There’s big money in real estate. But there’s also big risk if not played correctly. When I first started to take an interest in real estate investment, I didn’t realise there were so many options! This article will run you through the most common types of investments and the basic pros and cons of each.
Commercial real estate, although not the obvious first choice for most people, is actually a pretty good place to start because it tends to be relatively secure when compared with some of the other forms of real estate investing.
The rather large downside to this, however, is that this investment vehicle requires a massive investment up front and as a result is something that most real estate investors don’t consider until they’ve built up a strong portfolio that they can leverage to provide the necessary funding.
The stability of commercial real estate — one of its most attractive features — comes from most businesses wanting to lease on a long-term basis, which is pretty logical.
Businesses generally prefer to remain in the one location as they build up their customer base and local reputation. And this works well for the commercial property investor.
Residential Rentals is not as high-powered as being a commercial real estate mogul, but it is certainly a solid model for establishing a comfortable retirement plan. This is actually where most people get started in the real estate game because it’s not hugely difficult to buy an investment property and then positively gear it so that rentals pay off the mortgage and property management expenses.
Being a landlord (even if you farm out the property management to a real estate agency or a professional Property Manager) is a long-term commitment with potentially very nice payoffs.
It is also a good model for the high-risk averse investor to pursue.
Flipping on the other hand, is not for the faint hearted! What this basically means is buying a property and turning around and selling it on — with or without renovating it, for example. This kind of real estate investment requires an extremely detailed understanding of the property market in that geographical area and the ability to make quick, hair-raising decisions involving enormous sums of money. Not one for me, I have to say!
Pre-Construction (aka “Buying off the plan”) is even riskier than flipping, but has become insanely popular in the last 5 to 10 years. This is when the money raised by selling properties before they’ve even been built(!) is what funds the actual construction of the property (usually a block of residential apartments).
This mode of investment is, of course, wide open to scam artists setting up fake property development companies or even just unscrupulous property developers disappearing with all that money and never even starting construction!
A lot of people have been burned by this type of investment.
On the other hand, if it is legitimate, the real trick is in identifying an area that has a housing shortage or is set to boom in the next few years (possibly because of new infrastructure, for example). In these cases, the profits to be made are considerable.
So, like any form of investing, the risk is usually in proportion to the potential rewards and the time-frame in which they are delivered.
Lease To Own is probably a better option for most non big-time investors. The whole model of leasing a property that you’ll eventually be able to call your own is very attractive to many people who don’t qualify for a mortgage (young families, for example).
You can charge a little more than what you would charge to rent the property, with the extra going to pay off the principle and the agreement that they purchase the property for an agreed sum after a period of time.
For you (the owner), it also reduces maintenance costs. It’s more likely your tenants will take better care of the property because they’ll probably think of it as “theirs”! Which means that if they decide to move somewhere else and not actually go through with the purchase of the property, you will have far less drama and fewer problems getting the place ready for new tenants.
And there you have it! A quick overview of the main real estate investment vehicles. There are more complex versions and so on, but that’s the basic round up. Real estate is a proven model for building wealth over the long term. If you haven’t thought about it or you thought it was all too complicated, then I’d encourage you to do some research; you may find that it’s not as mind-bending or high-powered or difficult as you think.