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5 Types of Real Estate Investment: Which is Right for You?

With low interest rates and favorable tax rules for real estate investments, there is no time like the present for investing in real estate to realize some passive income and increases in equity. There are many types of real estate investment to choose from. In this post, we’ll cover some of the most popular real estate investment options so you can find the right fit for you.

Real Estate Syndication

With real estate syndication, individual investors can participate in larger scale real estate projects that might otherwise be inaccessible to them due to a lack of capital or know-how. For instance, a multifamily property might require a multi-million-dollar investment—but in the case of a syndication, individual investors can invest in a similar project for as little as $50,000.

In a syndication, a group of individual investors contribute funds to the project through an overarching sponsor company. The sponsor is in charge of performing all the legwork for the project, including identifying properties, performing renovations, property management and rent collection, and property sale. Meanwhile, individual investors participating in the project can enjoy a passive income stream from their cut of rental collections and/or a property sale, depending on the terms of the deal.

Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More

Pros of Real Estate Syndication

Real estate syndication is a type of real estate investment that offers some major perks for individual investors interested in generating passive income with minimal time investment. In addition to the income from tenants, the syndication should benefit from increased equity in the property at the time of sale, and that profit may be passed on to investors.

IRS rules provide many opportunities to maximize income from real estate syndication as well. Depreciation, mortgage interest, and a lower capital gains tax rate all translate to more in investors’ pockets.

One of the best parts of real estate syndication is that after researching and choosing a sponsor and committing to a project, no active involvement is required of the investor. The sponsor arranges for property management and any other oversight that the project needs. This can truly be a set-it-and-forget-it investment.

Cons of Real Estate Syndication

Unfortunately, there is no such thing as a sure thing, even in real estate syndication. One of the most significant risks, though, is something that investors do some element control over: the sponsor. When investing in a real estate syndication, the project sponsor can often make or break returns. Not all sponsors are scrupulous, so be sure to research the person or firm you are considering and ask plenty of questions before committing to the deal.

If you are interested in investing in a real estate syndication, be sure to read our post on What to Look for in a Commercial Real Estate Syndicator.

Real Estate Investment Trusts

Real Estate Investment Trusts (“REIT”s) are companies that own or finance real estate properties that produce income. They then pay out at least 90 percent of their taxable income from those income-producing properties to the shareholders.

Most REITs operate on major stock exchanges, and investors purchase company stock. The stockholders receive dividend payouts. Many people purchase REIT stock through their 401(k)s or other investment plans.  

Pros of REITs

REITs investing is accessible to anyone who manages their 401(k) or other investment accounts. This easy entry makes it one of the most popular real estate investment strategies that can be a great fit for people looking to make passive income from real estate but who want to commit to very little time doing so.

Even though you may use the same platform to purchase REITs that you use for other stock purchases, real estate generally weathers market fluctuations more steadily than equities.

Cons of REITs

With so many checks under the plus column, REITs may seem like a must-have. Before purchasing REIT stock, keep in mind there are a few drawbacks.

REITs commonly specialize in a particular type of property, so investing a lot in one REIT can be risky. For example, REITs that own office buildings or hotels have taken big hits during the pandemic whereas REITs focusing on self-storage properties or open-air shopping developments have better weathered 2020.

Just as investors usually see the best returns on properties after owning them for a number of years, so do REIT investors. While they do pay regular dividends, it can take a number of years to accumulate a large return from your investment. Best practice is to only invest in REITs if you do not plan to access the money for a few years. Conveniently, REITs are liquid, so you can retrieve your funds if unforeseen circumstances occur.

Rental Properties

For most people, becoming a landlord and leasing a rental property is the very first thing that comes to mind when considering a real estate investment. Being a landlord has long been a stepping stone to financial security, and given that Millennials report less intention to own homes, rentals continue to be an in-demand product.

Unlike the previous avenues discussed above, owning a rental property likely requires a significant investment both in terms of capital and time. It is most likely to be successful if you can pay cash for a property or if you can snag a great deal that gives you room for markup.

Fortunately, investors can find properties at a variety of price points due to the many types of rentals that tenants demand. Leasing a home or apartment building may seem like the most popular investment opportunity, but commercial leases and short-term rentals also offer passive income opportunities.

Do not overlook your primary residence’s passive income potential. For very little up-front investment, you can turn your home into another revenue stream—if you can tolerate opening your homes to others.  

