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Ever wondered how you can make money through investing in real estate, besides just owning a rental property? Real estate investments is one of the most popular asset classes for investors, as people always need a place to live and buildings to rent, right?
In today’s blog, we share with you some other ways that people invest in real estate whether it’s for a quick profit or regular monthly income.
This may be the most known way to invest in property, but essentially, investing in a rental property is when an investor purchases a property, either outright or with a mortgage and rents it out to tenants. This could be by letting a tenant rent out the entire property or having multiple tenants rent out individual rooms.
Many investors see great benefits from investing in a rental property. This is because the property can appreciate and the money from tenants can provide a regular income that could cover some, if not all, of your monthly mortgage payments.
Having said that, rental properties aren’t always the most accessible as many people struggle to get onto the property ladder as it is. To buy the property requires a large amount of capital upfront, not to mention covering any maintenance costs and vacant months. As a landlord, you’ll also have to manage your tenants, so if the boiler in your property breaks down, expect a call from your tenants - and money coming out of your bank to fix it!
House flipping is when you buy a house for a short holding period and sell it for a profit. Usually, when investors flip houses, they will buy under-valued properties or undergo renovations or repairs to add value to a property and sell it at a higher price.
So for example, if I purchased an old property for £300,000, I could undergo a renovation, add an extension, adding more value to the house. I would then be able to sell it for £400,000 and make £100,000 profit, as the property is now more desirable to buyers. However, note that £100,000 wouldn’t exactly be my take-home profit because of the costs of the renovations and deduction of Capital Gains Tax (CGT).
Whilst this investment strategy could offer quick and profitable returns, only tying your money for a short period of time, it requires large amounts of capital. This is because you would need money to buy the property in the first place and if you plan to add value to the property, the costs for any renovations or repairs will also need to be accounted for. House flipping also requires a deeper understanding of the real estate market to be able to evaluate a property & determine its potential.
Real Estate Investment Groups (REIGs)
REIGs are businesses that focus on investing in real estate by buying, selling, flipping, or financing properties. They are formed with private investors who combine their money to purchase properties to sell units of their properties to other investors.
By investing in REIGs, you essentially own a unit/s of a property, thereby joining the group. REIGs will manage the entire property by handling maintenance, managing tenants, and advertising vacancies, therefore they take a percentage of the monthly rent you receive from your tenants.
REIGs may be attractive to an investor who wants to invest in property but simply doesn’t want to deal with the hassle that comes with managing one, however, you may have to deal with dishonest managers.
Real Estate Investment Trusts (REITs)
REITs are bought and sold on the stock exchanges like any other stock. A real estate investment trust (REIT) is created when a company uses investors’ money to buy income-generating properties such as shopping centres, hotels, and warehouses. From the profit that they generate from these properties, they use it to pay the investors back in dividends.
REITs can be advantageous because you could earn a regular income with dividends. Also, you wouldn’t have to worry about your money being tied up as with most property investments, because you can trade it like a regular stock. However, there is a chance that your REIT stock may lose its value meaning that you may sell it for a cheaper price than you had bought it.
As you have seen, no matter the investment strategy, there’s no denying that each type of real estate investment comes with its own perks. However, as with all investments, investing in property comes with risk as there is no guarantee on returns and your invested capital can also be at risk of being lost.
The following is for general information and is not intended as a form of financial advice by Finndon or its representatives, nor the information intended to be relied upon by individuals in making any financial decisions.
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