Here are five fast ways that a typical retail investor, or even someone with access to much more funds, might invest in real estate and earn a return.
Investment Model, Traditional or Conventional :
Purchasing an asset or leasing it for an extended period of time, then renting it to tenants—either residential or commercial—is the simplest approach to invest in real estate.
The procedure is straightforward, but it requires a substantial initial Investment and ongoing maintenance fees. Make sure the asset is not subject to any legal complications before leasing, purchasing, or borrowing it.
If the property is commercial, you must complete the required registrations at the sub-office registrar’s with two witnesses and adhere to the steps described there.
Once the property has been registered, you can advertise it or let people know that it is available on the market. The lease agreement must be accepted and signed by the renter before the monthly rent payments become your passive source of income from the property.
To ensure that the asset is never fully vacant, it is a good idea to have tenants whose lease terms overlap. It also assists with timely maintenance expenditures. You might also hire a property management company to handle everything for you, but you’ll need to pay them a commission fee as well.
If the property is a residence, simply a trip to the sub-office registrar’s is required. Your returns on the investment will be determined by the monthly payments you get, and similar rental agreements will need to be created for each tenant.
Partially Renting Out Your Current Property :
You can start small by renting a room to business or residential tenants if you don’t want to be saddled with a big upfront investment expense. It is a better idea to rent out a whole floor of your current home if it is currently vacant.
However, you will have to manage the additional traffic that is created. The conditions might not be suitable for a person to live in the same place if you have rented a piece of your property to a business, depending on what they sell or provide. Your rental agreement must include all of your terms and conditions.
Fix-and-Sell to other (Flip) :
People with experience in general contracting have begun to become more and more interested in this type of investing.
If you have extra cash, you may invest in a commercial or residential property that requires extensive care, fix it up for good, and then sell the asset to asset/property management companies for a much greater price. Although the duration of asset ownership is very brief, if one has done their research on the market beforehand, this type of investing can produce high returns.
This approach offers less restrictions in terms of routine maintenance, registration work, and the like than owning a property in perpetuity. However, it necessitates that you are knowledgeable about the market’s supply and demand for real estate, as well as the cost of the renovation work you intend to undertake. Having a knowledgeable partner in this is beneficial.
Real estate investment using ETFs, mutual funds, and REITsn :
Despite the fact that none of the three are identical, they can all be placed in the same category. You can purchase mutual funds and exchange-traded funds (ETF) that invest in real estate themselves. ETFs that invest in real estate companies, such as publicly traded home builders, are available for purchase. REIT (Real Estate Investment Trust) investments can also be made through ETFs. Mutual funds that invest in property management companies and real estate developers are available. Mutual funds are actively managed, whereas ETFs are passively managed by a fund manager.
On the negative, there could not be any monthly dividends and you might not get any profits until you sell the appreciated shares, even if ETFs and mutual funds have high liquidity and low expenses. The main benefit of ETFs and mutual funds is their affordable investing costs.
The ability to invest in various real estate assets through a single fund is provided by REITs, on the other hand. Think of it as a mutual fund that only invests in real estate-related assets or loans that are backed by real estate. A REIT allows many investors to combine their funds, and the dividends received are shared among them according to the proportion of each investor’s investment in the fund.
Although REITs also permit relatively smaller investment ticket sizes, they infrequently offer yields that are comparable to or superior to those of equity-oriented products. Additionally, the investor has little influence over how their investment is allocated among all of the REIT’s assets.
All of these possibilities still include real estate, so they will all be somewhat stable, but for many people, the predicted profits may not be sufficient for long-term investment.
Partial Ownership :
Since REITs have been successful in India, this has been gaining momentum. Real estate is still one of the most popular investment options for Indians, and fractional ownership enables investors to park their money in real estate while significantly lowering investment costs.
Fractional ownership involves numerous investors, much like REITs, but it only pays attention to one asset at a time. Property or real estate investment companies that work with fractional ownership frequently scout for properties using thorough market analyses and local area past rent performance. The asset is then given a more thorough examination depending on the potential returns it has. The asset is listed as being open for investments on the company website once it has been suitably determined that it has good growth possibilities.
The company establishes a Special Purpose Vehicle (SPV) to handle investments and transactions involving a certain asset. The management of the SPV also includes any maintenance and upkeep charges. Normally, this investment is made for commercial premises with lease terms of three years or more.
Lease periods in specific types of commercial real estate may range from 10 years to more. Fractional ownership can produce a rental yield of up to 8% to 10% over a longer period of investment. Over a five-year investment term, that can be equivalent to an internal rate of return (IRR) of 16% to 20%.
Investors can diversify their portfolio by purchasing fractional ownership in a variety of asset classifications, including industrial floors, parking lots, warehouses, and commercial office space. It is simple to get out of a fractional ownership investment. You have two options for transferring ownership of the asset: either sell your own piece using the management company’s own portal or services, or wait until new tenants come in before deciding whether to keep the asset or let it go.
Which Alternative Should You Pick? :
Real estate is advantageous as an investment, but it’s important to know what works for you. You can choose based on your risk tolerance, the amount of liquidity you are willing to invest, the type of liquidity you like, the regularity of cash flow, and your investment goals.
Property ownership, rental, and flipping need significant financial outlays, extensive experience, and a thorough knowledge of the local real estate market. Additional duties include seeking for purchasers, maintaining assets, and finding tenants.
For people who prefer to invest gradually rather than in one large lump sum, mutual funds and ETFs are excellent options. However, there is no consistent cash flow, and liquidity is determined by the share price at redemption.
The majority of REITs pay their dividends quarterly, while others may be able to do so as well. In terms of the required investment’s minimum ticket size, they are likewise not particularly expensive. The REIT’s asset mix, however, cannot be altered; as a result, investors will be responsible for covering any asset losses while their money is invested. Selectively investing just in profitable assets is not an option.
As they enable investors to select a successful asset and sell their ownership if they feel their expectations aren’t being met, fractional ownerships are becoming more and more popular.
Whatever you do, keep in mind that investing in real estate for the long term will yield the best returns. To gain from real estate investing, you need hold onto an asset for at least one to two years, excluding the fix-and-flip option.