Passive income through real estate investing does not come easy, though. There is a lot that you need to know before you get started. Here are five details that you have to consider:

1. It takes money to get started. You cannot invest in real estate unless you are willing to part with some money. Sure, there is a risk involved but the payout in the end is well Read Complete Article

Bookmark It

“Flipping” homes over a decade

Since the 1960s, home prices have boomed almost every ten years, spiking in the 1970s, late 1980s, and of course, in the latest real estate rally. With history in mind, investors can expect to see growth in their real estate holdings – as long as they are held over the long-term.

During this long-term hold, savvy investors employ renters to pay down the mortgages, increase the equity in the property, and, of course, generate passive income.

Using renters to build your equity

Inherently, there will always be renters and landlords prevalent in the United States. The low rate of savings in this country means that many families will never look to own a home. Subsequently, you can use renters to build the equity in your property.

When you are looking for potential rental property investments, the key is to ensure that the rent charged would appropriately account for your mortgage payments and costs; in the current market, foreclosures are an excellent means of finding discounted properties to turn into rental income.

There are several steps to evaluating if a real estate investment property would be a viable outlet for passive income derived from rent:

• Assess the market value of rentals: Creating passive income from rental properties requires you to choose a property where the demand for rentals is high. Simultaneously, high demand leads to lucrative rents. Typically, highly populated regions with a younger, transient population, such as college areas, make for great rentals. On the other hand, if you would like to charge premium rents, then choose an area where professionals must travel frequently. For example, professionals from around the world must travel to Los Angeles to work on films, and thus, owning rental property in the Hollywood Hills can prove to be highly lucrative.
• Compare your true costs vs. rent: Certainly, it is critical to ensure that the amount of rent you can charge will cover your mortgage payment. However, there are other factors to consider, such as the cost of your mortgage insurance, property taxes, maintenance and repairs, insurance, and vacancy losses. Will you pay for the gardening and pool services, as well as any of the utilities? These costs quickly add up, and you want to ensure that the rental is generating passive income to be worthy of your time. Generally speaking, you may want to pay for the services that will maintain the value of your home, such as the landscaping service and subsequent water bill, while passing the consumer-expendable utilities of electricity and gas costs onto your tenants.
• Consider your timeline: How long you plan on holding the home makes a difference in your evaluation of the potential property. If you only want to hold the property for a few years, then you may want to choose a home that does not require significant remodeling in order to make it an attractive rental property. On the other hand, if you plan to hold the property for 10 – 20 years, then finding a great fixer-upper bargain and renovating the home can be a great investment. Keep in mind that the more years you hold the property, the more repairs and maintenance costs you will have to bear.

Long-term passive income turns into equity

With the right rental property structure, you not only enjoy the benefits of passive income, but over the course of time, your renters pay your mortgage and build your equity. In the early 1980s, my father purchased 10 different rental properties for approximately $100,000 each. Holding them over the course of 20 years, he generated significant passive income through renters, while they nearly paid off all of the mortgages. In the most recent real estate boom, he sold all of these properties for half a million each, pocketing a nice $5 million in equity – on top of the passive income he generated for 20 years.

Clearly, using renters to generate passive income and build your long-term equity is the way to generate significant, low-risk wealth.

�

Bookmark It

The Last Laugh with John Bird and John Fortune

Bookmark It

• its assets must consist mainly of real estate held as a long-term investment
• its income must be mostly derived from real estate
• it must pay out a minimum of 90% of its taxable income to it’s shareholders

Since a REIT must pay out most of its earnings to shareholders, REITs must raise more capital by borrowing or by selling more shares to fund expansion.

The major categories of REITs are:

• Equity REITs own physical properties such as apartment houses, shopping centers, office buildings, or other type of real estate.
• Mortgage REITs invest in mortgages and do not own real estate properties.
• Hybrid REITs both own properties and makes loans to real estate owners and operators.

REITs are allowed to provide the customary management services associated with leasing properties such as apartment buildings, shopping centers and office buildings. But REITs are not allowed to operate real estate that requires a high degree of personal service such as hotels and healthcare facilities. Recent regulatory changes, however, allow REITs to create affiliated companies that can provide management services in these sectors.

REIT are generally divided into the following categories:

• Residential: apartment and manufactured home community owners.
• Retail: shopping centers, outlet centers, small neighborhood centers, or downtown/heavily trafficked retail locations. Retail power centers are shopping centers with three or more “big box” anchors such as Toys R Us, Home Depot and Target.
• Industrial: industrial, warehouse, or distribution center properties. Flex properties are a recent innovation in industrial real estate. These are one-story buildings with high ceilings, rear loading docks, surface parking and generous landscaping. Flex building shells are designed to accommodate companies needing office, light manufacturing and/or warehouse space.
• Office: office buildings are generally categorized as Class A, Class B, or Class C, depending on amenities and location, and Class A is the best. Class B buildings are usually in suburban neighborhoods. Class C buildings are usually older and in low-rent areas.
• Mixed Industrial/Office: many REITs own both office and industrial/warehouse properties.
• Healthcare: owners, but not operators, of healthcare facilities such as nursing homes, medical office buildings, hospitals, etc.
• Lodging: hotels and resort properties. Lodging REITs are not allowed to directly manage their hotel operations, but many arrange management contracts with affiliated companies.
• Mortgage/Finance: REITs that invest in mortgages, or provide mortgage or other types of financing.
• Specialty: self-storage centers, restaurant property owners, and other REITs that do not fit into the major categories.
• Diversified: REITs that own properties in multiple categories.

Why do people invest in REITS?

REITs are total return investments. They typically provide high dividends plus the potential for moderate, long-term capital appreciation. Long-term total returns of REIT stocks are likely to be somewhat less than the returns of higher risk high-growth stocks and somewhat more than the returns of lower risk bonds. Because most REITs also have a small-to-medium equity market capitalization, their returns should be comparable to other small to mid-sized companies.

There is a relatively low correlation between listed REIT returns and the returns of other market sectors. Thus, including listed REITs in your investments helps build a diversified portfolio.

REITs offer investors:

• Current, stable dividend income
• High dividend yields
• Dividend growth that has consistently exceeded the rate of consumer price inflation
• Liquidity: shares of publicly traded REITs are readily converted into cash because they are traded on the major stock exchanges
• Professional management: REIT managers are skilled, experienced real estate professionals
• Portfolio diversification, which reduces risk
• Oversight: Independent directors of the REIT, independent analysts, independent auditors, and the business and financial media monitor a public REIT’s financial reporting on a regular basis. This scrutiny provides an investor a measure of protection and more than one barometer of the REIT’s financial condition.
• Disclosure obligations: REITs whose securities are registered with the SEC are required to make regular SEC disclosures, including quarterly and yearly financial reports.

What One Should Look For When Investing In REITs

The market usually rewards companies that demonstrate consistent earnings and dividend growth with higher price-earnings multiples. Thus, investors should look for REITs with the following characteristics:

• A demonstrated ability to increase earnings in a reliable manner. For example, look for companies with properties in which rents are below current market levels. Such properties provide upside potential in equilibrium markets and downside protection when economic growth slows.
• Management teams able to quickly and effectively reinvest available cash flow. The ability to consistently complete new projects on time and within budget. Creative management teams with sound strategies for developing new revenue opportunities under the REIT Modernization Act.
• Strong operating characteristics, including effective corporate governance procedures, conservative leverage, widely accepted accounting practices, strong tenant relationships and a clearly defined operating strategy for succeeding in competitive markets.

Bookmark It