Investing in real estate has always been attractive.
Some of the key reasons investors are often attracted to this asset class is due to the benefits that it can provide, including income generation, diversification, low volatility, and hedging against inflation. There are many ways of investing in real estate.
Nonetheless, to be successful in any real estate venture, you have to undergo some form of real estate investing training. Equipping yourself with the essential skills and knowledge is a worthwhile investment before starting your career in real estate.
Below, you’ll find an overview of the strategies and tips for investing in real estate.
Real Estate Investing Training 101
Reasons to Consider Investing in Real Estate
All investors should, at some point, consider having an exposure to real estate in their portfolio. Its enhanced income, the uncorrelated nature of the asset class, and its positive tax benefits are some of the things that make this asset class quite enticing.
It’s also important to choose the type of real estate that’s most suitable for you as an investment based on your financial landscape. Understanding your liquidity and cash flow needs, and having a thorough knowledge on the tax impact of real estate should be among your first steps.
The main reasons to invest in real estate are as follows:
• It’s an uncorrelated asset class for your portfolio: the best way to minimize volatility in your portfolio is diversifying your holdings. Real estate ideally yields uncorrelated results to bonds, stocks, and most other assets classes, which adds diversification to your portfolio.
• Hedging against inflation: In most cases, real estate tends to appreciate during inflationary times, and it can be a great source of cash flow.
• Tax Benefits: being a real estate investor can reduce your income tax liability, since the property taxes and mortgage interest of your primary residence are tax deductible.
• Leverage: when your property appreciates in value, your equity also appreciates. Equity brings along greater leverage.
• Fixed cash flow: rental real estate can be an excellent source of fixed, retirement incomes, and it often pays more than bonds.
Types of Real Estate Investments
1. Real Estate Investment Trusts (REITs)
One of the main hindrances to investing in real estate is the massive capital requirements. If you don’t have the capital to add a real estate property to your portfolio, REITs are a good alternative to access this asset class indirectly.
REITs ideally invest in different types of real estate such as hotels, office buildings, shopping malls, apartment buildings, etc. And while you won’t be a direct owner of the property, you’ll still enjoy the benefits of adding real estate on your portfolio.
REITs are also liquid, since they are traded and priced daily on a stock exchange. This is unlike buying directly, which results in adding a longer-term, illiquid element in your portfolio.
If you need cash immediately, you have to enlist the property, look for a buyer, and then go through a transfer process, which is not ideal. As such, the key benefits of investing in REITs are the minimal capital requirement, and the level of liquidity provided.
2. Buying Property
Despite the high capital requirements needed to acquire, and its illiquidity, purchasing real estate is an excellent investment for many investors. Owning real estate is perhaps the ultimate uncorrelated asset class.
Keep in mind that although REITs are invested in real estate, they are traded on a daily basis in the stock market. Headline news and other market bias fluctuations tend to influence correlation and increase the volatility of REITs to stocks, thereby offsetting one of the key benefits of investing in real estate.
In addition, the tax benefits of directly owning real estate are outright superior to those of REITs. Similar to a REIT, rental properties satisfy the generation of income for you as the investor.
But if you’re the direct owner of the property, you’ll have an extra tax deduction, along with interest and taxes; depreciation. The depreciation deduction will often let you completely offset your excess cash flow from rent, which ideally makes your rental income tax-free (annually). Income from REITs is taxable.
Consider your Current Financial Situation
What do you intend to achieve by investing in real estate? How long is your time horizon? Different real estate options will fit different investors for different reasons. Be sure to find the right fit.
Learn about the Various Real Estate Investment Options Available
Each form of real estate investment comes with its own unique benefits and drawbacks. Real estate investing training will help you understand the associated costs and tax implication of each.
Conduct Due Diligence
It’s important to understand the location, the market, and the appreciation capabilities when purchasing a property. For REITs, you need to understand the strategies used by the trust, the kind of properties it invests in, the dividend payments, and the tax implications.
Consult an Advisor for More Guidance
Even after undergoing real estate investing training, it’s still important to consult your tax and financial advisors, since they both understand your financial situation. They should be able to guide you in the right direction, and provide you with some helpful insights.