Last week we took a look at three simple ways you can invest in real estate. This week we take it a step further by looking at two more ways to invest in real estate. With real estate providing double-digit returns in cities like Toronto and Vancouver, it’s not hard to see why many investors are jumping on the bandwagon.
While real estate can be a great way to turn a profit, it can also be an easy way to lose your shirt. They say location, location, location are the three most important rules when buying real estate. Well the three most important rules when investing in real estate are research, research and research. Let’s take a look at two more ways to invest in real estate.
Real Estate Investment Groups
If you want to understand a real estate investment group, think of it like as a mutual fund for investment properties. If you want to get a piece of the pie of the lucrative rental property market, but you’re not too keen on the responsibilities that go along with being a landlord, a real estate investment group is a good compromise.
Here’s how a real estate investment group works: a developer will purchase or build an apartment building or condos and let investors purchase them through the firm. If you’re an investor on your own, you can purchase one or more units. Although you own the units, you aren’t responsible for the management, maintenance and repairs of the property. The real estate investment group takes care of the maintenance, repairs, advertising of vacant units and interviewing of prospective tenants. This does come at a cost though – similar to a real estate agent who rents out your property for you, the firm takes a percentage of your monthly rent.
Real estate investment groups comes in different variations, but the most common is for the lease to be written in the investor’s name. To protect the group of investors as a whole, the units chip in a portion of the rent to safeguard against vacancies. That means you’ll have enough dough to cover the mortgage on the unit even if the unit sits vacant.
Before investing, it’s important to look at the quality of the company behind the real estate investment group. Similar to mutual funds, it’s important to keep an eye on fees. High fees may be worth it if performance is above average, but high fees can also drag down the performance and your return.
Real Estate Trading
Real estate trading is a lot like house flipping. On one end of the real estate spectrum is the buy-and-hold strategy made famous by TV shows like HGTV’s Income Property; on the other end is real estate trading. Real estate trading involves purchasing properties to hold in the short-term (typically three to four months), hopefully selling them for a profit. This strategy commonly goes under the name of house flipping. Although it’s a lot more exciting than the tried-and-true buy-and-hold strategy, it’s also a lot risker.
In the housing flipping strategy, a real estate investor buy properties perceived to be undervalued. Hardcore house flippers will not put a penny into the house for improvements to spruce it up. The property has to be able to turn on a profit on its own without significant upgrades or improvements.
House flipping is seen as a short-term investment. If you aren’t able to sell the property in the timeframe needed for the desired price, it can spell trouble, as you may not have enough money to cover the mortgage and other carrying costs. You should always look to buy properties where you can turn a profit through rental income. If you can’t unload the property, renting it out in the interim can help cover the mortgage and bills.
When selling a property, it’s important to bear in mind the closing costs. Closing costs typically add up to 1.5% to 4% of the purchase price of a home and include everything from the land transfer tax to the lawyer fees. You need to turn a profit of at least 4% just to break even. If you sell for less, you’re actually losing money.