Investing in real estate is about more than just buying a property and calling it home.
To invest you need to look at the potential income you can receive from a property; it should never be viewed as your home; this will lead to sentimental touches and over expenditure. There is abundance of questions which need to be answered before you can purchase an investment property; such as the type of property or the purpose of the purchase. Properties can be ‘flipped’, rented or you can purchase land to build on and sell the properties afterwards.
Stocks and bonds are also more complicated than they may appear. In essence you can purchase these items and watch them grow slowly over the years; hopefully with dividend payments adding to your portfolio and increasing your investment. However, there is more to it than investing and hoping. On balance, real estate investment probably has more factors which need to be considered before you can start investing. It may help to understand the differences:
This is the process of purchasing land or property with the aim of making a profit on the purchase. Many real estate purchases will cost you money from day one and there will be monthly bills to consider. This is typical of building plots which you plan to sell on; with or without buildings. Other real estate can generate you an income immediately through renting the property to tenants.
The basic types of property investing are:
- Rental properties. You purchase a property and find a tenant. The tenant is charged a rental figure which is equal to the monthly expenses you incur buying and maintaining the property. The profit on the property comes into play once the finance has been paid off and an income stream is generated. It is far more complicated than investing in stock as you will need to keep a regular track of your property and complete a variety of tasks, such as maintenance or finding new tenants. Stocks are simply bought and held.
- Real Estate Investment Groups. This is an easy option to simply owning your own property and dealing with all the maintenance issues. A group will purchase a building which is made up of several properties. You then purchase as many of the apartments as you want and pay a fixed management fee to the group company which takes care of the property for you.
- Real Estate Trading. This is the official name for the practice which is known as flipping. There are two versions of this. The first is purchasing a property and selling it straight on for a higher price. Properties are usually moved on within three months and you need to have a good eye in the market to find the right properties. The second version is to buy a property which needs modernizing or has potential to be developed. This takes a longer time and is very time intensive which means that you can only take on one property at a time.
- REIT’s. This is a trust which is created to buy and operate an income producing property. The purchases are funded by investors and the trusts are then bought and sold on the stock market in much the same way as shares are. This type of property investment has much in common with traditional stock investment.
Purchasing a stock is, in effect, the same as purchasing a small piece of a company. You are then entitled to a share of any profits; in proportion to the percentage of shares you own. This share is paid via a yearly dividend. Investing in real estate gives you leverage, this is a big difference to the stock market where you must have the funds available to purchase your intended stocks. The property market allows you to only partially fund your purchase and borrow the rest as there is something concrete to loan against.
Why Real Estate?
Property ownership has been a fact for many middle and lower class people for many years and this makes the thought of property investment achievable. Stocks and shares have been the reserve of the upper class and will seem like an unachievable goal to many. It is possible to spend money on shares which never materialize as there are many unscrupulous traders on the stock exchange. This is much less likely with real estate as you can physically visit it and check it out.
In fact real estate has been seen as an excellent protection against inflation and a down drop in your currency. Of course real estate investment takes more work than purchasing stocks and bonds but the results are usually worth it.
By Davis Miller and PropertyTurkey.com
Image credit: Daniel X. O’Neil