What's important to know about real estate investments?

What's important to know about real estate investments?

Real estate can be purchased in a form you can see, touch, and pay maintenance costs on, or it can be purchased indirectly through the use of REITs and other securities tied to the real estate industry.

Real estate investments fall into a wide spectrum of subsets. You can invest in residential property, commercial property, development projects, raw land, etc. Within the residential sphere are multi-family residential complexes, rental houses, foreclosure flips, and vacation rentals with property management.

Some of those may also fall into the commercial real estate category to some extent. Commercial buildings with spaces available to businesses can make good investments, and development projects need investors from the ground up.

People may also invest in raw or agricultural land. Finally, there are real estate oriented securities such as REITs, stocks of companies affiliated with the real estate industry, mortgage-backed securities, ETFs, mutual funds, and so on.

Real estate investors tend to talk about their physical real estate investments in terms of Cap Rate, meaning the average annual return on an initial investment, expressed as net after predictable expenses. It’s important to realize that a lot of real estate investing is fairly risky, because you’re dealing with a physical thing that can be damaged, potentially in ways the insurance won’t cover, and the asset may become illiquid to you if you can’t find a buyer for it when you would like to.

The unpredictable expenses often get left out in the estimations of cap rate, and the estimations of how reliable occupancy will be may be off. When real estate is held over many years, the surroundings may change significantly and become affected by crime and lowering property values.

This is when it would be nice to sell the property but a good buyer with a good price might be elusive. Yet there are some tax advantages, such as 1031 exchanges and triple-net arrangements.

These physical real estate investments may be attainable through partnerships and private placements if you cannot buy the property outright. There is, of course, a lot to know, so you’ll want to learn from a good agent, developer, and real estate attorney.

For those of us who don’t want to go through all that trouble, the securities, such as REITs, ETFs, and mutual funds, present a more accessible and less troublesome option.