Investing in real estate has many benefits including, building equity, cash-based income streams, hedging against inflation, tax breaks, diversifying your portfolio, and more. On the surface, it’s an attractive investment with significant potential upside but “investing in real estate” has many different options and opportunities for growing wealth.
Real estate investments can range from flipping houses to a passive investment that can build wealth for you. Investing in real estate isn’t always about buying and managing properties; even at scale, some real estate investment options are relatively hands-off, require low initial contributions, and even alternative funding options using existing investment accounts.
Types of real estate investments
There are several types of real estate investments, but most are either physical real estate investments (such as land residential and commercial properties) or other types of real estate investments that don’t require owning physical property, such as REIT crowdfunding platforms, and real estate investment groups.
Residential real estate (Rentals)
When you think of real estate investing, you commonly think of the single-family home or duplex owned, managed, and rented to tenants. Residential real estate investment typically includes single-family homes, condos, and vacation homes.
This real estate vision could be even more extensive and extend to owning an apartment building with multiple units or consolidating funds with other individual investors to buy larger pieces of property or multiple single-family homes.
Residential real estate provides returns from rental income and appreciation over time.
The advantages to investing in residential real estate are:
- regular income from tenant rent
- asset appreciation over time, and many
- tax-deductible expenses
The downside to owning residential investment properties is that it can be tedious to manage tenants, repairing potential damage from tenants, and handling reduced income or income fluctuations from vacancies.
One of the common misperceptions about flipping houses is that it’s easy, fast, and highly profitable. House flipping is ideal for people with significant real estate valuation, marketing, and renovation experience. It requires capital and the ability to manage repairs and improvements, which can be substantial.
The financial gain from flipping a house comes in the appreciation of property value and the reduction of holding fees and costs associated with renovating, buying, and selling the property.
House flipping is sensitive to fluctuations in market value, even down to a neighborhood or street level. Investors who flip houses who cannot quickly turn their properties or don’t keep enough cash on hand to pay the mortgage and other holding fees can see their profits disappear and their losses snowball.
If you’re a risk-averse investor, house flipping may not be the right real estate investment vehicle for you.
Commercial real estate
Investing in commercial real estate isn’t just about office buildings; it also includes retail spaces, industrial or even mixed-use structures with offices, and retail businesses.
Industrial generally refers to properties where products are made rather than sold; it’s also considered a commercial real estate investment.
Commercial real estate investments tend to have longer leases in command higher rents than residential real estate, but they are more sensitive to economic shifts due to larger rents and cascading economic impacts on businesses who may be tenants.
Multifamily real estate, historically, is a resilient type of commercial real estate investment. It can provide stable cash flow and offers a diversified base of revenue, unlike other commercial real estate, which can rely on a single tenant to maintain cash flow.
Multifamily investments have shown stable demand with general workforce, Millennials, and Boomers looking to downsize and stay close to family. They also offer the opportunity for regular raises in rent with shorter lease periods compared to commercial real estate and are relatively resilient against economic shifts.
Land and property development
Acquiring land for future use and even development can be a long-term investment with potentially high returns if investors have the knowledge and experience to select the properties that will become highly desirable in the future.
Developing property for future residential or commercial use requires extensive knowledge of many real estate subjects, including building code zoning regulations, floodplain mapping, local and residential market forecasts, and future economic expansion planning. Additionally, property development investors may face legal challenges from local communities and environmental groups depending on the geographic location and use of the development.
Even if acquiring land is simply to hold the asset until it increases in value, research and knowledge of the geographic area and economic potential is essential to understand to help mitigate risk for this type of investment.
Real Estate Investment Groups (REIGs)
A Real Estate Investment Group is an entity that focuses the majority of its business on investing in real estate. It’s typically a collection of investors (partners and/or shareholders) who buy, renovate, sell or finance properties. They may commonly buy out a property and sell units to investors while taking responsibility for the property’s operations and maintenance.
A Real Estate Investment Group is essentially a consolidation of buying power amongst individuals and shareholders and typically invest in multifamily properties. It’s a private organization that is not publicly accessible to individual investors.
Real Estate Investment Trusts (REITs)
A REIT is a corporation that owns, operates, or finances income-producing real estate or real estate assets. The REIT allows investors to own shares in a portfolio of real estate assets.
Usually reserved for high-net-wealth individuals or financial institutions, REITs are now available to individual investors.
A REIT pools investors’ money in the same way mutual funds consolidate individual contributions and then purchase and operate income properties.
A REIT is ideal for investors who want the portfolio diversification real estate can offer, without the traditional real estate transaction or maintenance headaches.
Investors can profit from a REIT investment through dividends and asset appreciation. REITs are required by law to pay 90% of their taxable profits in the form of dividends to their investors, so the REIT managers have an incentive to be as profitable as possible.
There are three primary types of REITs available to investors:
- Publicly traded REITs, which are similar to stocks, offer high liquidity and are regulated by the SEC.
- Private REITs which are usually not available to individual investors and reserved for high net-worth individuals and financial institutions
- Public non-traded REITs like upside Avenue which are available to individual investors regulated by the SEC but requires a minimum holding time and minimum investment
Online real estate platforms (crowdfunding)
The newest real estate investment platform on the block is crowdfunding or online real estate platforms. These platforms are ideal for individuals looking to invest in a more significant commercial or residential deal. The investment is executed online via a dedicated platform known as real estate crowdfunding.
