Investing in real estate can be considered in two ways. You can consider it as a job or you can invest more passively with fewer responsibilities.
In this article, I will uncover how to create wealth investing in real estate, so you can choose the one that suits you.
I’m definitely in favor of more passive investments as they release more time (especially the last one in this article) but let’s look into it 🙂
Table of contens
Real estate as a job
➀ Monetising your own home
Traditional bed and breakfast, which usually requires investing in a large home and living with your family in a separate part of the house.
This would require a full-time job (or hire) of a receptionist and part-time cook. It also requires significant capital and monthly overheads, which adds some risk.
Unless the home is already owned without a mortgage, there will always be an element of opportunity cost if you don’t get enough guests.
If you purchase a second home specifically to rent out for Airbnb, you can actually make a good yield of 10% in holiday destinations 🤩
Airbnb has revolutionized the short-stay travel/hotel market and has changed the landscape of traditional bed and breakfasts.
If you have a room then this is also possible. You only greet them and say bye (and attend to any issues). Easy and flexible.
Furthermore, if you have multiple rooms spare, you can essentially hand-pick the facilities in the home that you include (allow them to use). This gives great freedom in choosing the level of privacy and involvement you have with the guests.
It’s possible to do this without any involvement (i.e. invest in a smart keyless door lock) but ultimately you will end up dedicating a certain amount of time to it regardless.
➂ Buy to lets
It’s the most well-known form for investment into real estate. Buy-to-let is the purchasing of a home to rent it out (non-residential).
Most people would answer this to the “How to create wealth investing in real estate?” question. It’s a very popular method.
When purchasing a home with this intention, you need a specific buy-to-let mortgage. This requires a larger deposit upfront (usually a minimum of 25% to 50%).
Different markets and locations have varying levels of average yield (the yearly income you get relative to the house price).
Getting over 8% should be the aim in my opinion, and anything under 4% is generally considered poor.
Generally, annual maintenance costs on a home are considered to be 1% of the house value. So this can be subtracted from the rental yield. Then you must consider mortgage repayments, time spent, possible empty rooms and unseen expenses. Ultimately will a lower yield poses a higher risk.
There are also an increasing amount of regulations for landlords in most countries. Tenants tend to have strong rights in Central Europe, meaning you give up some control. For example, in The Netherlands, if a tenant is renting a property for over 2 years, they can actually stay there indefinitely. Landlords cannot kick them out, even with 30 years of notice.
The cost of being a landlord is high. Renovations, fixing leaks, replacing kitchen appliances. This can be a lot of hassle.
One way to avoid being involved is to let a property agent manage, but this eats into your return, as they take a commission. On the upside, they can guarantee you rent, meaning you don’t have to worry about it not being occupied.
Buy-to-lets used to be one of the most profitable real estate investments. However, retail purchases (everyday people) have become more involved and it’s becoming more saturated.
With more and more people doing this, house prices become more expensive (more buyers) and rent becomes cheaper (more choice for the public). This has led to lots of saturated markets and damaged yields.
➃ House flipping
House flipping is the purchasing and selling of houses. Usually, property developers can buy a house, pay to have it fixed up, and sell it in under a year.
In the US this may induce capital gains tax and other taxes, like stamp duty.
It’s a tactic that requires a lot of knowledge and willingness to be posed a higher risk. This is perhaps the most challenging option and has also suffered from a slightly saturated market like buy-to-lets.
The reason why this is slightly less saturated is that the barriers to entry are higher. You need more capital, more knowledge, more effort (renovating) and more risk. The returns can be lucrative if you have plenty of capital or join syndicates.
Real estate as a passive income
Some of the above methods can be relatively passive:
- AirBnBs can be a relatively automated process, although this may damage your feedback reviews.
- Bed and Breakfasts can be run by workers, but this will likely cost too much for it to be profitable.
- You can leave your property to a property management company to collect the rent. This may still be profitable (not as much), but you still have to endure the administration. You still need to purchase the house, sign the contracts, deal with agents, deal with a mortgage company and physically visit the premises.
So, outsourcing and pacifying the above methods are usually less profitable.
Having to pay a professional to manage your $200,000 home that has a rental income of $600 per month is expensive.
But what if you had a professional to manage a collection of investments worth over $5 million? Suddenly, he wouldn’t appear to eat into that margin as much.
Well, just because you don’t have $5m, it doesn’t mean you can’t be a part of a $5m investment with lucrative yields.
This is where real estate crowdfunding comes in handy 😎
➄ Passive income with Real estate crowdfunding
Real estate crowdfunding is where many investors pool their money together and invest. You can join and invest from just 50 EUR.
Who are the people collecting this money? They are real estate professionals who are running large property projects.
These projects could be hotels, student flats, actually all sorts of projects. Many projects are lucrative because this market is not saturated and often secured with a first-rank mortgage (physical security).
These companies return, on average, more than 10%, and sometimes up to 20%.
This means you can have a piece of the pie in a very large real estate project, without having to get your hands dirty 😊
It’s a completely passive income. No paperwork, no meetings, no contracts, limit liability.
You can live your life on your terms and still receive your return.
I hope this “How to create wealth investing in real estate?” – topic gave you the inspiration to start investing in real estate.
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