Hands-Free Real Estate Investments

 Real estate investments offer many avenues for growing wealth. Investors can generate income from rents and see an increase in equity from the appreciation of their property over time. Moreover, unlike stocks and bonds, investors can utilize leverage, using debt (mortgages) to finance assets and pay off these debts gradually. A conventional mortgage requires a 20 to 25 percent down payment, while other loan arrangements may be obtained with as little as 5 percent down.

Investors can also use their property as collateral to acquire new assets. The availability of financing allows businesses and individuals to grow their real estate portfolios exponentially. Further, some real estate investments enable entrepreneurs to build their portfolios without worrying about hands-on management. Investors enjoy their passive income in the form of monthly cash flow.

The prices of US real estate properties are rising despite multiple challenges. The COVID-19 pandemic, inflation, and supply chain complications emanating from the war in Ukraine are affecting the sector’s consumer behavior. Mortgage interest rates in 2022 are approximately 75 percent higher than in 2019. Despite this, the value of homes has risen by 13.4 percent during this period, showcasing the resilience of real estate.

The Mortgage Bankers Association (MBA) predicts real estate prices will continue rising. With this situation, this sector will remain profitable, but the entry for new players may become challenging. However, industry knowledge can boost investors' chances for success. Two investment avenues can help them access this sector’s opportunities hands-free.

The first is investing in real estate investment trusts (REITs). These licensed public companies pool investors’ finances to purchase and operate the property. Entrepreneurs can build their portfolios without owning, operating, or financing assets. The companies collect rent, advertise vacancies, interview tenants, and trade mortgages on exchanges.

Investors’ returns are in the form of periodic dividends. By law, REITs must pay out at least 90 percent of their after-tax profits as dividends, making this option more valuable than many stock-based investments. Additionally, these assets can trade on major exchanges. This means that shareholders wishing to cash out of REITs can do so smoothly and cost-effectively, since they do not need agents.

Regulations govern REITs to ensure fair treatment of shareholders. Each company requires at least 100 investors and primarily focuses on commercial real estate, including office buildings, hotels, and apartment complexes. Investors can choose between equity and mortgage REITs, depending on their preferences.

Equity REITs are the most popular option, dealing with rental and lease properties to generate dividends. Equity REITs, however, are sensitive to economic shocks.

Mortgage REITs, on the other hand, generate income from mortgages or mortgage-backed securities. Interest from these loans service investors’ dividends and organizations still pay out most of their after-tax revenue. This option’s primary drawback is potential changes in interest rates, which may negatively affect earnings.

Second, prospective investors can invest in real estate investment groups (REIGs). Similar to REITs, these assets allow them to own property portfolios without managing or operating their assets. They also pool money from investors, but they operate differently from REITs.

In REIGs, organizations purchase land and develop properties using their own or borrowed funds. They then sell these assets to investors, making them group members. Investors can own multiple properties exclusively, but the company retains the management and operational obligations. The business deducts a percentage of the rental income to generate its returns.

Notably, investors receive risk immunity from this option. Organizations pool a small percentage of their returns to cover vacant units. The main challenge for entrepreneurs is their susceptibility to poor management and the obligation to pay annual fees.