Real estate investments can be a profitable experience if you have a good grasp on the process involved. Before you plunk down your hard earned cash you’ll want to learn everything you can about the real estate game.
There are two ways to make money with real estate investments. First, you can purchase real estate outright, as with the purchase of residential homes or commercial property. Second, you can invest in financial instruments such as shares of real estate investment trusts (reit) or stocks of housing developers.
Although there are several types of real estate investments, most are categorized as either residential or commercial. Residential real estate typically includes family, vacation, or second homes, as well as rental properties. Rental properties can include everything from duplexes and apartments, to mobile homes and condos.
Although multi-family properties such as apartment buildings or condominium complexes are residential, they fall under the category of commercial properties. Other commercial properties include office buildings and complexes, shopping malls, strip centers, retail shops and restaurants.
Another type of commercial real estate investment is that of vacant land. Investing in vacant land located in rapidly growing areas, or areas expected to grow within a few years, can be exceptionally profitable. Vacant land can be used for farming or ranching, or to erect office buildings or housing communities.
Many people prefer to invest in residential real estate. Oftentimes, these properties are used for rental purposes. Rental properties have the potential to provide a good return on investment; however, it can take several years to turn a profit.
An option for those investing in rental property is to use them as rent-to-own houses. With rent-to-own properties, the home is rented to an individual for a certain period of time. Generally, this time frame is two to five years.
During this period, a percentage of rent is applied toward the purchase of the home. At the end of the contract, the tenant obtains financing through a traditional lender and purchases the home using the applied rent as a down payment. Should the tenant default on the contract, the owner can either sell the property or engage in another rent-to-own contract. Therefore, this type of real estate transaction is relatively risk-free.
When engaging in rent-to-own transactions, certain legal documents are required to ensure the validity of the contract. Additionally, the internal revenue service requires specific bookkeeping records.
Last, but not least, house flipping is becoming quite popular with real estate investors. House flipping involves purchasing a home in need of repair or renovation. The house is purchased under market value, leaving investors with additional cash to make repairs and update the house. After the repairs and updates are completed the house is sold for profit. The entire transaction usually takes place within three months.
Although house flipping is usually a profitable real estate investment, it is not without risk. Should you decide to go this route take time to educate yourself about the real estate market where the property is located. Otherwise, you could sit on the property for quite some time.