Real estate investing can be an excellent strategy to build wealth. Not only can it provide good diversification for your clients’ investment portfolio, but this can also give them predictable and possibly regular income.
Other benefits include having a way to hedge against inflation. Your clients can lease out the property and keep rent at pace with inflation. Property values, and therefore rent, rise alongside inflation.
In this article, InvestmentNews tackles some important questions to help you guide your clients in real estate investing. This includes how to invest in real estate with no money and how to invest in real estate for passive income. We’ll also share some viable real estate investment examples for you to share with clients.
Real estate investing is an investment strategy where investors use property to create income or use the property for investment purposes. In some instances, the real estate investment property can be a home that would have served as the owner’s primary residence. The real estate property may also be used for commercial purposes.
Real estate investors can own several properties and live in one of them while using the others to generate rental income. They may also generate substantial profits by flipping houses – i.e., buying old homes on the cheap, then renovating them and selling them at a higher price.
There are different ways to invest and make good returns on real estate investments:
Having one or more properties to rent out is a perfect setup for investors who also happen to be good at dealing with tenants. This is also a great option for investors who are good at renovating properties.
Out of all the real estate investment strategies, this can have the highest capital requirement, whether refurbishing an existing property or building from the ground up.
Owning properties for rent can also involve maintenance costs and enough money to cover for when they remain idle, or when tenants fail to pay their rent.
RENTAL PROPERTIES | |
PROS | CONS |
Provides regular, reliable rental income | Managing difficult tenants can be stressful |
Properties can increase in value over time | Difficult tenants can damage the property |
Some expenses are tax-deductible | You can lose money if the property is untenanted |
You won’t lack for tenants if in a good location | Maintenance can be costly |
Another common way of making money from real estate is to get into the business of flipping houses. This is a bit like day-trading shares of stock, in the sense that you buy a house at a low price, then sell at higher price, “flipping” it for a profit.
The flipping part can be fun as the investor figures out ways to redesign or renovate the property, so it commands a higher price. Experienced realtors know that investors can get potentially large returns, simply by increasing a home’s curb appeal.
HOUSE-FLIPPING | |
PROS | CONS |
Capital can be tied up for a short period | Investors need a lot of experience and knowledge about the market, renovations and valuation |
Some houses can take a little time and a small investment to flip for a profit | Some houses may unexpectedly need costly repairs and eat into profits |
Significant returns | Hot real estate markets can quickly cool off or disappear |
While house-flipping does sound like an interesting real estate investment strategy, it’s not for the faint of heart, nor is it advisable for first-time flippers. Successfully turning a profit on a renovated property calls for savvy investors who know how to minimize costs and attract serious buyers.
If not sold within six months, a flipped house can tie up investments and worse, become a huge tax burden.
Another lucrative real estate investment strategy is to become part of a REIG. This is ideal for investors who want to own rental properties but prefer a hands-off approach when it comes to managing them.
Investing in a REIG requires some capital and financing. REIGs work like mutual funds, except for rental properties instead of shares of stock.
In this arrangement, a company buys or builds some apartment buildings or condominiums, then lets investors buy them via the company, making them part of the REIG.
A single investor can buy one or more of the apartment or condo units, while the company handling the REIG takes care of maintenance, advertising, and getting suitable tenants. In exchange for these services, the company takes a percentage of the rental income.
An unusual feature of the REIG is that a portion of all the units’ income is pooled to serve as a buffer against empty units. This way, investors can still receive some income even if their unit is unoccupied.
As long as the vacant units do not exceed the occupancy, the pooled money can cover costs and stave off losses.
REAL ESTATE INVESTMENT GROUP (REIG) | |
PROS | CONS |
Properties steadily appreciate | Risk of loss due to high vacancy rate |
Can give investors significant passive income | Management fees can be relatively high |
Investors don’t have to manage the property | Unethical managers can take advantage |
This investment strategy involves getting together with other investors on an online platform and has gained traction with investors in recent years. Like the REIG, a group of investors cobble money together to invest in a large commercial or residential property. Smaller amounts of capital are needed for this type of real estate investment, since investors do not buy property on their own.
