INCOME-PRODUCING & NON INCOME-PRODUCING REAL ESTATES

There are four broad types of income-producing real estate: offices, retail, industrial and leased residential. 


There are many other less common types as well, such as hotels, mini-storage, parking lots and seniors care housing. The key criteria in these investments that we are focusing on is that they are income producing.


Non-income-producing investments, such as houses, vacation properties or vacant commercial buildings, are as sound as income-producing investments. Just keep in mind that if you invest equity in a non-income producing property you will not receive any rent, so all of your return must be through capital appreciation. 


If you invest in debt secured by non-income-producing real estate, remember that the borrower's personal income must be sufficient to cover the mortgage payments, because there is no tenant income to secure the payments.


Source: Ian Woychuk, Investopedia.com

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REAL ESTATE INVESTING: AN INTRODUCTION

Usually, when you think about real estate investing, the first thing that comes to your mind is a home. For most people, their home is the best investment they ever will make.


However, once you purchase a home, it becomes an important part of your portfolio, because it serves a dual role as not only an investment, but also a centerpiece to your daily life.


Although a home is one of the largest investments an average investor will purchase, there are other types of real estate investments worth investing in, such as income-producing real estate.


Large income-producing real estate properties are commonly purchased by high net-worth individuals and institutions, such as life insurance companies, real estate investment trusts (REIT) and pension funds, etc.


Income-producing properties are also purchased by individual investors in the form of smaller apartment buildings, duplexes or even a single-family homes or condominiums that are rented out to tenants.


Real Estate is conventionally seen as an Alternative Investment Class, when it comes to the issue of portfolio investing. This implies that it is an extra investment used to build on a basic portfolio of stocks, bonds and mutual funds, etc.


One of the main contrast between investing in a piece of real estate as compared to stocks or bonds, is that real estate is an investment in the physical aspects of a building and the land it is built upon. This makes real estate highly tangible, because unlike most stocks you can see and touch your property.


This often creates substantial pride of ownership, but tangibility also has its downside because real estate requires hands-on management. For instance, you don't need to unplug the toilet of a stock or mow the lawn of a bond.


Source: Investopedia.com

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INVEST IN REAL ESTATE: LEVERAGE

With the exception of REITs, investing in real estate gives an investor one tool that is not available to stock market investors: leverage. 


If you want to buy a stock, you have to pay the full value of the stock at the time you place the buy order. 


Even if you are buying on margin, the amount you can borrow is still much less than with real estate. Most "conventional" mortgages require 25% down. 


However, depending on where you live, there are many types of mortgages that require as little as 5%. This means that you can control the whole property and the equity it holds by only paying a fraction of the total value. 


Of course, your mortgage will eventually pay the total value of the house at the time you purchased it, but you control it the minute the papers are signed. 


This is what emboldens real estate flippers and landlords alike. They can take out a second mortgage on their homes and put down payments on two or three other properties. 


Whether they rent these out so that tenants pay the mortgage or they wait for an opportunity to sell for a profit, they control these assets despite having only paid for a small part of the total value.




Source: Andrew Beattie, Investopedia.com

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INVEST IN REAL ESTATE: REAL ESTATE INVESTMENT TRUSTS (REITS)

Real estate has been around since our cave-dwelling ancestors started chasing strangers out of their space, so it's not surprising that Financial Institutions have found ways to turn real estate into a publicly-traded instrument. 

A real estate investment trust (REIT) is created when a corporation (or trust) uses investors' money to purchase and operate income properties. REITs are bought and sold on the major exchanges just like any other stock. 

A corporation must pay out 90% of its taxable profits in the form of dividends to keep its status as an REIT. By doing this, REITs avoid paying corporate income tax, whereas a regular company would be taxed its profits and then have to decide whether or not to distribute its after-tax profits as dividends. 

Much like regular dividend-paying stocks, REITs are a solid investment for stock market investors that want regular income. 

In comparison to the aforementioned types of real estate investment, REITs allow investors into non-residential investments (malls, office buildings, etc.) and are highly liquid - in other words, you won't need a realtor to help you cash out your investment.

Source: Andrew Beattie, Investopedia.com

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