This article is for educational purposes only. JPMorgan Chase Bank N.A. does not offer this type of product. Any information described in this article may vary by lender.
Real estate investing and investment properties typically go hand in hand. Real estate investing can mean many things. It can be something you take on in your personal life or it can turn into your new career path. There are entire companies based on real estate investing alone!
Whether you’re looking to get involved or just looking to learn, there’s something here for you. This article will take you through the basics of what real estate investing means, how it could benefit you and why it’s powerful knowledge to have.
What is real estate investing?
Real estate investing is the purchase of property with the goal of returning profit. Profit can come from the management, rental and/or sale of the investment property. This can be a short or long term strategy, depending on which avenue you take.
Real estate development
Real estate development is the improvement of an investment property to drive up its value and desirability. Development is a common practice in real estate investing.
Examples of real estate investing
Investing in a rental property could be a good way to bring in some extra cash. The caveat is that you are now a landlord. If this is something you’re interested in full-time, that may not be a problem. But if you’re looking to make passive income, this may not be for you. Your responsibilities include overseeing tenants and taking care of issues that arise. You can hire a manager to do so, but you’ll need to pay them.
Investing in rental properties can be broken down even further. It can mean investing in a vacation home and renting out, or it can mean becoming the landlord of various properties in a city and renting to numerous tenants. It could also mean purchasing an even bigger piece of real estate, like an office building, and then renting the space out to other businesses.
Overall, there’s a lot of opportunity in the rental space. But that comes with many responsibilities, legal requirements and restrictions and often a lot of capital is required to finance such an undertaking.
Benefits of investing in a rental property
Investing in a rental property is an enticing option for many people. Here are some of the reasons why:
- Passive income. Passive income means a source of money coming in on a regular basis with relatively low effort. If you’re looking to make some extra money on the side, this could be a good option. Keep in mind that, in most cases, it could take some time before you see much profit.
- Property appreciation. It’s likely that property will appreciate in value as time goes on. You can invest in a rental property for the time being, wait for it to appreciate, and then sell and make an even larger profit.
- You can use it when you want. If you invest in a vacation home or an apartment in a city you enjoy, you can enjoy it yourself as well. You have the option of renting out the property while you won’t be living there to cover your expenses and the option of coming back whenever you please. Keep in mind that you may not be able to rent out the property, or there might be certain legal restrictions, depending on the state your property is in.
Real estate investment trusts (REIT) and real estate investment funds
Real estate investment trusts (REITs) are companies that own, finance or manage real estate that generate profit. REIT companies accept investments from other companies or individuals and invest that capital in real estate. The investors recoup their money via dividends from the real estate investments made by the company, without having to manage the property or do any of the heavy lifting.
Real estate investment funds are like REITs in that they both use capital from investors to invest in real estate. The biggest difference is that REITs must distribute 90 percent of their taxable income to investors to remain an REIT in the eyes of the IRS. Real estate funds, on the other hand, don’t need to do this. They return money to investors through real estate appreciation rather than dividends.
Another popular real estate investment strategy is house flipping. In simple terms, house flipping is when someone purchases real estate with the intention of fixing it up and selling it for profit. Buying low and selling high is the idea. House flippers will usually buy a fixer-upper in a popular neighborhood, make substantial improvements and then attempt to sell for a large profit.
House flipping can be a tricky game. Many people make the mistake of underestimating how much time, resources, and skill it takes to flip a house. If you aren’t well prepared for this undertaking you risk losing a lot of money.
Buying land is a real estate investment strategy exclusive to people with a lot of capital or individuals who are looking to invest in an exchange traded fund (ETF). Investing in an ETF is usually more realistic and often comes with less risk.
Overall, buying land is a limited, high risk investment but has many opportunities. Here are some common land investments:
- Farm and livestock
When you think about it, almost anywhere you go there’s a piece of land or property that is owned by someone, somewhere. Whether its apartment buildings, office buildings or your local farm.
As you can see, there’s an overwhelming amount of opportunity in real estate investing. Real estate investing can mean buying another home, a rental property, or even a farm. It can also mean finding a real estate ETF for your portfolio. Even if you aren’t looking to get involved, it’s a good thing to keep in mind for the future.