Real Estate Terms Beginners Should Know
When learning how to invest in real estate, one of the first things you might notice is the abundance of industry-specific jargon and acronyms. Although there are many, it is imperative to know at least the basics of real estate terminology so that you can speak the same language as your new real estate colleagues.
Here are some terms to help you get started:
How To Invest In Real Estate Online & Make Money
Investing in real estate online is not unlike any other investment strategy: there are no guarantees. Due diligence, patience, and a keen eye for quality assets must be exercised to increase ones chances of making money online with real estate investing. Outside of the traditional qualities that make up a good investor, however, there are a few more things online real estate investors need to be aware of if they want to increase their chances of realizing profits:
Real Estate Investment Trust
The market for REITs is well established and includes people through stock brokerage accounts and retirement plans. It is typically a company that owns and operates real estate. So, when you are investing in the company but not just the real estate property. They pay out the investors in dividends.
However, the downside of REIT investments is the absence of the ability to benefit from the 1031 exchange, also known as deferring taxation on the capital gains made from the sale of shares.
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How Many Reits Are There In The World
A total of 865 listed REITs with a combined equity market capitalization of approximately $2.5 trillion are in operation around the world. As the following charts show, REITs have grown dramatically in both number and equity market capitalization over the past 30 years going from 120 listed REITs in two countries to 865 listed REITs in more than 40 countries and regions.
In particular, Asia has had strong uptake of REITs, growing from 31 REITs in six countries and regions in 2005 to 216 REITs in 11 countries and regions in 2021. The Middle East also has demonstrated meaningful growth since 2015 with the addition of REITs in Saudi Arabia and Oman.
Read About Real Estate For Beginners
If you truly want to start a real estate business, learning as much about the industry as possible is crucial. There are countless investing books, blogs, and magazines that are a great place to start. While there are a ton of options out there, try not to overwhelm yourself at first. Instead, try grabbing a few investing books or subscribing to a real estate newsletter and designate just 15 minutes a day to reading something new. One thing all successful real estate investors have in common is that they never stop learning. This continual education mindset will serve you well throughout your career as an investor. Check out this list of real estate investing books for a few recommendations to get you started.
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What Are The Pros Of Residential Reit
There are many benefits to investing in a residential REIT. Here are some of the most appealing aspects to expect as an investor looking into getting into a residential REIT:
- Diversify Your Portfolio. REITs offer investors the chance to diversify their portfolios across different sectors and asset types. By investing in a REIT, you can add a new real estate asset type to your portfolio. Not only does it create a balanced mix in your investment portfolio, but it can also help to mitigate risk in different real estate asset types.
- Attain Dividend Payments. One major benefit of investing in a REIT is the ability to receive regular dividend payments. Unlike other investments, such as stocks or bonds, REITs are known to pay around 90% of their taxable income as dividends to their shareholders. This makes them an attractive investment for income-seeking investors.
- Get Recession Resistance. REITs have also been shown to be relatively resistant to economic downturns. This is due to different factors, including the fact that REITs are required to pay out such a high percentage of their income as dividends, as well as the fact that they tend to be diversified across different sectors and asset types.
The Defining Questions Of Real Estate Investment
We could almost say that making money in real estate is automatic, but that would be going too far. There are risks, but if the original investment is done right, real estate provides a better risk reward ratio than most other investments.
Investors need only be disciplined in their buying, have time to allow the investment to produce and understand some important principles. That last point is where the Real Estate Investment Calculator comes in.
The calculator helps to answer the two defining questions for an income producing property investment:
Based on the price, my research, and my assumptions, is this property likely to make a profit? and
Will this investment cash-flow?
The calculator is designed to evaluate properties to be purchased, held and rented. It is not designed to evaluate our personal homes or flips.
Before we get started with the calculator, we should be clear about a few terms:
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Common Ways To Earn Passive Income
Investments in financial products or starting businesses that generate funds outside of your regular job are ways to create passive investment income.
