In return for taking a cut of the rental income, the company handles maintenance and tenant management. Think of these investments as small-scale mutual funds. Single investors can own individual units within multifamily housing. (The group itself becomes a legal entity with each member as a joint owner.) Since vacancy is always a risk with rental properties, many groups “pool” a portion of the rent so investors still earn some income even when their unit is empty.
For investors ambitious enough to embark on construction projects, trading or flipping real estate can bring in big returns in just a few months. Here’s how it works: an investor buys an undervalued residential property, renovates it, then sells it at a higher price. It’s possible to be a pure “property flipper” who leaves their purchase unrenovated and waits for the market to improve.
Selling isn’t guaranteed, of course, and you’re still on the hook for the mortgage if you can’t get tenants or buyers. “House flipping” is best for seasoned real estate investors who know how to hedge their bets with the local market. First, get familiar with the construction and design basics and local building codes.
Then get busy estimating a renovation timeline, pricing materials, etc…it’s an active investment. Professionals suggest working with a partner, ideally, someone with a skill set you don’t have. Be aware this type of investment comes with a pretty big risk. You can make lots of money in a short amount of time, but you might lose money if the market doesn’t go your way.
Ideally your cash flow will increase over time, since rents rise with inflation but your mortgage payment stays the same. