When you think about it, investing in real estate is really like a huge game of Monopoly. You run around in circles looking to buy all the best properties, you collect rent, and you try your best to stay out of jail. The similarities are uncanny! Though, jokes aside, there are some fundamental differences.
If you’re interested to learn what these are, just continue reading.
How Does It All Work?
When it comes to real estate, there are two ways you get a return on your investment — cash flow income and land appreciation.
Cash flow income is essentially the rent money you collect from various real estate properties you lease to clients. These include residential buildings, commercial properties, land, etc. Usually, the income is generated weekly, monthly, quarterly, and even yearly, depending on the agreement. Moreover, the potential profits largely depend on the type of real estate you have on offer. For instance, apartment buildings are probably more lucrative than, say, a mere warehouse, but not as lucrative as a large office complex.
As for the money gained from land appreciation, things get a bit messy. In essence, it’s a lot harder to pull off than cash flow income as it requires some skill and immense knowledge of the real estate market. Simply put, you purchase property for a certain price and over time the value of that property increases — either due to changes in the real estate market or due to the various repairs and renovations you’ve conducted over the years; all in all, you end up with more money (value) than you started with.
Different Types of Real Estate Investments
Now that we know the two basic ways real estate investments generate profit, let’s take an even closer look at the various types of investments you can make. The four most common types include:
- Renting residential properties;
- Renting vacation properties;
- Renting commercial properties;
- House flipping.
Residential Rentals
Starting with the most basic of the four, renting residential properties (houses, apartment buildings, etc.) is probably the easiest way to earn money from real estate. In general, it doesn’t require a whole lot of knowledge or expertise of the real estate market, making it ideal for beginners. Some of the benefits include a small — but stable — passive income, an increase in equity in the properties you hold, as well as the tremendous tax advantages you get (the ability to write off certain expenses such as mortgages). Overall, a good starting point for any budding real estate investor.
Vacation Rentals
Similar to residential rentals with the main difference being their location — they’re built around popular tourist attractions. This unique feature effectively increases their land appreciation quite substantially as the tourist locations rise in popularity. As an example, take a look at Indonesia. In the past, the country’s main tourist attraction was primarily the island Bali. Nowadays, thanks to the government’s targeted investments, Indonesia boasts ten new tourism hubs. According to an infographic made by Invest Islands, Indonesia’s Lombok Island currently sits as the world’s third-best investment destination. Once this yet undiscovered island paradise grows in popularity, property values will quickly skyrocket (along with the rent), amassing a small fortune for potential real estate investors.
Commercial Rentals
Investing in commercial properties is best reserved for more-experienced real estate investors. The main reason being, you lease out your commercial properties to companies and not individuals; meaning, it involves an abysmal amount of paperwork (contracts, insurance, etc.) and requires more initial capital to participate than residential properties. What’s more, commercial loans are also much harder to get, making them less appealing for investors that are just starting out. Typically, these properties include restaurants, retail stores, office spaces, and so on.
House Flipping
Last but not least, house flipping — a real estate investment best reserved for intermediate or expert investors. Simply put, it requires the most expertise and knowledge of the real estate market out of the whole lot. The basic principles are quite simple though: buy low, sell high. Basically, what you want to do is buy a run-down building, renovate and repair it, and then go off to sell it for a higher price; sounds easy in theory but it’s extremely difficult to pull off. It’s risky and it requires a huge amount of effort (as well as funds) that may or may not pay off in the end.
Some Potential Benefits of Real Estate Investing
As we reach the end of this article, let’s sum up all the potential benefits of investing in real estate.
- Tax advantages — the profits earned from real estate are essentially treated as capital gains; these have much lower tax rates than the regular employment income.
- Better control over your investment — unlike with stocks or bonds where you have to wait for the value to increase on its own, with real estate you can actively increase the value of your property (house flipping).
- Great hedge against inflation — rents and property values typically increase during times of inflation keeping your hard-earned capital safe.
- Provides a lot of leverage — investors can leverage their capital multiple times over; meaning, more funds to invest.
As with anything else — practice makes perfect. You can’t expect to score big on your very first house flip or become a millionaire overnight by leasing a small warehouse. Work hard, be patient, and you‘ll get there… eventually.
