Real Estate
12 min read
Real estate investments have long been a popular way for investors to build wealth, and for a good reason – the real estate industry is known for its stability and ability to produce consistent cash returns and long-term appreciation.
What is a real estate investment?
Real estate investing is a broad term that can be used for several kinds of investing. The most popular and common form of real estate investing is the owning and leasing of residential rental properties. However, some investors choose other asset classes such as industrial property, multifamily commercial assets, retail, hospitality, agricultural, offices, and land banking. Alternatively, some use real estate investment trusts (REITs) as vehicles for investing in real estate. There’s no single type of real estate investment or single best investment class. However, most investors target housing because of its historical stability, appreciation, and cash flow potential.
The real estate industry’s stability is partly due to the fact that people will always need a place to live. Whether renting or owning, the demand for housing is a fundamental part of human existence, creating a stable market for real estate investments. Also, real estate is a physical asset that cannot disappear overnight. Unlike stocks, which can be affected by market volatility, real estate is a tangible asset that can be seen and touched, providing investors with a sense of security. Its tangibility makes it far less susceptible to market fluctuations and provides investors with the potential to generate steady returns over the long term.
Most real estate investments can produce cash returns through rental income, which can be a significant source of passive income for investors. Rental income can provide a steady cash flow stream, allowing investors to pay off mortgages, cover maintenance costs, and eventually generate profits. Additionally, real estate investors benefit from the appreciation of their properties over time. Appreciation refers to the increase in value of a property over time, which can result from factors such as inflation, population growth, increased demand, and improvements to the property.
Real Estate is Inflation Resistant
One of the key benefits of real estate investing is that property tends to be inflation resistant. In other words, while prices of goods and services may rise over time due to inflation, real estate values tend to rise with it or even surpass the rate of inflation. This is because the value of a property is largely determined by the cost of construction materials and labor, which increase in price along with inflation. Therefore, real estate is not only a great asset class for building wealth but also for wealth preservation.
For reference, the US median house price in 1970 was $7,354, which is $93,621 inflation-adjusted to 2023, according to the US Bureau of Labor Statistics’ CPI Inflation Calculator. However, today, the median house price is $428,700. Therefore, it’s evident that home prices have historically appreciated over four times the rate of inflation. While past performance is not a reliable indicator of future performance, the current lack of inventory in the US housing market is a strong indicator that home prices and rental rates will remain resilient for the near future.
The potential for long-term wealth creation makes real estate an attractive asset class for many experienced and new investors. With the right strategies, investments in real estate can produce consistent returns and appreciation over time. Real estate investing is an excellent option for those looking to build a steady stream of passive income or become financially independent.
Due Diligence in Real Estate Investing
Real estate investments can provide investors with financial security, steady cash returns, and long-term appreciation. However, like any investment, it is essential to do your research before entering the real estate market – a thorough understanding of the asset class, location, and current market conditions is necessary for success. Real estate investing is not without its risks, however. Like any investment, real estate can be affected by market conditions, changes in demand, and other factors that can impact the property’s value. Therefore, it’s important for investors to conduct thorough research and due diligence before making any real estate investments and to work with experienced professionals who can help them navigate the complex world of real estate investing.
What is a REIT in real estate investing?
Real Estate Investment Trusts (REITs) are investment vehicles that pool investors’ funds to purchase, manage, and/or finance income-producing real estate. Think of a REIT as a mutual fund, but instead of being comprised of corporate stocks, it holds income-producing real estate. REITs typically invest in all types of real estate, including office buildings, shopping centers, apartments, single-family rentals, industrial facilities, and more. The primary benefit of investing in a REIT is that it allows investors to invest passively and diversify their real estate portfolio without needing large amounts of capital. Additionally, REITs are professionally managed by asset managers with knowledge and experience in the real estate market.
What is multifamily real estate?
Multifamily real estate has recently become the hottest asset class in real estate investing for private investors and institutions. A multifamily property is actually classified as a commercial property (as opposed to residential, as many assume). Any apartment building or townhouse complex on a single title with more than four units is classified as a multifamily property.
Multifamily real estate offers investors the potential for steady cash flow and long-term appreciation. Because of its comparatively higher tenant turnover and, therefore, the potential for rent growth when market conditions are good, multifamily properties are attractive to institutional investors and offer opportunities for small investors to pool their resources and invest in larger, professionally managed multifamily properties. Additionally, these properties are attractive because of their built-in diversification. With several units, multifamily properties can maintain lower vacancy rates as while one unit is vacant; there should be several others that are occupied and generating income.