Real estate crowdfunding platforms still require a capital investment, but the minimum contribution is less than buying an individual property.
Online crowdfunding investment vehicles can be a way for individuals to invest in a single project or a portfolio of projects that provide geographic diversification opportunities. Still, they tend to be illiquid due to lockup periods and are also subject to management fees.
Different ways to finance real estate investments
Once you determine the vehicle that’s right for your real estate investment, you need to understand how to finance or fund your investment. Every type of real estate investment has a different funding option, and each carries its own set of restrictions.
In addition to the guidelines set by each real estate investment option, what’s best for you depends on the specific property or investment opportunity and your financial situation. Consider your overall investment strategy, risk tolerance, creditworthiness, and exit strategy before investing in real estate.
Below are just some of the funding options for your real estate investment.
If you’re looking to buy a single-family home or a rental property, a conventional mortgage is a standard funding method. A conventional mortgage requires a high credit score, financial position, and down payment from the investor. Many lenders will limit the number of traditional mortgage loans issued to individual investors, and if you’re looking to exceed the number of loans available through conventional lenders, looking into a portfolio lender for a traditional mortgage is an option.
The Federal Housing Administration (FHA) loans help first-time homebuyers by lowering the down payment needed to purchase properties. Real estate investors rarely seek out FHA Loans because one of the FHA loan conditions is the borrower must live in the home.
If you’re a brand new investor looking to flip a house or increase equity overtime or even turn your existing primary residence into an investment property by attracting roommates, an FHA loan may be a viable funding option.
Home equity loans and lines of credit
If you have equity in your primary residence, lending institutions and banks may let you borrow money against that equity through the use of a home equity loan or a home equity line of credit (HELOC).
The advantage of this type of funding is that interest rates are typically lower than the prime rate. If you have good credit, you can usually borrow up to 90% of your home’s value. The purpose of this loan or line of credit is to increase your home’s equity or value over time, but it could be possible to use this as an alternative funding source for an investment property.
Private loans or hard money loans are loans provided by private lenders rather than government regulated financial institutions. These loans are typically short-term loans used to finance and flip investment real estate or bridge the gap between an investment property purchase and longer-term financing.
Due to their short-term nature, these loans tend to have higher interest rates than other options, and qualifications tend to be less stringent than other institutional financing options.
Other private loans could come from individuals with whom you already have an established relationship, such as parents, friends, acquaintances, or other high-net-worth individuals. There are no standard terms for these types of loans, and they are not regulated.
SDIRA or after-tax retirement accounts
Self Directed IRAs and other types of after-tax retirement accounts can fund certain kinds of real estate Investments. Funding a real estate investment with an SDIRA requires coordination through an account trustee or custodian and the funding recipient’s approval.
SDIRA’s allow investors to use retirement-qualified savings to invest in assets such as real estate, precious metals, and other “alternative investments.”
Investing in real estate with an SDIRA has potential tax benefits. If your investment holdings are in a Roth IRA or SDIRA, your investment increases in value tax-free, and you can also withdraw tax-free, but you must still wait until you reach the age of 59 and a half to withdraw your funds, or you’ll be subject to a withdrawal penalty.
How to find the right real estate investment for you
Finding the right real estate investment takes some leg work, and you should always ask questions about the real estate opportunity and assess your financial situation before committing.
Here are a few questions to ask to establish which type of real estate investment is right for you.
What are the risks? Every investment has risks. Risk is also a reality for real estate investments, even if they look like a “sure thing” on paper. In addition to asking what the investment risks are, you should also assess your risk tolerance. If you’re more willing to take on additional risk investing in house flipping might be the right option for you, whereas investing in REIT might be the smart move if you’re more risk-averse.
What is your exit strategy? Are you looking for a short-term boost of cash, or are you looking to hold an investment for the long-term and diversify your investment portfolio? Each type of real estate investment comes with its own general timelines and requirements for a profitable exit.
What are the historical returns? Understanding how the market is moving and how real estate prices and rents are affected is vital to understand before investing. If you’re looking to invest with an organization or a company that pools money, such as a REIT or a crowdfunding platform, examine their historical returns as well as their portfolio. Evaluate whether the company has been in existence long enough for you to trust your investment with them.
What are your financing options? Understanding the minimum amount of funding required for your investment, holding timelines, exit options, and the expected returns are all essential figures to calculate your potential return on your investment. [Text Wrapping Break][Text Wrapping Break]No investor wants to lose money on real estate. Ask questions, and do some calculations on your own to determine the right funding source and amount for your real estate investment.
Whether you’re looking to buy your first single-family home to live in with roommates or if you’re looking to make a more significant investment in a REIT, whether you have $300,000 to invest in real estate or just starting with $2000, there is a real estate investment product that’s well-suited for you.
About Upside Avenue
For decades, the ultra-wealthy and financial institutions have been putting their money to work in real estate—now with Upside Avenue, you can too. We provide access to a professionally managed, diversified portfolio of income-producing multifamily real estate for as little as $2,000. Learn more about the Upside Avenue Multifamily REIT with targeted returns of 10-15% IRR.