Nonetheless, real estate can indeed be a good long-term investment strategy. Shrewd real estate investors routinely reap not only significant financial rewards but can also gain personal fulfillment from their work. If you're thinking of getting your feet wet with real estate investment, here's what you should know before diving in.
According to U.S. News & World Report, there are two avenues for investing in real estate, real estate investment trusts (REITs) and direct ownership of property. The distinction comes down to how hands-on you want to be with your investments.
A REIT is the low maintenance approach, consisting of a portfolio of properties in which investors can buy shares. In this way, REITs are similar to stocks and bonds. However, REIT investment capital is pooled and used to purchase and manage real estate. The trusts are professionally managed, and investors make money both through dividend payouts — some of the highest available at 90 percent — from rents paid by property tenants as well as through moderate capital appreciation when properties in the portfolio are sold at a profit. REITs have been around since the '60s, when the National Association of Real Estate Investment Trusts (NAREIT) was formed. The NAREIT website boasts a wealth of information about REITs.
In contrast, direct ownership means purchasing an investment property and managing it directly. If you want to get first-hand experience in the real estate business, this is the way to go. However, you can't simply buy an apartment building and start making money. You must choose your moves wisely in order reap the benefits of your investment.
Planning is key. You wouldn't rent a retail space in a mall before knowing what you're going to sell or who's supposed to buy it, so before you even choose a property, determine your strategy. Smart investors make a plan first, and then look for properties that fit. When it comes to direct investment, there are plenty of options. For instance, you could:
● Get your feet wet with a duplex or triplex, living in one unit and renting the others.
● Buy one or more low-, middle-, or high-end single-family homes to rent.
● Buy homes to renovate and "flip" for a profit.
● Purchase a multi-family property, with a few units, or dozens.
● Set your sights on retail, office, or industrial property investments.
● Focus on nontraditional properties, including farms, self-storage, data centers, hotels or medical facilities, and student or senior housing properties.
Once you know what types of properties you'll focus on, start researching. Investopedia recommends finding out everything you can about a perspective property and its neighborhood. Consider everything from floodplain locations to what's likely to need repairs. If there are neighborhood nuisance issues — a commercial construction project down the street, a lack of parking, so-so schools, high crime — make sure you're aware of them and how they factor into your property buying decision.
Ask the seller and their agent questions about why they're selling, how long they've owned the property, what's been updated or replaced and what's likely to need repairs. But don't just take the seller's word for it — do your own research to get an even more complete picture.
You can view public records for many areas online, including tax assessment, permits, and other property records. For some research, you may need to visit your local archives in person. Local newspaper and business journal archives can be valuable as well. Neighborhood development projects, tax proposals, and quality of life issues are often chronicled in news stories. Crime and school statistics are also available online.
Numerous real estate industry organizations, such as CoreLogic, Trulia, the National Association of Realtors, and others, create annual research reports on various facets of the industry.
Lastly, for any real estate investment, a professionally completed title report and purchase of an owner's title insurance policy is a must. Investors should know upfront of any liens, encroachments, easements, or ownership issues for any property they're considering buying. Zillow points out preliminary reports could also include important details about historic oversight or planning department rules that apply to the property. Purchasing an owner's policy will ensure your investment isn't threatened by any further title issues that come to light after the sale.
You'll find investment real estate expenses turn up unexpectedly and add up quickly. You may have planned renovations to get the property ready for tenants or its next owner. Regular maintenance for a commercial building can be more involved and costly. If you hand off management duties, you'll need income to cover it. Lastly, though there are a number of tax incentives investors can take advantage of, you'll still have your share of tax obligations. In order to come out ahead, your rental income or the property's price appreciation at the time of sale will have to outweigh these costs.
Again, research is key. If you plan to remodel, get estimates from contractors before you buy. If the building already has maintenance personnel, ask the seller about the cost. If you decide to hire a professional property management firm, expect to pay between five to 10 percent of gross monthly rent for these services. If you finance your purchase, part of your interest will be tax deductible, though not all. Your investment property will be subject to annual property tax as well as capital gains tax when sold.
If your investment property is a duplex or a cluster of starter homes, you might be able to handle the everyday work on your own. If your property is any bigger, you're going to need some help. Bankrate advises assembling a team of go-to professionals to help with everyday property chores as well as renovation, financials, and realty matters. Include a real estate agent, appraiser, home inspector, attorney, mortgage lender, contractor, plumber, electrician, handyman, gardener, and cleaning service.
Hiring professionals may eat up more profit, however, the added expense may be offset by the efficiency of working with the same expert regularly or negotiating for better rates. Lastly, letting others work in your business allows you to focus on top level concerns or look for new investment opportunities.
In the simplest terms, a rental investment property should pay for itself, notes Zillow. A buyer should work to find a property that balances rental income and operational expenses so that cash flow is positive. Surprisingly, a flashier investment property may not be the one that offers a positive return. Zillow has an excellent illustration of this concept using two hypothetical townhomes.
For every property you consider, crunch the numbers to make sure it's a sound investment. Online return-on-investment calculators, like this one from Rental Property Reporter, make it easy to see how much profit you can expect to make and how long you'll have to wait to see those returns. Many MLS listing services also include data for their multi-family listings, such as gross rental income, net rental income, and expenses, in order to show the listing is profitable. Other online tools, like Rentometer, help landlords compare neighborhood rental rates, ensuring their rates are competitive.
You wouldn't want to jump into investment real estate without fundamentals like planning, research, and budgeting, yet the basics aren't enough to ensure you'll be successful. Real estate investment carries some risk, so it's important to learn as much as you can. Because your financial future is on the line, it's also important to seek advice from reputable sources.
The National Real Estate Investor Association is a good place to start. The organization offers online resources, a directory of local chapters, and information about classes. Investors can also use networking to their advantage. Consider reaching out to more experienced real estate investors in your area. Offer to buy lunch to get your questions answered.
Remember that investment real estate is a long-term strategy, even though you may see dividends and net profits fairly early. Before you dive in, commit to learning as much as you can. You'll have more success and less frustration with investments you've carefully considered.