Real estate investment involves the commitment of funds to property with an aim to generate income through rental
or lease and to achieve capital appreciation. Real estate refers to immovable property, such as land, and everything else that is permanently
attached to it, such as buildings. When a person acquires real estate, s/he also acquires a set of rights, including possession, control and
transfer rights.
Understanding real estate investment is crucial because it usually involves a substantial investment and a long-term one. Moreover
, the real estate market can be unpredictable. This is particularly important when one goes beyond buying a home to actually “investing” in real
estate. There are a number of ways in which an investor can participate in the real estate market.
Real Estate Investment: Rental
One can opt for real estate investment with an aim to rent the property out to a tenant. The owner (landlord) earns a
continuous stream of rent from the tenant, but is responsible for paying the mortgage, taxes and any costs associated with
maintaining the property. The owner also benefits from capital appreciation (a rise in the value of the property over time). The
landlord runs the risk of not finding a tenant and could suffer negative monthly cash flows, with mortgage payments and
maintenance expenses still to be borne. As compared to owning stocks and bonds, rental real estate requires a significant amount
time and effort to be devoted by the landlord.
Real Estate Investment Groups
Real estate investment groups are similar to small mutual funds. They are set up for rental properties. While an investor may own one or
more units, a professionally managed company acquires, builds, maintains and lets out all the units on the properties in exchange for a
percentage of the monthly rent.
Real Estate Trading
Real estate traders hold properties for only a short span of time (less than four months), aiming to sell them at a profit. This
process is called flipping properties. Investors aim at purchasing significantly undervalued or very hot properties. Such owners may or may
not invest money into improving the property before putting it back on sale. A bear market could result in substantial losses for a
real estate trader, since the investment is large.
Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) is a corporation that invests in real estate. REITs trade on major exchanges. A REIT uses
investors' money to acquire and operate properties.
The benefits of REITs are:
- REITs provide fairly regular income.
- Investors gain exposure to non-residential investments (like malls and office buildings).
- REITs are highly liquid.
- REITs are required by law to distribute 90% of their taxable income in the form of dividends to shareholders.
Before making a choice regarding the kind of real estate participation, an investor must evaluate his/her investment capacity
and risk appetite.