Banks view multifamily properties as a stable asset class and are, therefore, more inclined to provide attractive loan products for this asset class. As we have seen with the recent shifts in interest rates, financing can make or break an investment, whether it’s for private or institutional investors. In addition, multifamily properties are a great asset class that allows investors to use leverage to grow their portfolios.
What is leveraging real estate?
Leveraging real estate is a strategy where investors use borrowed capital to purchase and finance income-producing real estate. This strategy allows an investor to make a larger investment with less capital outlay, as the borrowed funds are used to fund the property’s purchase and/or improvement. Leveraging can help investors maximize returns while reducing risks associated with investing in real estate. Therefore, it’s important to understand and use the right financing strategy when leveraging real estate investments.
It’s also crucial for investors to understand that leveraging can increase risk and reward; if an investment goes sour, you may lose your capital and be responsible for repaying the debt used to finance the property. Therefore, investors should consult with qualified financiers and real estate professionals before engaging in any leveraging activities.
What is equity in real estate?
Equity in real estate refers to the difference between the market value of a property and the outstanding amount of any mortgages or loans secured against it. It is the amount of ownership value that an individual or entity has in the property.
For example, if a property is valued at $500,000 and the owner has a mortgage of $300,000, then the equity in the property is $200,000. This means that the owner has $200,000 of ownership value in the property, which can be used as collateral for other loans or as a source of funds for personal or business purposes.
Equity can also be increased over time through property appreciation or by making mortgage payments. Additionally, improving a property or paying down the mortgage can increase equity.
Equity is an important concept in real estate investing as it is the strongest indicator of value to the owner. It provides a measure of the financial health of a property and its potential value for future resale or rental income. Additionally, it allows investors to leverage the value of their properties to obtain additional funding for other investments or expenses.
What is a good return real estate?
The definition of a “good return” in real estate can vary depending on location, market conditions, investment strategy, and individual goals. For example, investors who make safer investments will likely be more satisfied with a lower return rate, while investors who take bigger risks will want a higher return in exchange for their risk.
In real estate investing, capitalization rates, or cap rates, are commonly used to discuss the returns a property can provide. The best way to learn about cap rates is to talk to local investor realtors who understand your market and the current market rate.
What is a cap rate?
A cap rate is a ratio of the net operating income (NOI) divided by the current market value of a property. Generally, higher cap rates indicate higher profits and returns, while lower cap rates may indicate lower returns but are often associated with less risk.
A good cap rate can vary depending on the location and market conditions. Some areas may have higher cap rates, indicating a potentially greater return on investment, while others may have lower cap rates. Got example, in Florida, a reasonable cap rate for a multifamily property can range from 3.5-4.5%. Generally, the higher the cap rate in Florida multifamily properties, the less attractive the asset. Class B and Class C multifamily assets will have higher cap rates than Class A.
Single-family home cap rates greatly depend on where an investment property is located, the condition it’s purchased in, any additional work and equity put into the property, and how it’s managed. Therefore, when investing in single-family properties, working with an investor friendly real estate agent who understands how to source excellent properties is important.
Ultimately, determining a good cap rate depends on the individual investor’s goals, risk tolerance, and investment strategy. Investors must thoroughly research and consult with experts before making any real estate investment decisions.
The benefits of investor real estate agents.
Not all real estate agents know how to find great investments, unlike great primary residences.
If you’re considering investing in real estate, working with an investor real estate agent is essential for ensuring you make the right investment decisions. Unlike a regular real estate agent who may have a general understanding of the market, an investor real estate agent specializes in identifying properties that offer the strongest returns on investment. They have the knowledge and experience to evaluate the property’s potential for rental income, future appreciation, and overall profitability. Additionally, they can provide valuable insights into market trends, local regulations, and potential risks that could affect your investment. By working with an investor real estate agent, you can be confident that you are making informed decisions based on accurate information and expert guidance, which is crucial when investing in real estate.
What real estate investments have the highest cap rate?
