How to Get Started in Real Estate Investment
Debt and Equity, Public and Private
Heralded for years as the best medium of investment, real estate attracts would-be investors from the world over to pool together and invest in residential, commercial, and debt vehicles to earn profits. However, with market corrections and price fluctuations in recent memory, many people are left wondering if real estate investing is still viable, and if so how to get started. This article discusses the merits of real estate investment, covers the different types of opportunities available, and outlines the process.
Real estate, the trade of land and buildings, primarily refers to ‘ownership interest’ in a given property. This ownership interest is monetized through collecting rent payments, improving the quality of the property, or reselling it at a profit. There are two markets (Public and Private) and two vehicles (Debt and Equity) of real estate investment, creating four possible investments. Details on each type including comparative risk profiles are noted below:
Private Real Estate: Investors or their property managers operate a residence or commercial area and earn rents from leasehold interest. This is considered the most straightforward method of conducting real estate investment due to the investor’s direct ownership of and responsibility for the property itself. Note that all expenses related to the care and maintenance of the property are duties that the owners are responsible for. Consider a property management company to collect rent payments and perform tasks related to the property’s upkeep.
Public Real Estate: Typically consists of holding shares of publicly exchanged real estate firms. These companies are typically organized as trusts and shares are traded in exchanges. Dividends are disbursed to shareholders as the firm collects rents and refines its portfolio. Because all properties belong to the company, individual investors are not responsible for any of the care and maintenance. Additionally, investments in these trusts carry less risk, as any potential losses are spread over the portfolio of the company which may contain hundreds of properties. However, this rule also applies to the revenues.
Private and Public markets both support equity and debt investing. Equity investment is ownership of the property in question. In this method, investors directly or indirectly assume responsibility for the operation and maintenance of the properties themselves. Conversely, debt investment is the financing of mortgages and lending so that others will own a property. Investors in this scenario earn their return through interest payments on the loan itself.
Each market and method combine to make four possible avenues: private equity, private debt, public equity, and public debt. Public equity is primarily traded by investment trusts whereas public debt is traded via mortgage securities- an agglomeration of mortgages across the nation that are traded similarly to stocks. Private equity entails purchasing the residential or commercial property and directly or indirectly managing it through acting as a landlord or further developing it. In private debt, you will be funding private mortgages.
Before undertaking any investment strategy, be sure to analyze your finances and portfolio to determine the best course of action. Real estate is widely regarded as an enhancement to many portfolios, as it creates a real asset as opposed to stocks and bonds. Additionally, a property is a store of value which often appreciates, and can supplement income through rents. Remember: costs will always add up to more than the purchase price. Closing costs, renovations, maintenance, and property management all add up and will affect your bottom line.
Be sure to get feedback from a multifaceted team before diving in. Consult your accountant, investment broker, and even other people in your network that have pursued real estate investing. When handled properly, an investment property will be under the watchful eye of a group of professionals from loan officers, accountants, property managers, home inspectors, insurance specialists, and real estate agents. When choosing a real estate agent, be sure to find someone who specializes in investment properties in the regions you are considering. Work with a broker or group of agents who will be able to track down exactly what you need without picking up additional costs along the way.
Real estate investing isn’t for everybody, but can add a spectacular asset to any portfolio. It’s a great opportunity for those who are interested in investing, but want to receive a tangible asset for their money.
Written by Gregory Lyons in Association with Harris Team Real Estate