When you invest in real estate, you generally have two options: “hard” investments and “soft” investments.
Hard investments are where you take direct control of real estate, whether through buying a US-based apartment, a Mexico-based vacation rental or even a Tuscany luxury real estate.
“Soft” investments are where you invest in real estate indirectly, through owning REITs or through buying shares in companies that invest in property.
When you make a hard investment in property, you stand to make money in two ways. Firstly, if you rent the property, you will make money on a monthly basis.
Secondly, if you sell the property for more than you bought it, you stand to make a profit from the appreciation in value.
Many investors are drawn to the idea of getting a mortgage, and then renting out a property so that the rental price covers mortgage payments.
In thirty years, the mortgage will be paid off and the house will have appreciated considerably in value. This mode of thinking is appealing, but it ignores a lot of complexities. Firstly, if your tenant does not pay the rent, you still have to pay the mortgage.
Secondly, you will be responsible for replacing the kitchen every few years, replacing the broken boiler, and all those other costs.
When you get mortgages by AmeriSave, explains the lender, “you need to be aware of the concept of leverage. You might put down 20% of the value of a property in the form of a deposit, and the rest if borrowed.
This means that you are seeing more pronounced exposure to the risks and rewards, because you benefit from the multiplier effect that comes from using a loan to buy another financial asset.”
When you are considering investing in real estate, you should also consider making“soft” investments. Soft investments put less demand on your time, and still allow you to access the upside of the real estate market.
“Those with smaller portfolios who want to invest in real estate generally should stick with real-estate investment trusts, or REITs, exchange-traded funds, shares of real-estate-focused companies and other investments that provide more liquidity than direct property ownership,” wrote Gregory Zuckerman in the Wall Street Journal.
“Properly researching and monitoring hard real-estate investments generally requires a significant commitment of time, making shares more attractive for most individual investors.”
Many REITs can give you dividends of up to 5% of the value of the property, which means that you can see strong results from early on in the process.
The dividend is a distribution to shareholders that is usually based on the profit that the business has made in the trading period, less any money that the management wishes to retain for future investments. If the company’s portfolio does particularly well, the resell value of your REITs could increase, just as if you bought the properties directly.
When you make soft investments, you are effectively buying a small slice of lots of properties, so you are less exposed to the risks of one thing going wrong.
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