What Is Real Estate Investing?Real Estate - What It Means
Real estate refers to land and the buildings on it, including the natural resources above and below the land as air, crops, animals, minerals or water. Real estate is also known as real property because it is immovable and permanent.
Real estate investing can be described as the purchasing, owning, development, renting, managing and/or selling of real estate for profit. Investing in real estate encompasses the broad range of activities centred around making money from property or cash flows tied to tangible property.
Investing in Real estate offers unique cash flow, profitability, tax advantages, and diversification benefits. However, as an asset class, real estate has limited liquidity. It is also capital intensive and highly dependent on cash flow and is susceptible to macroeconomic conditions which affect its value. If these variables are not properly understood and effectively managed then investing in real estate may become a risky venture.
Categories of Real Estate Investments
Real estate investment has several categories, each serving a unique market.
- Residential Real Estate
Residential real estate consists of the development of an area or property for people to live. They include properties such as residential houses, apartment buildings, townhouses, and vacation houses or country homes. Residential real estate cannot be used for commercial or industrial purposes. Revenue in this category of real estate is generated through rent, sale, lease or development of property
- Commercial real estate
Commercial real estate is that aspect of real estate that caters to commercial enterprises. It includes property which is used for commercial purposes such as office buildings, shopping malls, hotels, or warehouses.
This category of real estate can lead to high cash flow because revenue from commercial property involves multi-year leases which could provide a hedge against inflation and currency fluctuation. However, it may be challenging to review existing agreements if real estate valuations appreciate during the tenor of the lease.
- Industrial real estate
Industrial real estate consists of landed property used for industrial purposes. This includes factories, bakeries, assembly units, truck terminals, quarries, or industrial warehouses. Industrial real estate investments provide significant fees and a multi-service revenue stream.
Undeveloped land is another category of real estate investment. It includes vacant land, working farms, and ranches. Though there may be no plans to develop the land, it may serve other financial purposes. An investor may decide to purchase a piece of land with the hopes that its value appreciates in the future. He may also use the land to preserve his capital and protect it from inflation. The land could also be used as collateral to access loans or credit facilities.
Ways to Invest in Real Estate
Though real estate is one of the oldest forms of investment and a very popular asset class, a lot of new investors are not aware of the variety of available options in real estate investment. Most people are only aware of land and property ownership. Beyond these options, there are other ways to invest in real estate.
- REITs (Real Estate Investment Trusts)
REITs allow you to invest in real estate without the physically owning one. When you invest through a REIT, you are buying shares of a corporation that owns real estate properties. As an investor, you get dividends as returns in your investment which makes them a popular real estate investment choice. Some REITs are publicly traded, others aren’t. Though new investors are advised to stick with the publicly traded ones.
- Online real estate investing platform
Real estate investing platforms are for those that want to join others in investing in a bigger commercial or residential deal. The investment is made via online real estate platforms, also known as real estate crowdfunding. It still requires investing capital, although less than what’s needed to purchase properties outright.
Online real estate investing platforms connect investors to developers. They are ideal for investors who want to connect with others to fund a real estate project. The investment is down through online platforms. The capital required is usually less than what it would take to own the project outrightly. Investors can invest in different portfolios of projects across geographical regions. However, this type of investment tends to be illiquid.
- Real Estate Investment Groups (REIGs)
REIGs are like small mutual funds that invest in real estate (mostly rental property). Companies that own investment groups buy or build property then allow investors to purchase them through the company, which invariably makes them members of the group.
A single investor can own one or multiple properties, but the company operating the investment group collectively manages all of the units, including maintenance, advertising, and interviewing tenants. In exchange for conducting these services, the company takes a percentage of the monthly rent. REIGs are ideal for people who want to own rental real estate without the stress that comes with running it.
Flipping involves buying and renovating dead-beat property and selling them at a higher cost. It requires dexterity and proper valuation skills for significant profit to be made. Flippers are not generally seen as landlords because they do not buy the property with the intention to own or generate income from it. Instead, they often look to sell the undervalued properties within a short time frame profitably.
Real property flippers often don’t invest in developed properties. Therefore, the property must have the intrinsic value needed to make a profit. Because flipping is based in speculation, flippers who are unable to quickly sell-off a property may soon find themselves in trouble. The longer the property is unsold, the less money the flipper makes because they are paying a mortgage on the property.
Renting is another way of investing in real estate. The investor owns the property and may decide to rent out space in sections to tenants or commercial enterprises. This is cash intensive because a lot of money is spent on maintenance and administrative fees. Though it guarantees a stream of consistent cash flow, it would take a long time to accrue profits from renting.
Leasing is another way to invest in real estate. It is very similar to renting but differs in the time frame of payment. While rents may be paid monthly or annually, leases span for an extended period, usually from 10 years and above. Leases are convenient for commercial and industrial real estates rather than residential. They can provide a huge revenue stream and hedge against fluctuations.
It is possible to build a considerable amount of wealth from real estate investment. Investors have long regarded real estate as a very secure form of investment that guarantees a return on their money. Whether you rent, lease, flip or invest through REITs, real estate investment has boundless opportunities.