Investing in Real Estate

By Sharon A. Bassett

When investing in real estate, the goal is to put your money to work today so you have more money in the future. The profit, or return, you make on your investments must be enough to cover the risk you take and the taxes you pay. There are other costs of owning real estate, such as utilities, maintenance, and insurance. Real estate investing can be quite simple once you understand the basic factors of investment, economics, and risk. You buy properties, avoid going bankrupt, and earn money through rent, all so that you can buy even more properties.

Keep in mind that “simple” doesn’t mean “easy.” If you make a mistake, the consequences can range from minor inconveniences to major disasters. To manage risk and protect yourself, consider holding real estate investments through special types of legal entities rather than in your name. These include limited liability companies or limited partnerships. You should consult with a lawyer to decide which method is best for you. If the investment goes bust, or someone slips and falls, resulting in a lawsuit, these legal entities can protect your assets. That means the worst that could happen is that you would lose the money you’ve invested. You will have peace of mind knowing that your retirement accounts and other assets should be out of reach.

Real Estate Investment Groups (REIGs)
Real estate investment groups (REIGs) are ideal for people who want to own rental real estate without the hassles of running it. Investing in REIGs requires a capital cushion and access to financing. REIGs are like small mutual funds that invest in rental properties. In a typical real estate investment group, a company buys or builds a set of apartment blocks or condos, then allows investors to purchase them through the company, thereby joining the group.

A single investor can own one or multiple units of self-contained living space, but the company operating the investment group collectively manages all the units, handling maintenance, advertising vacancies, and interviewing tenants. In exchange for conducting these management tasks, the company takes a percentage of the monthly rent.

A standard real estate investment group lease is in the investor’s name, and all the units pool a portion of the rent to guard against occasional vacancies. To this end, you’ll receive some income even if your unit is empty. If the vacancy rate for the pooled units doesn’t spike too high, there should be enough to cover costs.

Pros of REIGs
• More hands-off than owning rentals
• Provides income and appreciation

Cons of REIGs
• Vacancy risks
• Fees like those associated with mutual funds
• Susceptible to unscrupulous managers

Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) is best for investors who want portfolio exposure to real estate without a traditional real estate transaction.

A REIT is created when a corporation (or trust) uses investors’ money to purchase and operate income properties. REITs are bought and sold on the major exchanges, like any other stock.

A corporation must pay out 90% of its taxable profits in the form of dividends to maintain its REIT status. By doing this, REITs avoid paying corporate income tax, whereas a regular company would be taxed on its profits and then must decide whether to distribute its after-tax profits as dividends.

Like regular dividend-paying stocks, REITs are a solid investment for stock market investors who desire regular income. In comparison to the types of real estate investment, REITs afford investors entry into nonresidential investments, such as malls or office buildings, that are generally not feasible for individual investors to purchase directly.

More importantly, REITs are highly liquid because they are exchange-traded trusts. In other words, you won’t need a real estate agent and a title transfer to help you cash out your investment. In practice, REITs are a more formalized version of a real estate investment group.
Finally, when looking at REITs, investors should distinguish between equity REITs that own buildings and mortgage REITs that provide financing for real estate and dabble in mortgage-backed securities (MBS). Both offer exposure to real estate, but the nature of the exposure is different. An equity REIT is more traditional in that it represents ownership in real estate, whereas the mortgage REITs focus on the income from real estate mortgage financing.

Pros of REITs
• Essentially dividend-paying stocks
• Core holdings tend to be long-term, cash-producing leases

Cons of REITs
• Leverage associated with traditional rental real estate does not apply

Buying and owning real estate is an investment strategy that can be both satisfying and lucrative. Unlike stock and bond investors, prospective real estate owners can use leverage to buy a property by paying a portion of the total cost upfront, then paying off the balance, plus interest, over time.

Contact Sharon Bassett at Premier Realty, INC for more information today!

Sharon A. Bassett
Broker/Owner | GREEN, ABR, SFR,
RENE, MRP, SRES, HSE, GRI

(352) 307-2925
bassettpremierrealty.com

sharonbassettsells@gmail.com
10935 SE 177th Place,
Suite 201,
Summerfield, Fl 34491