Have you ever wondered how to invest in real estate and create a robust portfolio? Real estate has become a popular way for investors to generate wealth. Although the initial investment is still comparatively high for those starting out in the property market, it’s still one of the most accessible types of investment avenues.
Like any other worthwhile investment, real estate has the potential to provide investors with an opportunity to achieve financial stability and long-term financial growth. This can be achieved through various avenues such as residential rental properties, commercial spaces, and even with exciting and relatively new investment concepts like syndication.
Real estate investment strategies like syndications and investment trusts are solving the problem of the typically high initial investment costs. They are also attractive options for investors looking for a more hands-off approach to investing. Real estate investing involves a deep understanding of the property market dynamics, careful selection of properties, and strategic management of these assets.
Why It Is Crucial for Investors to Work With Real Estate Professionals
Effectively managing and utilizing all of the necessary information and keeping up with the market often gets a little overwhelming, even for the most sophisticated investment professionals. Additionally, there are some real estate concepts, like property taxes and legal matters, that require professional expertise. To be successful, it’s important to understand the nuances of each investment type, have a clear investment strategy, and consistently monitor and manage your investments. This is why the first rule for any smart investment is to consult with industry professionals about your investment.
Real Estate Investment Professionals Help You Cut Through Unnecessary Investment Noise
The real estate industry is as vast as it is dynamic. Real estate professionals are constantly inventing new ways for investors to capitalize on the market. There is an infinite amount of information on the internet about various real estate investments. The amount of data and information coupled with the ever-changing market trends that investors need to keep up with can overwhelm even full-time real estate investors.
This is why it’s so critical for you to identify information sources that have the authority of the market. The best sources of information about investing in real estate are usually from those who have actual experience and have had success with their investments. Aggregated information from Redfin.com or Zillow is great for analysis, but not necessarily for deal analysis. Real estate investing is both a science and an art, and sometimes there are some key variables about local markets that cannot be quantified.
A Practical Example of Why a Real Estate Professional Is Invaluable
For example, when a realtor has a good rapport with lenders in their city or is able to access a network of exclusive off-market listings. These nuances can’t be measured, but are essential in achieving success when investing. Such professionals find it easier to navigate the market and stand a higher chance of generating returns from your investment than an inexperienced investor. Bishop Investing Group is such a firm.
Bishop Investing Group is an alternative real estate investment firm that seamlessly connects eligible investors with promising investment opportunities. The firm’s investment portfolio spans across diverse areas, including value-add multifamily properties, self-storage facilities, and manufactured homes. If you are looking to passively invest in real estate, get in touch with Michael Bishop today.
Types of Real Estate Investments
Now, let’s look at the types of real estate investments that are available on the market today. The real estate industry offers many opportunities for real estate investors, and these investment types cater to different investor needs and risk tolerances. Here are some popular ones:
Residential Real Estate
This includes single-family homes, apartments, townhouses, condos, and vacation houses where a family or individual is the tenant. Investors make money through rental income and property appreciation. The length of residential leases can vary, but in many cases, tenants tend to stay for at least a year. As the owner of residential real estate, investors are responsible for mortgage payments, property taxes, and maintenance costs, but these expenses can often be offset by rental income.
Commercial Real Estate
Commercial real estate involves investing in business-oriented properties, such as office buildings, warehouses, and shopping centers. Tenants are businesses, and leases are usually longer than residential real estate, providing a consistent, long-term income stream for investors. Commercial real estate can offer higher returns, but it can also come with higher risks.
Industrial Real Estate
This category includes properties like factories, warehouses, and distribution centers. These properties can generate a significant income, often through long-term leases, but they require a deeper understanding of the industry and market conditions.
Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts, or simply REITs, own, manage, and/or finance income-generating real estate across a range of property sectors. They provide a way for individual investors to earn a share of the income produced through owning real estate without having to actually own any property themselves. REITs that are traded on major stock exchanges may provide high liquidity compared to direct real estate investments.
Real Estate Syndication
Real estate syndication is a method of pooling resources from multiple investors to purchase properties that are larger and more expensive than an individual could afford or manage alone. In a typical syndication, an individual or a company, often referred to as the “syndicator” or “sponsor,” identifies a profitable real estate opportunity, such as a commercial property or apartment complex. This sponsor then organizes a group of investors to collectively fund the acquisition and management of the property. The sponsor generally has significant real estate experience and takes on the active role of managing the property and making key decisions.
