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 in the prospectus available from the fund. Read it carefully before investing.
SPECIFIC TYPES OF REAL ESTATE INVESTMENT
Real estate investment trusts
A real estate investment trust (REIT) is a company 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.
There are several types of real estate investment trusts which can vary widely in the different methods of operation, investment objectives, risks, fees, and liquidity involved. You should make sure you understand fully any REIT investment you’re considering before purchasing shares.
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 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.
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).
Real Estate Investment options may be a good strategy for your retirement. At Kuderer Financial we walk our clients through a Retirement Financial Plan to see if Real Estate is a good fit for their individual situation. Contact us to see if these are good options for you.
Prepared by Broadridge Investor Communication Solutions, Inc.