Real Estate Investing
Real Estate Investing involves the purchase, ownership, management, rental and/or sale of real estate for profit. Improvement of realty property as part of a real estate investment strategy is generally considered to be a sub-specialty of real estate investing called real estate development. Real estate is an asset form with limited liquidity relative to other investments. It is also capital intensive and is highly cash flow dependent. If these factors are not well understood and managed by the investor, real estate becomes a risky investment.
Types of Real Estate Investing.
Real estate is one of the oldest and most popular asset classes. Most new investors in real estate know this, but what they don’t know is how many different types of real estate investments exist. As you uncover these different types of real estate investments and learn more about them, it isn’t unusual to find a reference to someone who has built a fortune by learning to specialize in a particular niche.
1. Getting Started in Real Estate Investment
It goes without saying that each type of real estate investment has potential benefits and pitfalls, including unique quirks in cash flow cycles and lending traditions. Standards of what is considered appropriate or normal do exist, so you’ll want to study opportunities well before you start adding them to your portfolio.
2. Form a Protective Entity
A major tool in structuring your affairs correctly involves the choice of a legal entity. Virtually all experienced real estate investors use an LLC or a Limited Partnership (LP). Forming an entity to hold your real estate investments allows you to have an option to place that entity into bankruptcy without risking your personal property and holdings. This technique is called “asset separation” because it protects you and your holdings
3. Categories of Real Estate Investments
If you’re intent on developing, acquiring, owning, or flipping real estate you, you might come to a better understanding of what you’re facing by dividing types of real estate into several categories.
5 ways to get started in Real Estate Investing
1. Buy REITs (Real Estate investment Trusts)
REITs allow you to invest in real estate without the physical real estate. Often compared to mutual funds, they’re companies that own commercial real estate such as office buildings, retail spaces, apartments and hotels. REITs tend to pay high dividends, which makes them a common investment in retirement. Investors who don’t need or want the regular income can automatically reinvest those dividends to grow their investment further.
2. Use an online real estate investing platform
If you are familiar with companies such as Prosper and LendingClub, which connect borrowers to investors willing to lend them money for various personal needs, such as a wedding or home renovation, you will understand online real estate investing. These platforms connect real estate developers to investors who want to finance projects, either through debt or equity. Investors hope to receive monthly or quarterly distributions in exchange for taking on a significant amount of risk and paying a fee to the platform.
3. Think about investing in rental properties
Tiffany Alexy didn’t intend to become a real estate investor when she bought her first rental property at age 21. Then a college senior in Raleigh, North Carolina, she planned to attend grad school locally and figured buying would be better than renting.
4. Consider flipping investment properties
You invest in an underpriced home in need of a little love, renovate it as inexpensively as possible and then resell it for a profit. Called house flipping, the strategy is a wee bit harder than it looks on TV. There is a bigger element of risk, because so much of the math behind flipping requires a very accurate estimate of how much repairs are going to cost, which is not an easy thing to do.
The other risk of flipping is that the longer you hold the property, the less money you make because you’re paying a mortgage without bringing in any income. You can lower that risk by living in the house as you fix it up. This works as long as most of the updates are cosmetic and you don’t mind a little dust.
If you would like to learn more about the documents you need in estate planning, any one of our estate planning attorneys would be happy to assist you.