Each type of real estate investment comes with its own potential for returns, comparable risks, and management needs. Before you invest in real estate, it’s crucial to research the real estate market, understand the different types of investments available to you, and align them with your financial goals and risk tolerance. Consulting with real estate professionals can provide you with valuable insights and guidance as you navigate your real estate investing journey.
A Step-by-Step Guide for Getting Started in Real Estate Investing
If you’re just getting started with real estate, the process can seem overwhelming. However, by breaking it down into manageable steps, you can gradually make your way through the expansive real estate landscape. Please note that this is a general guide. There could be more steps involved when it comes to investing in a given property. Additionally, each step could have its own sub-steps. If you need more information about getting started in your preferred type of real estate investment, talk to us today. Here’s a step-by-step guide to get you started:
1. Set Clear Goals
As with any investment, the first step in real estate investing is to set clear, attainable goals. These might involve generating a steady stream of rental income, achieving long-term capital appreciation, or diversifying your investment portfolio. For instance, John, a successful business owner, wanted to diversify his investment portfolio. His goal was to generate a steady income stream to supplement his business revenue, so he decided to invest in rental properties.
2. Understand the Market
Before investing, it’s crucial to understand the real estate market. This includes researching market trends, property values, occupancy rates, and rental yields in different areas. Susan, a real estate investor, for instance, studied her local market before purchasing a rental property. She found that areas near universities had high demand and low vacancy rates, making them ideal for rental investments.
3. Decide on the Type of Investment
There are many ways to invest in real estate. You could buy rental properties, invest in Real Estate Investment Trusts (REITs), or even flip houses. For example, Robert, who didn’t want to deal with the hassles of being a landlord, opted to invest in REITs, which allowed him to earn income from real estate without the need to directly manage properties.
4. Find the Right Property
Once you have a clear understanding of your goals and the market, the next step is to find the right property. This process may involve hiring a real estate agent, attending open houses, and conducting thorough property inspections. Consider factors like location, potential rental income, and property condition. For example, Mike found a duplex in an area popular with young professionals. With its close proximity to the city center and robust job market, it was a perfect choice for a rental property.
5. Secure Financing
Understanding how you will finance your real estate investment is critical. You might use personal savings, secure a mortgage, or use a combination of both. Emily, a new real estate investor, used her savings for the down payment on a small apartment building and secured a mortgage for the remaining cost.
6. Purchase and Manage the Property
After finding the right property, make an offer and close the deal. Then, you’ll move into the management phase, which includes maintaining the property, finding and managing tenants, and handling finances such as rental income and expenses. Elizabeth, for instance, hired a property management company for her rental properties to handle tenant screening, rent collection, and maintenance tasks, allowing her to focus on finding new investment opportunities.
7. Gradually Grow Your Portfolio
Once you’ve successfully managed one real estate investment, you may consider expanding your portfolio. Diversifying across different types of real estate investments can help spread risk and increase potential returns. For instance, after successfully investing in several rental properties, David decided to diversify his portfolio by investing in a syndication fund, thus spreading his risk and potential for returns, all while limiting his active involvement.
Real estate investing requires careful planning, thorough research, and diligent management. However, with the right approach and commitment, it can be a rewarding venture, both personally and financially. Whether you’re interested in rental properties, REITs, or other real estate investments, the key is to start with clear goals, consistently educate yourself and learn from every transaction and experience.
The individuals highlighted above are hypothetical scenarios only and are not indicative of any person’s actual results or events. The hypothetical scenarios are examples only and are not specific recommendations pertaining to any person’s specific situation. You should consult with your own financial professional regarding your own specific financial goals.
Types of Returns From Real Estate Investments
Investing in real estate can provide several types of returns, depending on the investment strategy and the type of real estate involved. Here are some of the main ways a real estate investor can generate returns from their investments:
Rental Income
This is the most obvious form of return for those who invest in rental properties. As an investor, you collect rent from your tenants, which can provide a steady and reliable cash flow. For instance, if you own a residential property that you rent out, you receive monthly rental payments. After accounting for expenses such as mortgage payments, property taxes, and maintenance costs, the remainder constitutes your net rental income.
Property Appreciation
Over time, real estate property values tend to increase, or appreciate, making real estate a valuable long-term investment. For example, a real estate investor may buy a property in a growing market, hold onto it for several years, and then sell it at a higher price. The profit from the sale, after accounting for selling costs and capital gains tax, represents the investor’s return from appreciation.