Some of the best real estate crowdfunding platforms let investors pool their money to fund other investors who need financing for their real estate developments. This makes for a good opportunity for investors to diversify their portfolios with a small amount of money.
REAL ESTATE CROWDFUNDING | |
PROS | CONS |
Minimal capital for multiple projects | Low liquidity |
Can invest in different geographical locations | Costly management fees |
Can be a good passive investment vehicle | Lack of control over the investment |
Investing in a REIT is another good real estate investment strategy, especially for investors looking to diversify their portfolios.
REITs are also perfect for investors who prefer to avoid the nitty-gritty of real estate ownership. REITs are a more formal version of a REIG and provide access to a broader range of real estate types.
To create a REIT, a company or trust must use pooled funds from investors to buy and operate income properties. The properties in a REIT can include:
Within the real estate industry, data centers, industrial retail, senior housing, and hotels have shown strong pricing power.
What is unique about REITs? They share some qualities from both mutual funds and shares of stocks:
REITs are attractive real estate investment vehicles, since they are obliged to pay out 90% of their profits as dividends to shareholders to keep their REIT status. Additionally, REITs do not pay income taxes.
As with dividend-paying stocks, REITs can be an excellent investment for investors who want regular income. Compared to the other real estate investments, REITs can even give beginning investors access to larger investments like malls and hospitals.
REAL ESTATE INVESTMENT TRUSTS (REITS) | |
PROS | CONS |
Can give regular income | Leverage from rental properties does not apply |
Works like dividend-paying stocks | Some REITs use asset management companies that profit from issuing more shares, diluting their value |
Main income sources are long-term assets | Investors may not get access to foreign REITs which can be more lucrative |
With the right approach, a good credit score and a good network, it is entirely possible to invest in real estate property with little to no money. Here are ways that you can support your clients in this venture:
You can direct clients to reputable private lenders who offer financing for real estate investments. These lenders can offer flexible terms but may carry higher interest rates (6-12%) and more fees. The interest and fees can vary among different private lenders, so due diligence is a must to get the best deal.
In this type of partnership, the investor and one or more partners share ownership of the business and its profits and losses. As an advisor, you can ensure that clear agreements are in place to define how profits, losses, and responsibilities are shared among partners.
This can be a good option, especially when property values have increased. A home equity loan lets investors borrow money against the value of their home. The creditor lets them borrow money based on the amount of equity in their property.
This approach calls for a review of the client's overall debt capacity and the potential impact on their financial stability.
This is another good option for investing in real estate without using the investor’s personal funds. Even though there may be some mistrust with Fannie Mae and Freddie Mac, investors have warmed up to government loaning firms shortly after the 2008 mortgage crisis.
Advisors should stay informed on the qualifications and terms of these loans. That way, you can effectively incorporate them into client strategies when appropriate.
Given that these are the available options, which of these real estate investments or strategies are right for your client? That depends on their financial goals, circumstances, and needs.
To know which real estate investment is suitable for an investor, you must first pinpoint:
Knowing the answers to these questions will help guide your client in choosing an option that’s best for them.
Here’s a video that can provide more information on real estate investing. The presenter starts by asking investors what sort of real estate investment they would like to get into.
A rare form of real estate investing is tax lien investing. Here’s a guide on tax lien investing to share with your clients in case they’d like to explore this option.
Real estate investing offers unique opportunities and challenges. For financial advisors, guiding clients through real estate markets demands due diligence, market analysis, and strategic planning. The potential rewards can enhance portfolio diversification and yield substantial returns.
It’s essential to tailor real estate investment strategies to fit the financial goals, risk tolerance, and budgets of each client. If done right, real estate investing can be part of your client’s diversified portfolio to help them achieve their financial goals.
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