A real estate investment can be a fairly common transaction, such as the purchase of a primary residence, or it can be a complex commercial venture involving multiple investors and/or syndicates. When choosing a real estate investment, think carefully about your objectives for that investment. Your specific needs may suggest which form of real estate ownership makes the most sense for you. Each type of real estate investment involves differing risks and potential rewards. It is important to know what these are, and to determine whether the contemplated transaction is right for you and consistent with your investment goals.
In addition to the methods listed below for investing directly in specific real estate projects, some mutual funds and exchange-traded funds invest exclusively in REITs and/or companies in industries related to real estate, such as development companies. Before investing in such a fund, you should carefully consider its investment objective, risks, fees, and expenses, which are available in the prospectus available from the fund. Read it carefully before investing.
Specific Types of Real Estate Investments
Real Estate Investment Trusts
A real estate investment trust (REIT) is a company, usually publicly traded, that manages a portfolio of real estate to earn profits for shareholders who invest in the company. REITs may invest in a diverse array of real estate, from shopping centers and office buildings to apartment complexes and hotels. Some REITs own and operate income-producing real estate. Shareholders receive rental income from the properties held, as well as capital gains when properties are sold at a profit. Other REITs specialize in lending money to building developers and pass interest income on to shareholders. Still other REITs pursue a mix of equity and debt investments.
Real Estate Partnerships
Real estate partnerships include general partnerships and limited partnerships. In a general partnership, two or more individuals purchase a property together and act as co-owners and co-managers for profit. A limited partnership is a group investment whereby multiple individual investors collectively finance a real estate venture by purchasing small shares of ownership in the property. With a limited partnership, the limited partners have no say in managing the investment; only the general partners do.
Real Estate Tax Credit Limited Partnerships
Real estate tax credit limited partnerships are limited partnerships organized, primarily, to take advantage of certain tax credits associated with investment in real estate–specifically, the low-income housing credit and the qualified rehabilitation expenditures credit. Because limited partnerships are flow-through entities, partners can claim their share of the tax credit on their individual tax returns (subject to any limitations that may apply). In addition to tax credits, real estate limited partnership investors are entitled to their share of partnership income and may be entitled to take deductions for depreciation, mortgage interest, and real property taxes.
Rental of Vacation Property
Purchasing rental vacation property is one way for the average person to invest in real estate. Properties in many areas can be purchased and rented out on a short-term basis to vacationers. Most real estate investments are growth oriented, meaning the return on your investment is based on how much your property increases in value from the time you purchase it until the time you sell it. However, when you purchase rental property (either residential or vacation), your focus will be on current income and cash flow as well as possible personal use. Although you might someday sell the property at a profit, the greater part of your return will likely come from rental income. For this reason, vacation rentals are typically long-term investments.
Rental Property
Rental property is distinct from vacation property. It typically refers to a dwelling (single-family or multi-family) that you purchase with the intention of renting out. Most real estate investments are growth oriented, meaning the return on your investment is based on how much your property increases in value from the time you purchase it until the time you sell it. However, when you purchase rental property (either residential or vacation), your focus will be on current income and cash flow. Although you may someday sell the property at a profit, the greater part of your return will likely come from rental income. For this reason, rental property is typically a long-term investment.
Raw Land
Investing in raw land involves the purchase of unimproved property, often with the intent of building, leasing, or selling the land at a later date. Investing in raw land may be as simple as purchasing a single lot in a subdivision on which to build a home, or as complex as accumulating hundreds of unimproved acres to hold for future development and subdivision. Speculators often invest in raw land, acquiring tracts of land in anticipation of future rezoning. Regardless of your position and purpose, the success of an investment in raw land depends on a few important factors. Among these factors are the location and physical features of the property itself, the timing of the investment, the opportunity cost of the investment, and (in the case of a large-scale investment) whether the community and local governing bodies are supportive of the development.
Strategies for Real Estate
You can maximize the returns you get from real estate and/or reduce the risks if you utilize the proper strategies. Although a number of possible strategies for real estate exist, the two main ones are to invest directly in residential property and to invest directly in commercial property. Residential property includes single-family dwellings, duplexes, condominiums, and apartments. Commercial property includes business properties, warehouses, factories, and professional office buildings. Despite the differences between them, both strategies share certain potential advantages (e.g., capital growth, current income) and risks (e.g., changes in general and local economic, financial, and environmental conditions, interest rate changes, default risks).
If you have questions, contact the Experts at Henssler Financial:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