Syndication Dividends
Investing in a syndication agreement allows investors to earn returns without the need for direct ownership or management of the asset itself. Syndication companies own, operate, or finance income-producing real estate, and they pay out a significant portion of their income as dividends to their shareholders. These dividends represent a return on investment for the investors.
Tax Benefits
Real estate investments can offer tax advantages that have the potential to improve your overall returns. For instance, the IRS allows investors to deduct property-related expenses (like maintenance, mortgage interest, and depreciation) from their income, reducing the amount of tax owed. Additionally, if an investor sells a property and uses the proceeds to purchase another investment property, they might defer paying capital gains tax through a process known as a 1031 exchange.
Why Alternative Real Estate Investments are Increasingly Attracting New Investors
The real estate market is becoming more accessible and attractive to new investors, thanks in large part to alternative investment strategies such as real estate syndication. These innovative approaches offer opportunities with attractive benefits in a market that has been traditionally reserved for the wealthy. Alternative investment options have made real estate investing accessible to a wider demographic of investors. Here are a few reasons these options are becoming increasingly attractive, where we will use syndication as an example:
Diversification
Real estate syndication offers an opportunity for investors to diversify their portfolios beyond traditional investment vehicles like stocks and bonds. Real estate often moves independently of the stock market, providing a measure of protection against market volatility. Further, within real estate investing itself, syndication allows investors to spread their risk across multiple properties, multiple sponsors, or different asset classes (e.g., residential, commercial, industrial) rather than putting all their eggs in one basket.
Access to Larger Investment Deals
Real estate syndication provides individual investors with access to larger, more lucrative deals that would otherwise be beyond their financial or operational reach. For example, a commercial property or an apartment complex that costs several million dollars might provide higher returns than a single-family home, but few individual investors could afford to buy it outright. Through syndication, they can pool resources with other investors and share in the profits of such large-scale investments.
Professional Management of Investment Properties
Real estate syndication is typically led by an experienced syndicator or sponsor. This professional management relieves individual investors from the day-to-day responsibilities of property ownership, such as finding tenants, handling maintenance and repairs, and dealing with legal issues. This benefit is particularly appealing to new investors who may not yet have the knowledge, skills, or desire to manage properties themselves.
Opportunities for Passive Income
Syndications can provide investors with a passive income stream. Investors make their initial investment and then receive regular distributions from the cash flow generated by the property (e.g., rent). While the amount can vary depending on the property’s performance, this can be an attractive feature for investors looking for an income stream that doesn’t require active participation.
Potential Tax Benefits
Real estate syndication can offer significant tax advantages. These may include depreciation (a non-cash expense that can offset income), the potential for tax-free cash flow (through the return of capital), and long-term capital gains treatment upon sale. Tax benefits can be complex, so investors should consult with a tax professional to understand them fully.
A classic example of a real estate syndication agreement could be a group of 20 investors each contributing $50,000 to collectively purchase a $1 million apartment complex. The syndicator manages the property, finds tenants, and oversees repairs, while the investors receive a share of the rental income and profits from the eventual sale of the complex. The investors benefit from the syndicator’s expertise, gain access to a larger investment than they could afford alone, and earn passive income, while also benefiting from the potential tax advantages associated with real estate investing.
How to Effectively Manage Your Real Estate Investment
Managing your real estate investment can be as vital as the initial steps of purchasing and financing it. This process involves several key areas, including maintaining the property, managing tenants, handling finances, and strategizing for growth. Let’s look closely into how your asset should be managed:
Maintaining the Property
The physical condition of your property significantly affects its value and the rental income you can generate. Routine maintenance, responding to emergencies, and periodically updating the property to maintain its appeal is all part of the maintenance process.
Managing Tenants
If you own rental properties, you’ll need to find and retain reliable tenants. This includes advertising vacancies, screening potential tenants, setting and collecting rent, handling tenant complaints, and even dealing with evictions if necessary.
Handling Finances
Real estate investing involves managing numerous financial aspects, from handling rental income and paying property taxes to covering repair costs. Using property management software like Buildium and Tenant Cloud can help streamline these tasks.
Strategizing for Growth
Successful real estate investors are always looking for new opportunities to grow their portfolios. This could involve investing in new properties, joining a real estate investment group, or diversifying into real estate funds or mutual funds.
