table of contents
View more View more
How to invest in real estate: 5 ways to do it in 2024
Here are five ways the average retail investor, or someone with access to a lot more capital, can make a profit investing in real estate.
Method 1: Traditional/Conventional Investment Model
The simplest way to invest in real estate is to buy or lease a property for the long term and rent it out to residential or commercial tenants.
The process is simple, but requires a large initial investment, followed by annual maintenance and upkeep. Make sure the property is free of legal issues. Acquire it on lease, buy it upfront, or buy it on a loan.
For commercial property, register it at the Registry Office with two witnesses and follow the procedures outlined therein.
Once your property is listed, you can advertise it and spread the availability of the property on the market. Tenants will need to agree and sign a rental agreement, after which the monthly rent will become your passive income from the property.
Having tenants with overlapping lease periods in the same property is a good idea as it helps keep the property occupied at all times. It also helps save money on timely maintenance costs. You can hire a property management company to do all this for you, but at the same time, you will have to pay a fee.
If the property is for residential use, a visit to the registry office is not enough: similar rental agreements must be drawn up for each tenant, and the return on investment is measured based on the monthly rent.
Option 2: Rent out part of your existing property
If you don’t want to incur huge investment costs, you can still start small by renting out a room to a commercial or residential tenant. If an entire floor of your current home is unused, renting it out is a good idea.
However, you will need to deal with the extra traffic that will be generated. If you are a business, renting a portion based on your products or services may result in unsuitable terms for living in the same place. All terms and conditions should be included in the rental agreement.
Option 3: Repair and resell
This form of investment is becoming increasingly popular among experienced general contractors.
If you have the capital to spare, you can invest in commercial or residential properties that require maintenance, fix them up completely, and sell the property at a much better price to a property management company or property management firm. Though the ownership period of the property is relatively short, such an investment can fetch you good returns if you research the market beforehand.
This method has fewer restrictions, such as regular maintenance and registration work, than owning a property forever, but it requires thorough knowledge of the supply and demand of the real estate market, the cost of renovation, etc. Having an experienced partner is reassuring.
Method 4: Invest in real estate through ETFs, mutual funds, and REITs
Real estate investments can be divided into similar categories. You can buy exchange-traded funds (ETFs) or mutual funds that invest in real estate. You can also buy ETFs that invest in real estate stocks, such as publicly listed home builders. Some ETFs also invest in REITs (real estate investment trusts). There are also mutual funds that invest in real estate developers and property management companies. Fund managers passively manage ETFs, while mutual funds are actively managed.
ETFs and mutual funds offer high liquidity and low costs, but the downside is that they may not pay monthly dividends and you may only make a profit if you sell shares that have appreciated in value. The main advantage of ETFs and mutual funds is the low cost of investment.
REITs, on the other hand, allow investors to invest in multiple real estate assets through a single fund. REITs are investment trusts that consist solely of real estate assets or loans secured by real estate. Various investors pool their money in a REIT and the dividends earned are distributed among the investors based on the rate of investment in the fund.
REITs allow for relatively small investments, but they rarely offer yields that are comparable to or better than those of equity-oriented products. Additionally, investors have no control over how their investment is diversified across all of the REIT's assets.
All of these options involve real estate and are therefore relatively stable, although the expected returns may only suit some people's long-term investment goals.
Option 5: Fractional Ownership
This trend has only accelerated since the success of REITs in India. Real estate remains one of the preferred reinvestment destinations in India and fractional ownership allows investors to park their money in real estate while significantly reducing the cost of investment.
Similar to REITs, fractional ownership involves multiple investors, but they focus on one property at a time. Real estate investment companies that deal with fractional ownership often scout properties based on detailed market analysis and the area's past rental performance. The property is then further analyzed based on the income it can generate in the future. Once the property's growth prospects are sufficiently established, it is listed as a public investment on the company's website.
The company sets up special purpose vehicles (SPVs) to manage investments and transactions in specific assets. The SPV also covers maintenance and upkeep. The investments are typically made in commercial real estate with leases of three years or more.
For certain specialty commercial properties, lease terms can be 10 years or more. With longer investment horizons, fractional ownership can provide rental yields of up to 8%-10%, which equates to an internal rate of return (IRR) of 16%-20% over a five-year investment period.
Fractional ownership allows investors to diversify their portfolio across multiple asset subclasses, from commercial office space, warehouses, laboratories, parking lots to industrial floors. Exiting a fractional ownership investment is easy: you can use the management company's portal or services to transfer ownership by selling your portion, or wait until a new tenant moves in and then decide to keep the asset or let it go.
Important Factors to Consider Before Investing in Real Estate
5 questions to ask yourself before investing in real estate
What type of property are you looking for?
Before investing in real estate, it makes sense to start with the type of property you want to own.
Residential Industrial Retail Commercial
Is the property’s location easily accessible or will it be valued in the future?
Most investors prefer to buy properties that are easily accessible or have road access. Properties along roads generally appreciate in value in the future. Also, for properties that are easily accessible, say a bungalow, consider the age and condition of the property.
Do you have enough money to invest in real estate?
Ask yourself if you have the required funds for real estate investment, whether you are buying a property with your ready-to-use savings or applying for a mortgage. Banking institutions prefer borrowers with a stable income, good credit score, and repayment history.
Are there any legal issues with this property?
Investors should thoroughly check whether the seller has all the documents related to the property, as this will protect the investor's interests in the long term, as it will allow them to establish the ownership of the property, to carry out financial transactions such as leasing in the future, to legally settle any disputes that may arise, and to protect their investment from fraudulent activities.
Please note that financial institutions will only approve your loan application after the property deed is verified.
Are market conditions favorable for real estate investment?
Real estate is one of the main drivers of the stock market, and the stock market also has a significant impact on real estate. Changes in market conditions have a direct impact on real estate prices.
Which option should you choose?
While real estate can be beneficial as a form of investment, it's important to understand what works for you. It can be based on how much money you're willing to invest, the type of liquidity you desire, your cash flow regularity, and your risk tolerance. Leasing and flipping properties requires a significant investment and experience, so you'll need to have a strong understanding of the local real estate market. Additional responsibilities may include soliciting tenants, managing the property, and finding buyers.
Mutual funds and ETFs are great for people who don't like to invest a lump sum and want to invest slowly and steadily, but they don't have regular cash flows and liquidity is based on the value of the shares at the time of redemption.
REITs pay dividends quarterly, although some pay monthly. They are also relatively inexpensive in terms of the minimum ticket size for investment. The asset mix of a REIT must remain constant. Asset losses must be absorbed at the time of investment. There is no option to selectively invest only in profitable assets.
Fractional ownership is becoming more popular as it helps investors choose between a profitable asset or selling their ownership interest when they decide their expectations are not being met.
Regardless of which option you choose, understand that real estate only pays off best if you invest in it for the long term. Apart from the option to fix it up and resell, you will need to hang on to the property for at least a year or two to see any profits from your real estate investment.
Frequently Asked Questions (FAQ)
How much can a real estate investor make?
Investors earn more from the appreciation of property values over time. Returns vary between residential and commercial properties depending on whether the property is rented or leased.
What are the pros and cons of real estate investing?
Investing in real estate is one of the best ways to diversify your portfolio. Real estate can generate profits as the property value increases over time. Renting out your property can provide a steady income and has tax benefits.