Although no investment can guarantee a profit or even safeguard the principal, real estate has historically been one of the safest asset types for investors while still providing the opportunity for gains.
Real estate investing can provide a number of advantages not found in other types of investments. Here are a few of the advantages.
One of the most compelling advantages of real estate investing is the possibility for investors to leverage their money multiple times. In other words, real estate investors can borrow money to buy a piece of property they couldn’t afford altogether, but then reap the full benefits of ownership. However, it is equally crucial to note that higher leverage entails increased hazards.
Real estate can also offer a variety of tax advantages. Real estate profits, for example, are taxed as capital gains, which are taxed at a lower rate than employment income. Furthermore, because the tax legislation allows you to depreciate your real estate every year, the tax basis of your investment assets may shrink over time. Additionally, if you generate cash flow through a rental property, you may be able to avoid paying self-employment taxes on those profits.
Some people value the extra control they have over their investments as another benefit of real estate investing. When you buy stocks or mutual funds, all you have to do now is sit back and wait for their value to rise. You won’t have much say in how those companies operate unless you’re a significant shareholder, which means there’s typically nothing you can do to immediately boost the value of your investments. When you invest in real estate, on the other hand, you have some control over almost every variable — gaining knowledge or negotiating skills to get a better deal on the purchase, improving the property, coming up with creative ways to generate extra revenue (adding laundry machines to your apartment complex, for example), and so on.
Risks of Real Estate Investing
Naturally, no discussion of real estate investing would be complete without mentioning the hazards. Real estate, like any other investment, has the risk of loss. When you invest actively in real estate, such as by purchasing a residential property to rent out, you run the risk of vacancies, which will result in a loss of revenue on the property, as well as a real estate market downturn, which will lower your equity in the investment.
Passive real estate investments, such as owning stock in real estate-related businesses, owning shares in Real Estate Investment Trusts (REITs), or investing in transactions through real estate crowdfunding platforms, all include dangers, which we’ll go over below. The value of these assets may diminish over time in the event of these investments. As a result, both active and passive real estate investments will require you to conduct your own due diligence and study prior to making a decision, just like any other sort of investment.
WHAT ARE REAL ESTATE INVESTING COMPANIES?
We’ve been talking about individual real estate investors up to this point, but real estate investment firms own and control a considerable amount of all real estate. These are often regular businesses, such as corporations, limited liability companies (LLCs), limited liability partnerships (LLPs), and so on.
Real estate investment companies (REICs) are simply groups of investors who pool their money and use it to buy real estate, either for long-term cash flow and appreciation or for quick turnaround and profit.
These firms invest in real estate in the same way that individual investors do, with the exception that the larger and more sophisticated companies tend to participate in deals that are far larger and more complex than an individual real estate investor could handle. Some of the largest real estate investment firms even buy land and then develop the property — apartment complexes, shopping malls — on their own.
Individual investors can also operate a real estate investment firm because the only requirements are to set up a business (for legal and tax purposes), locate funds, and then find the suitable real estate investments.
WHAT DO REAL ESTATE INVESTING GROUPS DO?
Real estate investment groups are a subset of the larger category of real estate investment companies. These companies serve a very specific purpose: they buy or construct a group of properties, then sell them to other investors who can rent them out. These real estate investment clubs also help investors find tenants and function as property managers in exchange for a part of the rent, because they are generally sophisticated and knowledgeable.
HOW CAN I INVEST IN REAL ESTATE WITH LIMITED FINANCIAL RESOURCES?
Although most people believe that real estate is exclusively for the wealthy or those with a large sum of money to invest, the truth is that you may invest in real estate with very little money.
Many significant real estate companies, for example, are publicly traded, and you can buy stock in real estate brokerages, real estate development companies, construction companies, and so on.
You can also invest in a real estate investment trust (REIT), which we’ll go into in further depth later.
Real estate crowdfunding is another newer kind of real estate investing that allows individuals to participate in deals without having to invest a lot of money.
For example, on point realty solutions is a top real estate crowdfunding company, and our platform connects investors interested in investing as little as $1,000 directly into real estate deals with real estate possibilities that have been vetted by our specialists.
On point realty solutions allows individuals to engage in possibilities that were previously only available to institutions or the rich by allowing participants to pool cash and invest in these projects. And, without the headaches of property ownership, our platform allows such investors to realize both future income and longer-term growth in real estate purchases. Keep in mind that there are hazards involved, so do your homework.
WHAT IS A REAL ESTATE INVESTMENT TRUST (REIT)?
A REAL ESTATE INVESTMENT TRUST (REIT) is a trust that invests in real estate.
A Real Estate Investment Trust, or REIT, is a real estate firm that operates in a similar way to a mutual fund, pooling funds raised from investors to buy real estate (either for ongoing income or for resale).
The majority of REITs focus on one or more property types, such as office buildings, apartment complexes, or self-storage facilities.
Although most REITs are publicly listed, and anybody can buy shares in them like any other stock, certain REITs are private, and only accredited, sophisticated investors can buy them.
HOW DOES REIT INVESTING WORK?
The simplest and most widely available way to invest in a REIT is to purchase shares in a publicly traded REIT company or in a REIT mutual fund. Any individual with a stock trading account can invest in REITs this way.
But accredited investors — typically high-net-worth individuals who meet certain minimum financial criteria based on income and total assets — can also invest in private REITs. These are not publicly traded and are not registered with the Securities and Exchange Commission, which means they do not have the same regulatory requirements to disclose details about their financial records. This is why investment opportunities in private REITs are typically open only to accredited investors.