How to Invest in Real Estate: 5 Ways In 2024
Here are the five ways for an average retail investor or even someone with access to much more significant capital to invest in and earn a return on real estate.
Way One: Traditional/Conventional Investment Model
The simplest way to invest in real estate is to buy or lease an asset for the long term and then rent it out to tenants–residential or commercial.
The process is simple but needs a significant initial investment and involves yearly maintenance and upkeep costs. Ensure that the asset is free from any legal hassles. Acquire it on a lease, buy it upfront, or through a loan
If it is a commercial property, register it with two witnesses at the sub-registrar’s office and follow the procedures outlined there.
Once the property is registered, you can advertise it or spread the word about its vacancy in the market. The tenant will have to accept and sign the lease agreement, and then the monthly rentals will be your passive income from the property.
Having tenants with overlapping lease periods in the same asset is a good idea so the property always remains occupied. This also helps with timely maintenance costs. You could even get a property management firm to handle all this, but you must pay their commission charges simultaneously.
If the property is residential, visiting only the sub-registrar’s office is unnecessary. Similar rental agreements will need to be drawn up for every tenant, and your returns from the investment will be measured based on the monthly rentals you receive.
Way Two: Renting Out a Portion of Your Existing Property
Even if you do not want to be burdened with significant investment costs outright, you can start as small as renting a room to commercial or residential tenants. If you have a whole floor of your current house lying unused, it is a better idea to rent it out.
However, you will have to deal with the extra traffic generated. If it’s a business, and you have rented the portion based on their product or service, the conditions might not be conducive to living in the same place. All your terms and conditions need to be included in your rental agreement.
Way Three: Fix-and-Flip
This investing mode has been gaining popularity among people with experience in general contracting.
If you have the capital to spare, you can invest in a commercial or residential property that needs much maintenance, fix it up for good, and sell the asset at a much better price to asset/property management firms. The ownership of the asset is for a relatively shorter term, but if one has done their homework on the market beforehand, this kind of investing can generate good returns.
This method has fewer constraints regarding regular maintenance, registration work, and the like than owning a property forever. However, it requires you to be familiar with the market’s demand for and supply of real estate and the cost of the renovation work that you will attempt. Having an experienced partner in this helps.
Way Four: Investing in real estate via ETFs, mutual funds, and REITs
Such an investment in real estate can be clubbed into a similar category. Exchange-traded funds (ETF) and mutual funds can be bought that are themselves invested in real estate. Buying ETFs that invest in real estate stocks, such as publicly-traded home builds, is possible. Some ETFs invest in REITs (Real Estate Investment Trust) as well. You can find mutual funds that invest in real estate developers and property management firms. While a fund manager passively manages ETFs, mutual funds are actively managed.
ETFs and mutual funds offer high liquidity and low costs. Still, the downside is that there might not be any monthly dividends, and you may only receive returns once you sell the appreciated shares—the advantage to ETFs and mutual funds primarily lies in their low investment cost.
On the other hand, REITs allow investors to invest in multiple real estate assets through a single fund. A REIT is a mutual fund made entirely from real estate assets or loans secured by real estate. Various investors can pool their resources into a REIT, and the dividends earned are divided among the investors based on the percentage of their investment in the fund.
While REITs also allow for a comparatively smaller investment ticket size, they rarely provide yields that can match or be better than equity-oriented products. Additionally, the investor has no control over how the investment is spread across all the assets in the REIT.
All these options still involve real estate, so that they will be relatively stable. However, expected returns might only suit some people’s long-term investment goals.
Way Five: Fractional Ownership
This has been picking up pace since the success of REITs in India. Real estate is still among the preferred reinvestments in India, and fractional ownership allows investors to park their money in real estate while significantly reducing the investment cost.
Like REITs, fractional ownership involves multiple investors but focuses on one asset at a time. Property or real estate investment firms that deal in fractional ownership often scout out assets based on detailed market analysis and historical rent performance in the area. The asset is then further analyzed based on the returns it can generate in the future. After satisfactorily ascertaining that the asset has good growth prospects, it is listed as an open investment on the firm’s website.
The firm creates a Special Purpose Vehicle (SPV) to manage investments and dealings with a particular asset. The SPV also includes any maintenance and upkeep costs. This investment is typically done for commercial properties with lease agreements of three years or more.
Lease terms can be as long as ten years or more in specific specialty commercial properties. Upon longer investment terms, fractional ownership can generate a rental yield of up to 8% to 10%. That can be equivalent to an internal rate of return (IRR) of 16% to 20% over a five-year investment period.
Fractional ownership allows investors to diversify their portfolio across multiple asset sub-classes, from commercial office spaces, warehouses, labs, and parking lots to industrial floors. Exiting an investment in fractional ownership is easy. You can use the management firm’s portal or services to transfer ownership via the sale of your portion or wait until new tenants move in to decide whether to hold on to or let go of the asset.
Key Factors To Consider Before Investing In Real Estate
Here are five questions you should ask yourself before investing in real estate
What type of property do you want?
Before investing in real estate, starting with the kind of property you want to own is obvious.
Lease terms can be as long as ten years or more in specific specialty commercial properties. Upon longer investment terms, fractional ownership can generate a rental yield of up to 8% to 10%. That can be equivalent to an internal rate of return (IRR) of 16% to 20% over a five-year investment period.
Fractional ownership allows investors to diversify their portfolio across multiple asset sub-classes, from commercial office spaces, warehouses, labs, and parking lots to industrial floors. Exiting an investment in fractional ownership is easy. You can use the management firm’s portal or services to transfer ownership via the sale of your portion or wait until new tenants move in to decide whether to hold on to or let go of the asset.
Key Factors To Consider Before Investing In Real Estate
Here are five questions you should ask yourself before investing in real estate
What type of property do you want?
Before investing in real estate, starting with the kind of property you want to own is obvious.