December 04, 2018
The Three Ways to Make Money by Investing in Real Estate
Real estate is a valuable and fairly reliable means by which to increase one’s wealth through investment—the occasional market hiccup aside.
Once an investor determines the type (or types) of real estate in which they would like to invest, it makes sense to take stock of the methods by which to make money from these properties. These break roughly into three: interest from loans, appreciation, and rent. What follows is a basic description of these methods.
Interest from Loans
In the language of real estate, interest from loans is known as “debt.” This type of investing is often done by real estate investment platforms, Real Estate Investment Trusts (REITs), and private equity firms.
Generally, where loans are concerned, an investor will lend money (known as the “principal”) to a developer, who builds the site to meet a determined use. Then the investors will earn interest on the money they’ve loaned, resulting in their being paid back, over time, an amount greater than that which they initially invested.
This type of investing is beneficial in that it supplies the investor with ongoing and reliable cash flow, as the interest must be paid back regularly.
There are various types of “debt” within the “capital stack” of this kind of investment. (A “capital stack” refers to ordering of “seniority” of claims.)
- Senior debt—this type of debt is secured, and the investor has the right to foreclose on the property.
- Junior debt—can be secured or unsecured, and only sometimes has the right to foreclose on the property.
- Mezzanine debt—unsecured debt. Generally doesn’t have right of foreclosure.
Appreciation refers to the increase in value of a property that grows with the passing of time. The profit to an investor comes in one large payment at the time when the property is sold, rather than on an ongoing basis.
When an owner chooses to lease out property they own, the money they receive in return is “rent.” As with loan interest, this can provide a regular stream of income to the investor. Sometimes an investor chooses to hire a property management company to handle day-to-day issues pertaining to a property, in which case the rental income is shared with the property management company.
Whatever type of income you choose to make from your investment strategy, and whether you’re looking to buy in Westchester, Massachusetts; West Palm, Florida; or Newport, Rhode Island, you’ll need to make sure your investment is not threatened by defects in your ownership of title. Topouzis & Associates, P.C. delves deeply into the history of properties in order to ensure that an investor’s property-based income will not be hindered by past issues with ownership, and we provide the Title Insurance to back our assessments. Contact us to ensure coverage in the case of surprise.