Purchasing and owning real estate is a profitable financial option because, unlike stocks and bonds, real estate investors can purchase a property by paying a percentage of the whole cost initially and then paying the remaining amount in instalments (along with interest) over time.
Traditionally, mortgage in Pakistan demands a 20% to 25% down payment. However, in rare situations, a 10% down payment is all that a real estate investor has to pay to get ownership of the property. This ability to own the asset as soon as the documents are completed gives house flippers and landlords more confidence, allowing them to take out second mortgages on their homes to fund down payments on more properties. Here are five important ways real estate investors can make a profit.
Graana.com, Pakistan’s smartest property portal, has compiled a brief guide on why you should invest in real estate, and which options can give you the highest return on investment.
Why Invest in Real Estate
Before we look at the different types of real estate investment, let us take a look at why one would invest in real estate. Given below are the top five reasons why:
High Return on Investment and Positive Cash Flow
For a number of reasons, investors consider investing in real estate as the most successful opportunity. Investors can create good cash flow whether they invest in long or short term property projects.
Because you may receive monthly positive cash flow and a high ROI, Airbnb and rental properties are the best types of real estate investment. Investing in rental properties especially yields a steady and substantial profit.
Appreciation of Real Estate
Appreciation benefits an investment rental property as well. The term “real estate appreciation” refers to a growth in the value of a property over time. When an investment property appreciates in value, so does its selling price.
Appreciation of property also makes the investment much more profitable when combined with a cash flow. This buy-and-hold investment approach is the most popular technique for real estate.
Another benefit of investing in real estate is that it allows you to diversify your portfolio. Investors can profit from tax breaks if they own a standard rental house/apartment or commercial property.
However, tax deductions vary greatly. Repair charges, depreciation, insurance premiums, and mortgage payments are all common examples.
Tax advantages may not be the major motivation for some people to invest in rental homes. They do, however, serve as a nice bonus for investors.
The flow of Income (Active or Passive)
Another advantage of investing in real estate is its adaptability. Active and passive real estate investments include short-term and residential income assets. Investing in rental properties, in particular, allows investors to be as hands-on as they desire.
Active real estate investing is a full-time commitment that includes maintaining a property. On the other hand, passive real estate investing necessitates less work. Passive investors frequently hire property managers to retain the property income.
Real Estate Rental Strategy Selection
The versatility of real estate investing adds to its enormous profitability. Rentals are the greatest real estate investment property type because of their regular occupancy and profitability. You can choose whichever you want based on your region and personal preferences.
On the other hand, buying a commercial property is also a good investment but investors will have to wait for the property to appreciate.
Types of Real Estate Investment
Now that we understand why an investor should invest in real estate, let us look at the different types of real estate investments.
Individuals who prefer do-it-yourself (DIY) solutions, like polishing raw wood or cleaning a marble floor, may find owning rental homes a more appropriate investment. This technique, however, necessitates a significant amount of capital to cover initial maintenance costs and vacant months (before you find a tenant).
Real Estate Investment Groups
Real Estate Investment Groups (REIGs) are perfect for those who wish to own a rental property but don’t want to deal with the inconveniences of managing it. Investing in REIGs necessitates a capital reserve and access to capital.
REIGs are rental property investment trusts that are similar to small mutual funds. In a typical real estate investment group, a business purchases or constructs a series of apartment buildings or condos and then sells them to investors who join the group.
A single investor can purchase one or more self-contained living units. But the investment group’s management firm oversees all the units, including maintenance, advertising vacancies, and tenant interviews. The company takes a part of the monthly rent in exchange for performing these management services.
A typical real estate investment group lease is in the investor’s name, and all of the units pool a portion of the rent to protect against vacancy. As a result, even if your unit is vacant, you will earn money. There should be enough to cover costs as long as the vacancy rate for the pooled units does not surge too high.
House flipping is only for those with extensive knowledge in real estate assessment, marketing, and renovation. However, house flipping necessitates money and the skill to do or supervise repairs as needed.
Real estate flippers differ from buy-and-rent landlords in the same way that day traders differ from buy-and-hold investors. Real estate flippers, for example, are looking for short term profits. Therefore, they sell the property in less than a year on whatever profit they have gained.
Property flippers rarely invest in renovating their properties. As a result, the investment must already have the inherent value required to earn a profit without any changes. Otherwise, the property will be eliminated from consideration.
Flippers who cannot quickly sell a home may face problems since they often do not have enough uncommitted cash to pay a property’s mortgage over time. This can lead to a downward spiral of losses.
Another type of flipper earns money by purchasing moderately priced properties and refurbishing them to increase their value. When investors can only afford to take on one or two properties at a time, this can be a longer-term investment.
Real Estate Investment Trust
A real estate investment trust (REIT) is the greatest option for investors who want to expand their portfolio without making a typical real estate transaction.
A REIT is formed when a corporation (or trust) purchases and operates income assets with funds provided by investors. REITs, like any other stock, are purchased and sold in major markets.
To keep its REIT designation, a company must pay 90% of its taxable profits in dividends. REITs avoid paying corporate income tax in this way, compared to a typical firm that would be taxed on its profits.
Like normal dividend-paying equities, REITs are good for stock market investors looking for a consistent income. In contrast to the categories of real estate investment mentioned above, REITs allow investors to participate in nonresidential ventures such as malls and office buildings. These are typically not available to individual investors.
More crucially, because REITs are exchange-traded trusts, they are extremely liquid. To put it another way, you won’t need a real estate agent or a title transfer to get your money back.
Finally, investors should distinguish between equity REITs that own buildings and mortgage REITs that provide real estate financing and dabble in mortgage-backed securities. Both provide real estate exposure, but the form of that exposure differs. An equity REIT is more traditional in the sense that it symbolises real estate ownership. Whereas mortgage REITs concentrate on real estate mortgage financing income.
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