Real Estate Investments
There are multiple ways to invest in real estate:
- Investment property — You buy a house, apartment building or commercial space to rent to tenants.
- Real estate investment group — You buy property from one of these companies and rent it out to a tenant. The real estate investment group provides property management services, including maintenance and tenant selection, in exchange for a portion of the rent.
- Real estate investment trust (REIT) — A REIT is a security that invests in real estate and sells shares of ownership to investors. Shares are sold on the major exchanges, like any other stock.
- Real estate trading ("flipping") — You buy a property, with the goal of reselling it for a profit in the short term. The price increase and profits are due to a hot property market or major renovations and improvements you make to the property.
It generally takes a significant amount of time to earn money from investing in real estate. Be cautious of pitches or ads that promise great returns in a short time period from investing in real estate, or that promise huge profits without risk. These are often a scam.
Before you select a real estate investment, consider these questions:
- What are your goals? Do you want to earn revenue from rental payments, make a profit when you sell the property or both?
- Have you done research? Research neighborhoods and prices. Look at properties and set criteria to evaluate potential properties that you would like to buy. Understand the housing market and determine if prices are increasing or if there is a need or demand for rental property in the neighborhood.
- Do you plan to hire a Realtor? A licensed Realtor can help you locate properties and share information about an area's pricing, zoning rules and growth potential.
- Do you plan to be a landlord or hire a property manager? There are major responsibilities involved with managing a property, such as selecting tenants, paying mortgage and insurance, doing maintenance and repairs, collecting rent, and handling tenant complaints and disputes. A qualified property manager could cut into your profits but, if the company or individual is experienced, could help save you money in the operations of your property.
- Do you have enough for a down payment? You may be required to pay 20 percent or more as a down payment. Mortgages for investment property don't qualify for private mortgage insurance or a reduced down payment.
- Can you afford to own a rental property? In addition to the mortgage, you need a cash reserve to pay for repairs, taxes and unexpected expenses. You should also have money set aside for months when your building is vacant, so that you are still able to pay the mortgage.
- Have you shopped around? Compare interest rates that banks are offering on mortgages for investment properties. They are often higher than the interest rate on a mortgage for a primary residence, as these mortgages are more risky to a bank.
U.S. General Services Administration (GSA). (2016, January). Investing: Real estate. In Consumer action handbook (p. 36). Retrieved December 14, 2016, from https://www.usa.gov/