Pros of Rental Properties

Owning a rental property gives investors the chance of a two-fold source of financial gain. The monthly rental payments after expenses and set asides for future planned expenses should provide a regular monthly income. Second, the owner can realize gains from an increase in property equity in the future when selling the property.

Steady rent payments from a reliable tenant provide a great source of predictable monthly income on a property that is also growing in value. That is an investing win/win.

Cons of Rental Properties

There’s a reason that many people end sentences about being a landlord with a groan. It can be hard, unpleasant, and even unpaid work if you do it all yourself and run into trouble collecting rent. Being a one-person operation will likely not feel like passive income even though that is how the IRS classifies it.

Property managers can do everything from find tenants to hire maintenance staff to reduce the owner’s workload, but their services add to the expenses and eat away at the owner’s profits. Reliable, easy-going tenants will also diminish the burden of being a landlord—but unfortunately, rental properties do not come with crystal balls to predict the future behavior of prospective tenants.

Rental properties bring many of the same risks of home ownership, including costly repairs that come on suddenly. Owners must remember not to think of the monthly rent above any mortgage and expense as pure profit. An emergency fund is just as necessary for your second property as your first.

House Flipping

House flipping is another type of real estate investment that can require significant capital and time investment. House flippers buy homes that are in distressed condition or undervalued, then sell for a profit.

Contrary to common belief, not all house flippers heavily invest and remodel entire homes. That is just one model for house flipping, which requires significant capital investment, time and effort. Flippers using this method usually hold on to the property for a bit longer to allow for the work to be completed and the property to be prepared for the market.

The other type of house flipping is less well-known: some investors purchase properties in foreclosure, then simply resell them in a traditional buy-and-sell transaction. Prospective homebuyers may not be willing to go through the challenging and lengthy short sale for the home but will snatch it up when it is a regular sale.

Pros of House Flipping

House flipping can give handy DIYers a great return on their investment. Given that much of a home’s value comes from a gut-level appeal that can be accomplished with some paint, new appliances, and a little know-how, there is a real chance at profit.

For flippers who buy distressed properties without the intent to remodel, much of the process can be done virtually. If an investor becomes a real estate broker and eliminates some commissions that would be paid to another, there is even more possible profit.

Cons of House Flipping

House flipping can get messy fast, both figuratively and literally. The market can quickly change, making a property hard to offload, and flippers must have a keen ear to the ground to be aware of the demands and real estate climate in their community. For flippers hoping to renovate or remodel, unexpected costs can add up quickly, and these projects can require significant work and time in addition to substantial capital.

Because such large sums of money are involved, significant funds can be tied up, preventing investors from taking advantage of other opportunities. And, in the event the property is slow to sell, it can be hard to withdraw the invested funds if an emergent need arises.

Agricultural Land Leasing

Owning and leasing agricultural land is an often-overlooked form of real estate investing that can yield passive income. In areas of the country with booming agricultural business, crop and animal farmers will be seeking land to lease.

Agricultural land leasing can be much less time-intensive than traditional residential rentals, because the farmer will do the lion’s share of the work on the property—from building and maintaining fences to fertilizing the land.

Pros of Agricultural Land Leasing

Especially when interest rates are low, investors can potentially purchase land at terms that make the mortgage payment less than the rental income. Additionally, the owner could enjoy an increase in equity and make a tidy profit when selling the property.

Cons of Agricultural Land Leasing

Similar to being a landlord of residential or commercial properties, one of the greatest risks in this type of real estate investment is tenant vacancy. Unless the land is divided into multiple units, there may be feast or famine when it comes to rent payments.

Although farmland value has generally increased across the country since 1988, there are blips in that upward trend where value decreased, both on its face and when adjusted for inflation. Investors looking to unload properties during these trends may experience loss.

The United States Department of Agricultural forecasts farm income to continue to increase, indicating farmers can support the continued upward valuation of farmland. But given the factors that contribute to farmland value, investors should be very in-tune and educated about this particular market before investing.

Make Real Estate a Piece of Your Portfolio

The takeaway is that there are numerous types of real estate investment opportunities to fit investors’ budgets, taste for risk versus reward, and desire to tie up funds for the long-term. Most real estate investments offer tax benefits not realized from earned income, making them a more efficient way to make month rather than relying on additional earned income.

Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More

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