The Basics of Investing in Real Estate

  • November 4, 2022
  • admin

Do you want to invest in real estate but don’t know where to start? Are you interested in learning the pros and cons of real estate investing? Most importantly, are you aware of the tax benefits of real estate investing?

This article provides a comprehensive guide to real estate investing to help you make informed decisions. Let’s begin.

Before investing in real estate, decide what type of investor you are. There are two types of real estate investors:

  • Passive Investors: If you don’t have experience in the real estate sector, you are better off investing your capital in the business and letting real estate professionals manage the operations 
  • Active Investors: This category of investors must have sufficient experience in real estate management. From managing tenants to day-to-day operations, everything is your responsibility

After you’ve determined what real estate investor category you fall under, you need to decide where you want to invest.

Real Estate Investing Options

Here are the different real estate investment options you can consider:

Residential Real Estate

Options under residential real estate include:

  1. Single-Family Homes: Unlike larger units, single housing has higher volatility and smaller profits. Leveraged property (taken against a loan) could lead to negative cash flows if there is a vacancy. Since the margins are small for smaller properties, you cannot hire a professional and have to take charge of the entire cycle of renting, from getting tenants to handling day-to-day problems
  2. Multi-Family Homes: There are 100 or more units in such properties. They require professional management, and the cash flows are more stable compared to single-family homes. Since the capital required for investing in these properties is high, you can join an investment group. You could also invest through a property management company. Ensure, however, that such companies have sufficient cash for maintaining the property, minimal debt, and a long-term strategic vision
  3. Short-Term Rentals: Find out if your neighbourhood allows short-term rentals or not before investing in this category. Short-term leases offer higher returns compared to long-term leases. Such rentals are ideal for accessory dwelling units or spare homes
  4. Crowdfunded Real Estate: Passive investors invest through real estate syndicators with expertise in real estate. Earlier, you could only find out about these syndicates through references, but later these syndicates could advertise their services. You can expect consistent returns and efficient operations provided you do your research and choose high-quality syndicates with a good track record

Commercial Real Estate

Some commercial real estate investing options include: 

  1. Real Estate Investment Trust (REIT): Investing in these instruments is similar to stock market investing. They are traded on the stock exchange, unlike private properties that are available only to select buyers. You need to apply the same principles as investing in stocks by verifying the quality of the management, investment strategies, the proportion of debt, and sufficient cash to seize any profitable real estate investing opportunity. The advantage of investing in REITs is that you can find detailed information about different companies online and make an informed decision based on the management quality and previous performance
  2. Commercial Lease: The different options under commercial leases include office buildings, mini-malls, or industrial parks and are best suited for active investors. These leases offer higher rentals compared to residential leases. Events like COVID-19 have impacted returns from commercial leases, and it’s important that you go through a reliable real estate agent to profit from commercial leases

Alternative Options for Active Investors

The following real estate investment opportunities are available for active investors:

  • Land Speculation: In this investment option, land is bought with the intention of reselling it later in part or full. Active investors need to choose a location that is in high demand by commercial developers, home builders, farmers, or oil gas miners. You should get a valuer to assess the land for its current and future potential
  • Property Flipping: This option involves buying property, conducting essential repairs, and selling it for a profit. If you are an experienced investor, you could try a construction loan. If you can’t sell the home immediately, you could rent it out for a short term 

Advantages of Investing in Real Estate

Here are some compelling reasons to invest in real estate:

Cash Flow

Investing in real estate generates a passive income stream for you. The returns are higher compared to fixed-income returns offered by bank FDs and money market funds. Long-term leases ensure a steady cash flow over longer periods. 

Tax Benefits

Investing in real estate offer tax benefits to investors in the following ways:

  • Tax Deductions: You can deduct items like accelerated depreciation or bonus depreciation to reduce your tax liability
  • Capital Gains: You can save on capital gains by buying another property with the sale proceeds of your present property

Capital Appreciation

The returns from real estate tend to be higher since, apart from the regular monthly rental, the price of the property also appreciates over time. The net operating income or NOI for multifamily real estate increases the property’s value. 

Factors to Consider Before Buying Real Estate

Before investing in real estate, keep these points in mind: 

  • Location: Choose a site that is close to business hubs and has favourable labour laws
  • Leveraging: The ideal LTV (Loan to Value) ratio is between 55 and 75% since it greatly impacts your returns
  • Investment Manager: Passive investors need the right syndicator to generate profits
  • Return on Investment (ROI): Your ROI needs to cover the period of holding and the annual cash flow to provide accurate results 

Conclusion

Investing in real estate is like investing in any other product, it has its benefits and drawbacks.

If you are a passive investor, hire an investment manager to manage the operations. Choose the right syndicate if you are an active investor.

With the right investment strategy, you can earn high returns from real estate. 

About Us

OHI is a sixteen-year-old real estate services company working with 75+ commercial and residential real estate developers, funds and property management companies across USA. Our deep expertise in real estate accounting, financial analysis, lease administration and asset management has helped clients cut associated costs by 40-50%. We currently provide these services to a portfolio of 100,000 units across clients.

We invite you to experience finance and accounting outsourcing through us.


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