Real estate has made a lot of people wealthy, and you don’t need to pay all cash to take part. Borrowed money is a normal part of the business, which sets it apart from buying stocks or bonds. Whether you’re just starting out or adding to what you already own, these are three of the most common ways in.
1. Buy a rental property
When you own a property and rent it to tenants, the rent can become regular income. The arithmetic is simple. If the mortgage payment is $1,200 a month and the rent is $1,800, you have $600 left to cover expenses and profit.
Being a landlord is also a job. You’re responsible for upkeep, so when the refrigerator or washing machine breaks, the repair is on you. If you aren’t handy, you can hire contractors or hand the whole thing to a property management company.
Not every month will be profitable, and some repairs will come out of your own pocket. It helps to see those as investments. A well-maintained property attracts better tenants now and a better price when you sell. We cover the upside in more detail in 3 major advantages of owning a rental property.
2. Fix and flip houses
Flipping means buying a property with the intention of selling it for a profit, usually within months. Flippers look for houses that need work, because those sell for less. They then put money into repairs and updates and bring the house back to market.
Unlike a used car, a house can be worth more after you improve it. That’s the logic of the flip: spend on renovation knowing the sale price should more than cover it. The risk is in the estimates. Underestimate the repairs or overestimate the sale price, and the profit disappears. Our fix and flip tips for new investors explain how to avoid that.
Flippers often use short-term financing, since the loan only needs to last as long as the project. Sachem Lending offers fix and flip loans for exactly this.
3. Buy real estate stocks (REITs)
Real estate investment trusts, or REITs, trade on the major exchanges like any other stock. You can buy in for the price of a single share, which gives you exposure to real estate without buying, repairing or selling a building yourself.
REITs also let you invest in kinds of property most individuals could never buy outright, including malls, office buildings and shopping plazas. That adds variety to a portfolio.
The other draw is dividends. REITs are required to distribute most of their taxable income to shareholders, so when the properties earn money, investors generally receive a share. Dividends and share prices do move with the market, so treat REITs like any other stock investment.
Which is right for you?
It depends on how much money you have to start with, how hands-on you want to be, and how soon you want a return. We compare the three side by side in REITs vs buy and hold vs fix and flip.
If your next step involves buying or renovating a property, take a look at our loan programs or contact us.
