Types of Real Estate Investments, Due Diligence, and Financial Risk
Investing in real estate could be the most profitable way to create financial abundance – especially if you do due diligence and are aware of the risks! Here are several types of real estate investments, as well as a caution about financial risk.
Before the tips, a quip from billionaire Warren Buffett:
“Why not invest your assets in the companies you really like?” Buffett asks. “As Mae West said, ‘Too much of a good thing can be wonderful.'”
Diversifying your investment portfolio by investing in both companies you like and profitable real estate properties can be the best way to get too much of a good thing (money!). To learn how to minimize your financial risk and maximize your profit, read After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade. And, here are financial expert Travis W. Freeman’s tips for investing in real estate…
Types of Real Estate Investments
A basic type of property investment is to simply purchase a new home and rent out your old one to a tenant. Or, you can invest in a large office building and rent to commercial and retail businesses. A third type of real estate investment is to buy a piece of land, build a home or office building “on spec”, and sell it later.
But no matter what type of real estate you invest in, you need to be aware of the risk of liability and loss in the value of your property. Knowing how to bounce back from a bad financial investment is almost as important as knowing how to make a good financial investment!
The Financial Risk of Investing in Real Estate
The larger the percentage of your net worth that is tied into any type of real estate, the greater the level of risk to your personal financial goals.
If you want to buy a home and rent it out, talk with an attorney to ensure all legal documents are in order and you have binding contracts with your tenants. Also, speak with your mortgage and insurance professionals to discuss the changes that will take place with your mortgage rates and/or insurance premiums. If this is your first purchase, learn as many tips for first time home buyers as you can!
If you want to invest in commercial real estate, team up with other investors to finance the project. Find a partner with experience investing in real estate. If commercial real estate investing is not your day job, it will be like trying to play Rugby for the first time without knowing the rules. It’s risky and you may become beat up quickly!
Real Estate Investment Trusts
Real Estate Investment Trusts (REITs) pool the dollars of numerous investors together to purchase either residential buildings (such as multi-family housing) or commercial investment-grade real estate. These types of investments involve a professional management team, so there isn’t much you need to do beyond contributing to the pool.
In return, the REIT must pay you 90% of their inflows and profits, which you typically receive as a dividend. You can also participate in appreciation if your share of the “pool” increases in value. There are two types of REITs: traded stock REITs and non-traded REITs.
After due diligence, you’ll easily determine if a building or property belongs in your portfolio. Research the history of the building, check for county titling issues, check for any liens the seller may have on the building, have the proper building inspection completed, and determine what your expected rent may be from comparable sources in the area.
If it’s a commercial property, check the demographic research. For instance, your tenants may look for a “retain building” next to high-traffic areas. The more attractive the property, the more you should receive in rent, and hopefully, appreciation. And, the sooner you’ll achieve your financial goals!
3 Tips for Investing in Real Estate
- Take your time completing research and doing due diligence. When you’re taking a financial risk, it hurts much worse to make a large money mistake than it does to miss an opportunity.
- Team up with someone that has experience in managing real estate if you’re looking at large residential or commercial property.
- Put all your legal and insurance “ducks in a row” to protect yourself from liability. Talk to a lawyer or two!
A Surprising Tip About Real Estate Investment
It may take years to receive the huge paycheck or financial abundance you hope for. Freeman says most of his clients who own small residential real estate don’t make much of a profit after taxes, repairs, and insurance. But some do…
Travis W. Freeman is the director of the Eastern Missouri Chapter of the Foundation for Personal Financial Education, a non-profit organization dedicated to financial awareness in the community.
If you have any questions or comments about types of real estate, due diligence, and financial risk, please comment below…