (For related reading, see: 10 Tips for Buying Your First Rental Property.)

2. Real Estate Investment Group

Real estate investment groups are sort of like small mutual funds for rental properties. If you want to own a rental property but don't want the hassle of being a landlord, a real estate investment group may be the solution for you. A company will buy or build a set of apartments or condos, then allow investors to buy them through the company (thus joining the group). A single investor can own one or multiple units, but the company operating the investment group collectively manages all the units, taking care of maintenance, advertising vacant units and interviewing tenants. In exchange for this property management, the company takes a percentage of the monthly rent.

3. Real Estate Trading

This is the wild side of real estate investment. Like the day traders who are leagues away from a buy-and-hold investor, the real estate traders are an entirely different breed from the buy-and-rent landlords. Real estate traders buy properties with the intention of holding them for a short period of time (often no more than three or four months) and selling them for a profit. This technique is also called flipping properties and is based on buying properties that are either significantly undervalued or in a very hot market. (For related reading, see: Flipping Houses: Is It Better Than the Buy and Hold Strategy?)

4. Real Estate Investment Trust

Real estate has been around since our cave-dwelling ancestors started chasing strangers out of their space, so it's not surprising that Wall Street has found a way to turn real estate into a publicly traded instrument. A real estate investment trust (REIT) is created when a corporation (or trust) uses investors' money to purchase and operate income properties. REITs are bought and sold on the major exchanges just like any other stock. A corporation must pay out 90% of its taxable profits in the form of dividends to keep its status as an REIT. By doing this, REITs avoid paying corporate income tax, whereas a regular company would be taxed on its profits and then have to decide whether or not to distribute its after-tax profits as dividends.

5. Leverage

With the exception of REITs, investing in real estate gives an investor one tool that is not available to stock market investors: leverage. If you want to buy a stock, you have to pay the full value of the stock at the time you place the buy order. Even if you are buying on margin, the amount you can borrow is still much less than with real estate. Most conventional mortgages require 20% down. However, depending on where you live, there are many types of mortgages that require as little as 5%. This means you can control the whole property and the equity it holds by only paying a fraction of the total value. Of course, your mortgage will eventually pay the total value of the house at the time you purchased it, but you control it the minute the papers are signed. (For related reading, see: Leverage: Increasing Your Real Estate Net Worth.)

The Bottom Line

We have looked at several types of real estate investments. However, as you might have guessed, we have only scratched the surface. Within these examples there are countless variations of real estate investments. As with any investment, there is much potential with real estate, but this does not mean it is an assured gain. As with any investment, make careful choices and weigh out the costs and benefits of your actions before diving in. (For related reading, see: Real Estate vs. Stocks: Which One's Right for You?)

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