Are you ready to strategically coordinate new real estate investment strategies into your portfolio to grow your income?
Although every market has its ups and downs, real estate has historically been a reliable and consistent asset to invest in – especially in the long-term. It can be an excellent strategy to diversify your investment portfolio and earn a source of reliable income month over month, making for even more good reasons to invest.
However, you will need to know the ins and outs of the different investment strategies available to you before making an educated decision. This guide will walk you through the various methods of investing in real estate, along with some real estate investment strategies to help you achieve the best results.
How to Invest in Real Estate
If the idea of adding real estate to your portfolio appeals to you, it can help to prepare. There are many different ways to invest, each with its own approach, advantages, and disadvantages. From residential real estate to commercial, you should know the core real estate investment strategies that can help you make the most of your investments.
Residential
When it comes to residential real estate, you can do more than simply own your own home. All you have to do is prepare for the right strategy and you can generate a consistent income or even a lump sum payment.
Here are the three most common ways investors will leverage residential real estate:
Long-term Rentals
Long-term rentals allow people to lease a property for longer than one month though many people will look for annual leases. It provides a reliable source of income with less turnover in tenants (and therefore, less in property management fees). For those who don’t want to pay cash for their real estate investment, it is also easier to obtain financing for long-term rental properties.
However, you may find it is more challenging to raise rent in accordance with local trends or you may sign with a bad tenant whom you will be stuck with for the long haul.
Short-term Rentals
The popularity of short-term rentals has soared with the prominence of sites like Airbnb. A short-term rental might be the best fit for you if you want to be able to adjust your rent prices in real-time with the market. Because tenants are always coming and going, you can change the price between bookings. It’s an extremely flexible way to generate revenue.
On the other hand, you may go through seasons where you have few to no bookings. Unlike long-term rentals, you lose some of that predictable income. You may also have more expenses such as cleaning services between renters. And of course, there will be significantly more attention needed.
Flipping
Flipping homes is another way you can make decent cash from buying properties at a lower rate, fixing them up, and then selling them at a much higher price. If you have the spare time to invest in fixing up a property and some amount of handiness, this is a lucrative investment. Even if you do not plan on doing the work yourself, you can still make good money flipping houses.
The downside to flipping is that nothing is guaranteed. Fluctuations in the housing market might mean that you sell for less than you planned. You can also lose money quickly if the rehab process takes longer than anticipated or unexpected things come up.
Commercial and Industrial
Maybe residential real estate doesn’t sound like the best fit for your portfolio. Instead, you might want to turn your attention to commercial or industrial properties such as office buildings, storage units, warehouses, and retail locations. The leases on these types of properties tend to be more long-term, often giving you another source of predictable income for three years or longer.
At the same time, commercial and industrial properties are also considered high-value properties to add to your portfolio. You will generally earn more per month for a commercial property when compared to a residential option. Of course, commercial property is often more expensive to buy and own.
If you do decide to make a move into commercial real estate, you may want to include a clause in your contract that raises rent year-over-year so you do not miss out on the growing real estate costs while in a multi-year lease.
Raw Land
Raw land is one of the most flexible options you can add to your portfolio. You can buy, hold, sell the land, or build on it. The major benefit of raw land is that it tends to cost less than developed property and has no need for repairs or maintenance.
The downside is that it is a highly speculative market. To make a sound investment, it will require a lot of research, knowledge about the industry, and market analysis. Investors need an intimate knowledge of zoning regulations, flood plains, and more.
If you intend to build on your land, you must also understand building codes, know how to submit for permits from the township, and all of the other bureaucratic obstacles you will have to go through to bring your building to fruition.
Passive Real Estate Investments
Some people prefer not to be so hands-on with their real estate investments. The good news is that you can still diversify your portfolio with real estate investments through REITs, ETFs, and online or crowdfunding platforms. Let’s take a closer look at each one of these options:
Real Estate Investment Trusts (REITs)
A real estate investment trust allows you to invest in a portfolio of properties that produce an income without tying you down to one specific property. Many are traded on the stock market and allow you to invest in a diversified portfolio of properties that are already generating money.
It may allow you to invest in both residential and commercial real estate at the same time. Be careful, though, as sometimes they can be difficult to liquidate.
Exchange Traded Funds (ETFs)
If you want an investment that tends to yield high dividends, then ETFs might be the way to go. An ETF invests in REITs and other companies that relate to the real estate market. You’ll get access to a wider array of income-producing opportunities related to real estate when compared to a REIT alone.
Plus, it saves you from having to research and select just one or two REITs that suit an investment strategy as it gives you exposure to multiple assets. Beware of the fee structure, which may be deep with multiple entities involved.
Online and Crowdfunding Platforms
Last but not least, you might decide to invest in real estate via online or crowdfunding platforms. By pooling your investment with others, you can more easily scale a real estate portfolio to greater heights. You can get around the need for loans and interest payments by putting your money with others to buy properties outright.
It also allows for high dividends paid out and gives you the ability to diversify between residential and commercial properties. Make sure you check the validity of any of the vendors you work with prior to investing.
4 Key Real Estate Investment Strategies
Once you have narrowed down what type of real estate you would like to invest in, it is time to touch on the investment strategies you need. Here are four ways you can make the most of your investment and get those big dividends.
1. Watch the Market
First, you need to pay careful attention to market trends such as whether it’s a buyer’s or seller’s market.
Always keep your finger on the pulse of the market. Without this understanding of who benefits from the sale of a property, you might pay too much for something that is meant to be an income-producing asset.
In addition to the overarching trends in real estate, you also need to understand the local market where you are investing. Know what the prime locations are so that you have a better chance of leasing a property out or listing it for sale as a flipped home.
2. Talk to Builders and Contractors
Investing in real estate is also an opportunity to build up your contacts. Builders and contractors can often give you access to properties before they are publicly listed for sale. With a network of industry professionals, you can access new opportunities without the stiff competition from other investors.
3. Diversify
As with all investment strategies, you don’t want to put all of your eggs in one basket. Find several real estate opportunities and invest a little bit of money in all of them. This protects you from the fluctuations of the market and allows you to weather any financial upheaval.
4. Understand Tax Implications
Before you invest, understand the tax benefits of your real estate purchase to make the most of things like depreciation and 1031 exchanges. There are also impacts on your taxes depending on when and how you sell your property, known as capital gains taxes.
Long-term and short-term capital gains can eat into your profit, so make sure you account for them upfront. Take a look at our Capital Gains Tax Estimator calculator to get an idea of what you may owe.
If it applies to your plans and strategy, you might want to consider minimizing the tax impact by selling your real estate through a charitable remainder trust (CRT). This allows you to avoid capital gains taxes and pay deferred tax on the distributions. In turn, you or your beneficiaries can receive payments from the trust for either a set period or for the remainder of a lifetime.
Optimize Your Real Estate Investment Strategy
Real estate investments touch on three distinct areas: legal, financial, and tax. To get the most out of real estate investing, you need the best partners at your side. Unfortunately, this is often easier said than done. Coordinating various advisors and trying to get everyone to collaborate for the good of your overall portfolio can be challenging.
At Magellan Planning Group, we house the power of three firms – law, financial, and tax – under a single roof. Our diverse team of experienced attorneys, financial advisors, and tax planners all coordinate their efforts into a cohesive plan for you! Contact us today to learn more about how we can help.