Remember that song by Kenny Rogers, “The Gambler”. When you are looking at finding riches in real estate the song is still applicable, ” you got to know when to hold ’em, know when to fold ’em, know when to walk away.” Realtor.org recently did an article covering the most common ways people get started. “These days, there are a dizzying variety of different takes on the once-simple idea of property investing—all requiring varying levels of blood, sweat, tears—and risks. Which one might be right for you?”
There are several common ways people dip their toes into real estate investing. Just make sure you, “look before you leap” when looking at at using real estate for investment purposes. Some of the ways include flipping, renting, U.S. Reits, crowdfunded real estate, and owning your own home. The article broke down “the typical returns (aka profits) investors have received over the past few years, along with the pros and cons of each.” Let’s take a look at the results.
Flipping Real Estate
Flipping is usually one of the first that comes to mind. There are a lot of shows on television with young and eager people buying a home and “flipping” it in 30 days and making thousands of dollars on their return. But is that reality? While they may show thousands of profits gained, you have to remember the cost of the renovation, closing costs, property taxes and insurance that had to be paid as a part of the flip. And then there is the time value that was involved. Time is money! Creating a budget is an absolute must. Budget in 10-20% for unexpected items that come up. Also, they say you should figure 20-30% from your profits for the previously mentioned expenses. The study reported a total gross return in 2017 of 48.6%. Remember, that is gross return, not net return.
Renting Real Estate
Maybe you are more interested in buying a home, keeping it for a long term investment and renting it out. “I think I’d make a great landlord!” you think to yourself. I mean, how bad can it be? You just collect the rent every month and take care of the occasional issues that come up, right? And that extra income will sure come in handy. Another advantage is the tax writes offs you can take.
When you are looking for a rental, look at areas that are growing or at least areas that are stable. You can always hire a property manager such as EverStar Realty to manage it for you. Just make sure you build that management cost into your budget so you have a better expectation of what your profits may be. We have a list of 10 things to look for when looking at a profitable rental property to help if you decide that the rental route is for you.
Remember you are dealing with tenants. There are laws to protect them and you. You will be legally responsible to abide those laws. You will want to make sure to have a company set up, such as an LLC, to protect your personal assets in case you get sued.
Also, your renters may move out. When that happens you will need to go in and clean up the home,maybe repaint the walls, and then re-rent it out. During that time you are not getting paid rent but you still have to make the mortgage payment. Make sure that you are able to. You also have to pay for insurance on the home. As they state in the article, “When something goes wrong in a tenant’s life, you’re the last person to get paid.” Rental properties showed a 13% return in 2017. They showed a 3 year return of 9.9% and a 5 year return of 11.67%.
U.S. Reits are where you buy shares in real estate instead of buying shares of companies. REITS are Real Estate Investment Trusts. They are bought just like traditional shares and they even have specific exchanges you can buy them on. You can see a list of public U.S. REITs here.
“There are two main kinds of publicly traded REITS. Equity REITs own rental properties ranging from homes to business space, and make money collecting income on them. Residential and commercial mortgage REITs allow investors to buy mortgage debt where investors profit from the interest.
Of all of the real estate investment trusts, data center REITs—where companies rent out space to store their network servers—had the highest one-year returns, at 29.79%, according to the National Association of Real Investment Trusts, a Washington, D.C.-based REIT trade group. It was followed by home financing mortgage REITs, which invest in bundles of home loans, at 25.57%.” As far as the stats are concerned, U.S. Reits showed a 2017 return of 8.72%. They showed a 3 year return of 8.39% and a 5 year return of 9.79%.
Crowdfunded Real Estate
Yes, crowdfunded real estate is a thing, albeit fairly new. If you have heard of Kickstarter, it is much the same idea, except people pool their money to invest in real estate. Compared to REITs, they are typically smaller investments. Instead of mega properties, they are smaller properties and usually require a long-term commitment.
The article reports, “These are long-term investments, so if you pull your money out early, there’s usually a financial penalty,” Ippolito says. That’s a big difference from REITs, which can be sold at any time. “Retirees who need the money soon probably should look elsewhere.” 2017 showed a return for crowdfunded real estate of 8.72%. The two year return was 8.89%. If you are interested in this idea, there is a review of the top 100 sites here.
If you are a home owner, you have money in the game too. Typically real estate appreciates over time. You should plan on living in your home for at least 5 years. It typically takes that long for the equity to build up in order to net a profit after closing costs are taken into account. For most people, it is the largest investment they will make in their lifetime. So, you want to make sure you are getting a good return. Luckily, for 2017 the report shows a 10% appreciation! They showed a 3 year appreciation of 26.7% and a 5 year return of 44.8%.
Real Estate Investment Decisions
As you can see, there are many options but no magic crystal ball you can predict the future with. You can take a look at the rate of return, but that is only part of the story. How much risk are you willing to take? How long do you want to wait to see a return? Are you looking for a quick flip or a long term rental income for retirement? Which option is right for you is one question that you can speak with one of our Realtors about. Remember, make sure to “look before you leap” as the saying goes.
As always, thanks for reading and we welcome any additional information or comments you may have.
1920 N. Pittsburgh St., Suite A
Kennewick, WA 99336
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