Exploring Indirect Real Estate Investing
Indirect real estate investing is another approach to managing and growing your investment portfolio. This can be through real estate investment trusts (REITs) or syndication deals. This strategy allows you to reap benefits from the real estate market without the need to own or manage physical property.
Understanding and Mitigating Risks in Real Estate Investing
Real estate investments can be lucrative, but like all investments, they come with certain risks. By understanding these risks, investors can mitigate them and make more-informed decisions. Here are some common risks associated with real estate and strategies for managing them:
Market Risk
Real estate markets can fluctuate due to a variety of factors, such as changes in the economy, interest rates, and local market conditions. For instance, an investor may purchase a single-family home intending to sell it at a profit, but a downturn in the local market could mean the property’s value decreases instead. To manage this, it’s advisable to stay informed about market trends, diversify your investments, and have a long-term investment strategy.
Financial Risk
Buying real estate requires significant financial resources. For instance, a down payment is typically required when purchasing property, and investors also need to be able to cover ongoing costs such as mortgage payments, property taxes, and maintenance costs. Before beginning your investment journey, ensure you have adequate financial resources. Consider strategies like house hacking (living in one unit of a multi-unit building and renting out the others to cover your mortgage), or look into seller financing options.
Also, unlike stocks or bonds, real estate properties can’t be quickly sold for cash without potentially losing value. This lack of liquidity could be a problem for financially strapped investors. Investors should maintain an emergency fund, diversify their portfolio with more liquid assets, or consider investing in publicly traded REITs, which can be bought and sold like stocks.
Property Management Risk
Managing rental properties can be time-consuming and challenging. From finding and keeping good tenants to dealing with maintenance issues, being a property manager requires a significant commitment. Another management risk is dealing with the physical property. This includes structural problems, environmental hazards, or unexpected maintenance needs. If you are looking at real estate as a long-term investment opportunity, consider hiring a property management company or using property management software to streamline operations.
Investment Risk
Different real estate investment opportunities have different levels of risk. For example, buying rental properties can provide a steady cash flow, but it also involves the risk of vacancies, property damage, and market fluctuations. On the other hand, indirect real estate investments, like REITs and syndications, can generate income with potentially lower risk, but they often have an investment minimum and may only pay monthly or quarterly distributions. Ensure you thoroughly understand the risks and potential returns of each investment type, diversify your portfolio, and align your investments with your risk tolerance and financial goals.
To Summarize:
Real estate investing can be an incredible avenue for wealth creation, providing multiple ways to generate income and potential for long-term growth. Each type of investment offers unique opportunities and comparable risks. Every investment involves some level of risk, and real estate is no exception. Conduct thorough due diligence, stay updated on market trends, leverage professional consultation services when needed, and always ensure your investment decisions align with your overall financial goals.
Are you looking to get into real estate? Today, there is so much that investors need to learn about the market. But, a key to succeeding in the industry is having the right partner to walk the journey with. A partner who’ll help you understand the nuances of your preferred investment, advise you on a clear investment strategy that aligns with your financial plans, and have the resources to monitor and manage your investment. Bishop Investing Group can be that partner for you. A syndication partnership may be just what you have been looking for if you are not keen on being hands-on with your investment.
Our aim is to identify and assess stable assets with the potential of lucrative returns for your investment consideration. Our experience, along with the collective experience and track record of our network of operator partners, has enabled us to create a portfolio with a valuation of over $1 billion in 31 locations across the country. Do you want to know more? Schedule a call with Michael Bishop today.
DISCLAIMER:
Investing in real estate carries some risks which may include unexpected rise in interest rates, lower than expected occupancy, and the operator’s failure to execute the renovation and rental increase business plan. Real estate investments are also illiquid meaning there is no readily available market for an investor to sell their interest in a real estate syndication. Investors are typically required to be deemed an accredited investor.
Certain real estate investments may also have fewer disclosure obligations than more traditional investments which may translate into limited information for investors. For instance, fees assessed for such investments may be higher and can erode and/or evaporate gains.
The complexity, costs, and risks of REITs products vary. Additionally, yields obtained from REITs may be relatively low compared to that of other investments. Investors should assess the risks, consider their own investment profile, and consult with their financial professional before investing.
This material has been prepared for information and educational purposes only, and it is not intended to provide, nor should it be relied on for tax, legal, accounting or investment advice. Investors should consult with their own tax, legal, accounting and financial professionals before engaging in any transaction.
This article was written by a third party for the registered representative use.