Investment properties with the highest capitalization rates will often have a higher risk. Alternatively, investors will get higher cap rates in markets where appreciation has been historically low. For example, cities like Toledo, OH, and Detroit, MI, are two cities where investors can find great cap rates and cash returns. However, the values of their properties have experienced minimal growth, and rent growth has also been slow.
Florida investment properties offer a desirable balance between cap rates and appreciation. Because Florida has benefited from strong population growth, demand for homes and rental properties has grown significantly over the past few years. As a result, real estate investors are turning towards Florida for its balance of risk, reward, and return.
What is turnkey real estate?
Turnkey real estate is a term applied to properties that are either new construction or fully renovated and ready for occupation. Additionally, it’s often applied to properties that are not just ready for occupation but already leased. Many investors are attracted to turnkey real estate as it offers a low-risk investment opportunity with minimal effort. The investor can purchase and close on the property quickly, then immediately start collecting cash flow from their tenants.
One of the main benefits of investing in turnkey real estate is that it allows investors to enter the rental property market without dealing with the challenges and risks associated with managing renovations or finding tenants. Additionally, turnkey properties are often located in areas with strong rental demand, which can provide investors with a steady stream of rental income.
Another benefit of turnkey real estate is that it often has pre-established property management upon purchase. Having property management in place is incredibly helpful for new and remote investors. Investors who live in other areas of the country will find it difficult to self-manage their investment properties without the assistance of a local professional.
Turnkey real estate investments are prevalent in markets like Florida, where investors can benefit from strong rental demand and comparatively affordable purchase prices. With turnkey investments, investors can benefit from both high cap rates and potential appreciation in the future.
What is a tax deferred exchange in real estate?
Did you know that you can sell one property, then purchase another, and not have to pay capital gains on the sale of your initial property? A tax deferred exchange in real estate, also called a 1031 exchange, is a real estate strategy that allows investors to upgrade their investment properties and defer capital gains.
Here’s how a tax deferred exchange in real estate works:
Let’s say you own a rental property and want to sell it for $500,000. You originally purchased the property for $300,000, so you have $200,000 in capital gains. If you were to sell the property without a 1031 exchange, you would owe capital gains taxes on that $200,000 in gains.
However, if you decide to do a tax deferred exchange, you can defer paying those taxes by using the proceeds from the sale to purchase another “like-kind” property within a certain time frame. The definition of “like-kind” in real estate is fairly broad, meaning that you can exchange a commercial property for a residential property, land for a warehouse, or a house for an office building, as long as the properties being exchanged are considered investment properties (they can’t be a primary residence).
To complete a tax deferred exchange, there are a few rules you must follow:
- You must identify potential replacement properties within 45 days of selling your original property.
- You must close on the replacement property within 180 days of selling your original property.
- The value of the replacement property must be equal to or greater than the value of the property you sold.
- You must use a qualified intermediary to hold the proceeds from the sale of your original property until the purchase of the replacement property is complete.
- It’s important to note that a 1031 exchange does not completely eliminate your tax liability – it simply defers it. When you eventually sell the replacement property, you will owe taxes on the original gains plus any additional gains you may have made on the replacement property.
There are a few exceptions to the like-kind exchange rule, such as personal residences or vacation homes, but in general, tax deferred exchanges can be a powerful tool for real estate investors looking to grow their portfolio and defer taxes. It’s a tax strategy often used by investors who want to build generational wealth, as when an investor passes away, their heir’s co0st basis is reset, and no capital gains are ever due.
It’s also important to work with a qualified tax professional and experienced investor real estate agent tax deferred exchange. The rules can be complex, timelines are narrow, and mistakes can be costly. But if done correctly, a tax deferred exchange can be a valuable tool for real estate investors looking to grow their wealth while minimizing their tax liability.
Work with an investor friendly real estate agent for a successful investment.
When buying real estate investments, you need to work with an investor real estate agent with an in-depth understanding of your market and your investment criteria. Investor realtors should be looked at as a part of your investment team. An investor real estate agent will have the resources, contacts, and knowledge to help you find profitable investment opportunities.
Investor realtors can provide valuable insights into market trends and conditions, evaluate properties for their potential cash flow or appreciation in value, negotiate an offer that meets your needs, as well as structure financing options tailored to your goals. They understand the rules and regulations that apply to investment properties.When buying an investment property, ensure you’re working with a qualified investor realtor like Oak Avenue who can help you maximize your profits while minimizing your risk.