There is a good chance that investing in real estate is listed as one of the most reliable and intelligent methods of building wealth by any investor. Many people in the U.S. and worldwide rely on real estate investments to increase their wealth and diversify their portfolios.
A solid investment in real estate has long been considered a wise choice. Here are some of the best options for individual investors:
✅ Rental Properties
When you invest in rental properties, you become a landlord. Landlords are responsible for paying mortgages, property taxes, and insurance, maintaining properties, finding tenants, and handling any arising problems. So you need to consider if you will be comfortable with that role.
The maintenance of a rental property can be time-consuming and not always enjoyable. Landlords must actively participate in their properties’ management unless they hire a property manager. By carefully selecting your properties and tenants, you can reduce the risk of encountering significant difficulties.
Landlords earn their income by collecting rent. They also make money through appreciation — They may be able to sell the property at a profit if its value appreciates.
✅ Flipping Houses
The goal of flippers is to buy properties, hold them for a short period of time, typically between three to four months and then sell them quickly for a profit.
There are two main approaches to flipping a property:
1. Repairing and improving the property
You may adopt this strategy if you anticipate that certain repairs and improvements will significantly increase the property’s value. Ideally, the work should be completed as quickly as possible, and the home should be sold for a price greater than the total investment (including the renovations).
2. Hold the property and resell it
This type of flipping is different. As opposed to purchasing a property and repairing it, you would invest in one that has a rapidly rising value, hold it for a few months, and then sell it at a profit.
In both types of flipping, you risk being unable to sell the property at a profitable price. Flippers often do not have sufficient cash to pay mortgages on properties over the long term, which presents a challenge. Nevertheless, if done correctly, flipping can be a profitable investment in real estate.
Generally, real estate investment trusts (REITs) are entities that invest in, operate, and maintain income-producing properties. The shares of REITs can be bought and traded on major exchanges in the same way as stocks and exchange-traded funds (ETFs).
REITs must pay out 90% of their taxable profits as dividends to shareholders. Thus, REITs can avoid paying corporate income tax. In contrast, a regular company would have to pay tax on its profits, thereby reducing the amount of dividends it could pay to its shareholders.
In much the same way as regular dividend-paying stocks, REITs are suitable for investors who want a steady income stream and the potential for appreciation. REITs invest in a range of properties, including shopping malls (about one-quarter of all REITs specialize in these), healthcare facilities, mortgages, and office buildings. Due to their high liquidity, REITs have an advantage over other real estate investments.
✅ Real Estate Investment Groups
Investing in rental properties is what real estate investment groups (REIGs) do. You may find that a real estate investment group is a viable option if you wish to own a rental property but do not desire to be a landlord.
A company might purchase or construct a set of buildings, such as apartments, and then allow investors to buy those buildings through the company. Nevertheless, the company operating the investment group is responsible for managing all the units, advertising, and finding tenants. In exchange for this management, the company takes a percentage of the rent every month.
✅ Real Estate Mutual Funds
A real estate mutual fund invests primarily in REITs and real estate operating companies. Investing in these offers the opportunity to gain diversified exposure to real estate with relatively small capital. Depending on an investor’s strategy and diversification objectives, they can provide a much broader portfolio of assets than can be achieved by purchasing individual REITs.
A solid investment in real estate can provide a steady income stream and build wealth over time. Even so, one disadvantage of investing in real estate is illiquidity, which is the difficulty of converting an asset into cash. Unlike a stock or bond transaction, a real estate transaction can take months to close. Finding a suitable counterparty can take several weeks, even with the assistance of a broker. There is no doubt that REITs and real estate mutual funds offer superior liquidity and pricing. However, they are associated with greater volatility and a reduced degree of diversification, as they are much more correlated with the overall stock market than direct real estate investments.
Michael Choi is a senior lawyer based in Hong Kong whose background includes international trade and trade financing. Over his career, he has assisted numerous international corporate clients in raising capital and increasing their funding levels. Michael has also provided free legal advice to the public in Hong Kong since 2011 to assist those who cannot afford to pay the legal fee.