Investing in real estate captures the attention of a wide variety of investors these days: from people with no experience in investing to veteran investors. If you are looking to get into the world of real estate investing, then the best approach is to conduct as much research as you can in order to avoid making amateur mistakes down the line. In this article, we’ll take a closer look at what investing in real estate entails and the best practices for generating passive or active income from an investment property.
Advantages and Risks of Investing in Real Estate
Investing in real estate, like anything else, comes with its own set of advantages and limitations. It’s best that you are aware of them all and can objectively see which one outweighs the other for you.
A few of the most notable advantages of investing in real estate are:
- Passive income — when you decide to rent out a house, you will generate a new stream of passive income from the recurring rent payments by your tenants. If your residential property has a nice location, is well-renovated, and is equipped with all the necessary amenities, then you should have no trouble finding either short-term or long-term tenants.
- Long-term security — once you have full ownership over a property, it’s yours until you decide to sell it or pass it down to a family member. With that being said, you have the power to rent out, sell, or even abandon the property altogether. You can decide to sell it 10, 20, or 30 years down the line for a profit. Simultaneously, you can always live in the
property yourself if your primary residence becomes unavailable for some reason. - Tax benefits — owning an investment property comes with several advantages when it
comes to taxes. For example, if you sell your property for more than the initial buying
price, the profit is not taxable as income. Instead, it will be taxed as capital gains, which
have lower tax rates than income.
On the other hand, the possible risks include:
- No guarantees — whether you decide to invest in a residential or commercial property for sale in Cincinnati Ohio, there are no guarantees that you will generate income from it: just like any other business investment. There are no guarantees that you will find renters, sell them for the price that you expected, or that the commercial lot will generate any income. This is one of the most notable risks that you need to take into account.
- No liquidity — a real estate investment is not considered a liquid asset like cash, bonds, or shares. If you are ever in need of money quickly, then the only way to liquidate a home is to sell it. Selling a home can take anywhere from a few days to several months depending on how much value it has and other factors related to the housing market at the time of the sale. You can’t always rely on the fact that a house can be easily liquidated.
Options for Profiting From Real Estate
Now, let’s take a look at the different paths you can take in order to generate income from an investment property.
1. Buy and Hold
One of the most common first time homebuyer tips we hear is that owning a property is a bigger asset than renting — and it’s true! You can purchase a property and hold it for decades before you decide to sell it when the value of it has gone up, for example. That’s essentially what buying and holding entail. Many people prefer to rent out the property in order to cover the mortgage payments if it’s a second property. If it’s your primary property, it’s still an investment nonetheless. You can live in it for about five years and then decide to sell it for a profit. As long as you ensure the quality of the home doesn’t diminish over the years, you’ll be able to sell it for more than you bought it for.
2. Flip the House
House flipping is a great way to unlock some of the hidden potentials of a property and profit from it. With this approach, you don’t invest in a property that already has a lot of value, but you create the value from scratch. You purchase a property that is not properly renovated, doesn’t have livable amenities, and no designer flair, and then flip it into a completely new space to sell it for top dollar. If you can find an affordable property to flip in a great location, that can then also become a great selling point to increase value during the sale.
3. Develop the Land
You can always invest in an empty lot of land and then build an establishment from the foundation up. Acquiring a piece of land is more cost-effective than buying an already built house that has equity. This way, you can also build the house or commercial property that you have in mind, down to the very last detail. You can create all the amenities you want the property to have and then sell or rent it out accordingly.
4. Make it Commercial
Not everyone wants to purchase a residential investment property and turn it into a vacation rental home. You can invest in a property that you can use to transform into a fully- functioning business, such as a coffee shop or an office. Depending on your business plan, you’ll be able to generate enough profit to make owning the property worthwhile.
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