BUYING and selling real estate is a popular way to invest money, driven by rapidly rising property prices.
There’s lots of ways to get involved – from buying a property and renting it out, flipping houses or even specific investment products.
Of course, no investment is 100% secure, and the main risk with real estate is what happens if the market drops.
If property prices fall rapidly, you could find yourself with an underwater mortgage and your house is in negative equity.
If you need the cash quickly you might even have to short sell.
Other concerns include rental properties standing vacant, and money being tied up when you need it.
Here are three of the most common ways to invest in real estate, as well as some of the main risks to be aware of.
Buying a rental property
One of the most obvious approaches to investing in real estate is to buy a property and rent it out.
Done well, the rent you charge can cover the mortgage costs, and when you’ve paid it all off then you’ll have a steady stream of income.
Some of the downsides include the hassle of managing tenants, the up-front capital needed to pay for a deposit, maintenance costs and gaps in income when properties are vacant.
If you don’t fancy managing rentals yourself, you could consider investing via a Real Estate Investment Groups (REIGs).
These are small funds that invest in rental properties, for instance by purchasing or building an apartment block or group of condos.
Individual investors can own one or more units, but the REIG handles the tenant management, maintenance and even advertising vacancies.
Some of the risks with this approach include high fees and needing to trust the managers involved.
There are two kinds of house flipping. The first is where you buy and sell properties quickly, hoping to capitalise gains on the market.
This approach is quite risky, particularly if prices fall and requires a lot of knowledge.
The second style of house flipping is when you buy a property, renovate it and then sell it on for a higher price.
This requires knowledge about which renovations will add the most value, and enough money to pay for upgrades.
With both approaches, if the markets crash your capital could be at risk and you could have to sell at a loss or get stuck with property you don’t want.
You can capitalize on the property market without actually directly buying a home through investment vehicles and platforms.
One of the most common ways to do this is with a Real Estate Investment Trust (REIT).
REITS is when a trust uses investors’ cash to buy and operate properties. This can be anything from rental blocks to malls and corporate office blocks.
REITs are bought and sold on exchanges, like stocks and shares, but the corporation has to pay 90% of its taxable profits as dividends, meaning you should get a regular stream of income.
As with any investment, your money can go up as well as down, so one of the biggest risks is that the price of your REITs falls, and you need to sell at a loss.
Another approach is through Real Estate Platforms and crowdfunding. This is where investors are connected with real estate developers looking for finance.
Some of the main risks here are that your money is often locked away for a long time, and the fear that the projects could run into issues.
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