Keep careful records of your income residuals to avoid paying unnecessary taxes. Those that fall under passive income may vary depending on their source.
Here are some of the best investments for passive income that investors can earn from:
Owning An Online Business
Similar to owning a traditional business, owning an online business can generate income for your investment as well.
Commonly, this involves earning income from display advertising, affiliate marketing, course offerings, training, services, and many other inventive ways for making money online. You can even be a financial content writer.
The key is to find a niche audience with problems you can uniquely address. Once you build this audience around your online business, you can have a dedicated audience who come to you directly to resolve their problems.
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S You Need To Take To Start Investing In Real Estate
If youre committed to the idea of real estate investing, youll need to establish a plan for getting started. These steps should help you with your goal:
Not Trusting The Numbers
A lot of first-timers want to operate off of their gut. The perfect property becomes available, and while the numbers say the property is overvalued or wont produce income, they still think its the right price based on what they know about the local market.
Here are a few real estate investing rules of thumb that have stood the test of time:
Get a more detailed look at these rules of thumb in the video below:
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Understanding Different Types Of Real Estate Investments
When you think of real estate investing, buying an investment property and renting it out might be the first thing you think of and while that is a viable option, its just a drop in the ocean in terms of all the real estate investment choices at your disposal.
Most real estate investments fall under two general categories: active or passive. Active investments are ventures that will cost you not only your money but also likely your time and potentially physical labor.
Flipping houses and managing residential rental properties are examples of active investing because they require a lot of effort from you as the investor. Active investments tend to be a little more lucrative than passive ones, but they require more cash flow and are typically riskier.
Passive real estate investments are opportunities that dont require you to personally own or manage a property. Investing in real estate investment trusts , real estate funds and real estate crowdfunding are considered passive. These methods allow you to invest in real estate without having to commit a lot of money upfront or manage any properties.
Whether you have the time and money to spend on an investment property or not, there are many ways to get involved in real estate investing. Lets explore a few of the options available to you.
Rent Out Your Home Room Or Storage Space
If you own real estate right now such as a home or vacation home its easier than ever to turn that into an investment property.
Options here include:
- Airbnb and VRBO. Generate income renting out your home, apartment or even a single room inside your home. Learn more in our guide to starting an Airbnb business.
- Neighbor. Allows you to rent out spaces in your home for storage, such as a garage or basement space. Learn more in our Neighbor review.
Renting out an existing asset through Airbnb or VRBO is the ideal way to start for someone who wants to get into vacation rental property investing.
Renting out your home or apartment for a weekend a month allows you to understand how these platforms work, and then when it comes time to own a vacation property of your own, youll be better equipped to evaluate the potential income not to mention, youll have valuable experience in working with renters.
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Real Estate Trust Investments
Real estate trust investments, or REITs, are companies that operate as trusts and oversee a number of real estate investments. Unlike many of the previous options, REITs are considered passive investments. Rather than owning properties yourself, you can invest in a REIT and generate income from the properties managed by the company.
Some REITs are listed on the New York Stock Exchange and are publicly traded. These companies typically specialize in commercial properties, such as malls, offices and hospitals, so if youre interested in commercial real estate but lack the capital to invest in a property yourself, a REIT can be a great option.
Pros
- You can make extra cash without ever having to see, manage or own the property personally. The workload of active real estate investments is not your responsibility when investing in a REIT.
- Depending on the REIT you invest in, you can expect to make steady, albeit smaller, bits of income.
- Many REITs are technically stocks, but since theyre real estate investments, they can help diversify your portfolio while maintaining flexibility and liquidity.
Cons
- REITs are best utilized as long-term investments that yield you growing amounts of cash over time, so if you want to make a lot of money quickly, REITs will be of little help.
- REITs are taxed higher than qualified dividends.
- You have little control over your investments with a REIT, since you dont own or manage any of the properties or loans yourself.
Learn More About Smart Investments With 1031 Crowdfunding
Real estate investment carries some risks, although it can also bring potentially high returns. Researching the real estate market thoroughly is essential to making informed investment decisions.
