Real estate investments can be a profitable experience if you have a good grasp of the process involved. Before you spend your hard-earned cash, you’ll want to learn everything you can about the real estate game.
There are two ways to make money with real estate investments. First, you can buy real estate outright, such as buying residential homes or commercial properties. Second, you can invest in financial instruments such as shares of real estate investment trusts (REITs) or shares of real estate developers.
Although there are several types of real estate investments, most are classified as residential or commercial. Residential real estate generally includes family, vacation or secondary residences, as well as rental properties. Rental properties can include everything from duplexes and apartments to mobile homes and condos.
Although multi-family properties such as apartment buildings or condominium complexes are residential, they fall under the category of commercial properties. Other commercial properties include office buildings and complexes, shopping centers, malls, retail stores and restaurants.
Another type of commercial real estate investment is vacant land. Investing in vacant land located in fast-growing areas, or areas that are expected to grow within a few years, can be exceptionally profitable. Vacant land can be used for agriculture or ranching, or to erect office buildings or residential communities.
Many people prefer to invest in residential real estate. Often these properties are used for rental purposes. Rental properties have the potential to provide a good return on investment; however, it may take several years to turn a profit.
One option for those investing in rental properties is to use them as rental-to-own homes. In the case of a rental with option to buy, the house is rented to an individual for a certain period of time. Generally, this period is two to five years.
During this period, a percentage of the rent is applied to the purchase of the house. At the end of the contract, the tenant obtains financing through a traditional lender and purchases the home using the applied rent as a down payment. If the lessee breaches the contract, the landlord can either sell the property or enter into another lease-purchase agreement. Therefore, this type of real estate transaction is relatively risk-free.
When engaging in lease-to-own transactions, certain legal documents are required to ensure the validity of the contract. In addition, the internal revenue department requires specific accounting records.
Last, but not least, house flipping is becoming increasingly popular with real estate investors. House flipping involves buying a house that needs repairs or renovations. The home is purchased below market value, leaving investors with extra cash to make repairs and update the home. After the repairs and updates are complete, the house is sold for a profit. The whole transaction usually takes place within three months.
Although house flipping is generally a profitable real estate investment, it is not without risk. If you decide to go this route, take the time to research the real estate market where the property is located. Otherwise, you might sit on the property for a while.
