By Paul Bandong 9:24 am September 6, 2014

Investing in real estate has become increasingly popular over the past five decades. Housing can be more than just a home; it can also be a source of income. Why choose real estate as an investment? Cash flow, debt reduction and equity build-up, appreciation, tax benefits, and leverage.

There are a number of ways to invest in real estate, rental properties, real estate investment groups, real estate trading or flipping, and Real Estate Investment Trusts.

Rental properties

Rent payments provide a steady stream of income that can be considered over time as residual income. Assuming the rental income covers the monthly mortgage payment, property taxes, insurance, repairs and maintenance costs, the positive cash flow difference would be profit.

Even at break-even, inflation can make this a good investment. At a 7 percent annual appreciation rate each year, a $200,000 dollar property would double in value in ten years.

Factors affecting this investment are vacancy rates, maintenance, repairs, or bad tenants. Owners can do the maintenance, repairs, advertising vacancies, interviewing of potential tenants themselves or hire a property manager (adding another cost to ownership). Not all investors want to be landlords.

Real Estate Investment Groups

For those who want to own rental properties, but dont want to be landlords, joining a real estate investment group a company who buys or builds apartments or condos and allows investors to buy in may be the right option.

The company operating the investment group manages all the units (maintenance, repairs, filling vacancies, etc.) in exchange for a percent of the monthly rents. Investors can typically own one or more units. There are several versions of investment groups and there may be additional fees.

Real Estate Trading or Flipping

Reality television shows have shown both the upsides and downsides of flipping houses in various regions of the country. The key is buying properties that are undervalued or in hot selling markets. Many investors look for properties that have enough intrinsic value to turn a quick profit without modifications; others look for properties that they can add value by renovating them.

The latter case can be more time and money intensive. The challenge to the flipper investor is the length of time it takes to unload the property at the desired price. Many get into the property with a small investment, but do not have enough cash on hand to pay the mortgage on the property for a long term; the longer it takes to flip the house the more the mortgage payments (and renovation costs) cut into the profitability of the project.

Those investors dependent upon contractors and subcontractors often miscalculate the time/workload/cost of getting the necessary tasks done on time and on budget.

Real Estate Investment Trusts (REIT)

Congress established REITs in 1961. REITs are like mutual funds, but with commercial properties instead of stocks in the portfolio. REITs allow individual investors to earn a share of income produced through commercial real estate ownership, without actually spending hundreds of millions of dollars to get the properties.

To qualify as a REIT among other requirements the company that owns and operates the incomeproducing real estate or real estate-related assets must distribute at least 90 percent of its taxable income to shareholders annually as dividends. The REIT can then deduct the dividends from its corporate taxable income. Because of this special tax treatment, many REITs pay out a high percentage of their taxable income in order to owe no corporate taxes.

There are three categories of REITs, equity, mortgage and hybrid. Many REITs are publicly-traded on a stock exchange. Some are not (non-exchange traded REITs) and cannot be readily sold on the open market.

REIT shareholders are responsible for paying the taxes on the dividends (ordinary income) as well as on the capital gains. Many investors own the shares inside of a tax-deferred account.

Generally speaking

Many factors favor real estate investing. The population is still expanding at an exponential rate and the supply of land for residential construction is limited. Inflation causes a rise in both land value as well as rents. According to realtor.org, the average annual price increase of real estate in the United Sates over a recent forty-year period has been 6.4 percent.

Residential income property investments have led all other commercial real estate investments for total return over the past thirty-five years (National Council of Real Estate investment Fiduciaries, NCREIF). Real estate investing offers unique tax-sheltered benefits. Leverage gives investors the ability to buy and control a property with an upfront investment much less than the total value of the property, sometimes as little as 5 percent down.

This article is a brief overview scratching the surface of available options. Investing in real estate can take many forms and potential investors are encouraged to seek expert tax, legal and professional real estate information and advice before investing.

About Paul Bandong

Paul is a former Silicon Valley Business Management Consultant and Executive who wears many hats: Sales & Marketing, Business Development, Business and Real Estate Writing, as well as Sports Writing. Our print products, online websites, and social media marketing and communications provide the best source for local news and advertising for our local communities and businesses.