1031 Crowdfunding is an online marketplace for 1031 exchange investments, offering vetted properties and expert help from our team of securities and real estate professionals.
Our management team has been involved in over $2.2 billion in real estate transactions, equipping us to excel in various real estate investment scenarios. If you are interested in passive real estate investment, register with 1031 Crowdfunding.
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What Are The Risks Of Mreit Investing And How Can You Manage Risk
Most mREITs are registered with the SEC and are required to publish regular financial statements for review and monitoring by investors and analysts. The business risks that mREITs face are similar to those of other financial firms. mREITs have considerable experience managing many types of risk:
mREITs play an important role in the economy by helping to facilitate the housing market by investing in mortgage-backed securities. In fact, mREITs help finance 1 million U.S. homes. On the commercial side, mREITs invest in commercial mortgages helping to finance the buying and selling of income-producing real estate.
mREITs provide a simple way to hold an equity investment in the mortgage market with the liquidity and transparency of publicly traded equities advantages not available through direct investment in mortgage loans and mortgage-backed securities.
There are other mREITs whose shares are registered with the SEC but are not listed on any stock exchange. These public non-listed REITs are typically sold to investors by a broker or financial advisor. Mortgage REITs also can be privately held.
REIT dividends can be taxed at different rates because they can be allocated to ordinary income, capital gains and return of capital. The maximum capital gains tax rate of 20 percent applies generally to the sale of REIT stock. Learn more about taxes and REIT investment.
What Is Passive Income Real Estate
Passive income real estate is a strategy through which an investor can create earnings without having to be actively involved. The term passive income is used loosely, as the level of required activity and involvement varies based on the investment type. Some common examples of this real estate income include rental properties or earnings made from investment portfolios.
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How To Buy And Sell Reits
You can invest in a publicly traded REIT, which is listed on a major stock exchange, by purchasing shares through a broker. You can purchase shares of a non-traded REIT through a broker that participates in the non-traded REITs offering. You can also purchase shares in a REIT mutual fund or REIT exchange-traded fund.
Consider Flipping Investment Properties
This is HGTV come to life: You invest in an underpriced home in need of a little love, renovate it as inexpensively as possible and then resell it for a profit. Called house flipping, the strategy is a wee bit harder than it looks on TV. It’s also more expensive than it used to be, given the current higher cost of building materials and mortgage interest rates. Many house flippers aim to pay for the homes in cash.
There is a bigger element of risk, because so much of the math behind flipping requires a very accurate estimate of how much repairs are going to cost, which is not an easy thing to do, says Meyer.
His suggestion: Find an experienced partner. Maybe you have capital or time to contribute, but you find a contractor who is good at estimating expenses or managing the project, he says.
The other risk of flipping is that the longer you hold the property, the less money you make because you may be paying a mortgage without bringing in any income. You can lower that risk by living in the house as you fix it up. This works as long as most of the updates are cosmetic and you dont mind a little dust.
» Which is better?Real estate vs. stocks
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How To Begin Real Estate Investing With Crowdfunding
Fundrise is considered the first company to crowdfund real estate investments successfully and is currently the largest real estate crowdfunding platform. It remains a leading service for helping people to start investing in real estate.
Fundrise acts similarly to a REIT where you get to invest in real estate portfolios. With Fundrises Starter Portfolio, the minimum to invest is only $10.
Theyll help you create a customized portfolio based on your personal goals and you can track your performance and view updates in real time with this passive income app.
Consider signing up for an account to learn more about the service and whether this alternative investment option would be a good fit for your investment portfolio.
Related: 10 Best Fundrise Alternatives
If youre in a high income bracket, the real estate crowdfunded investment company EquityMultiple may be a good fit for you. The minimum investment for this company is $5,000 and they focus on individuals interested in commercial real estate investing.
However, that same $5,000 can also make money on Fundrise and may involve less effort on your end.
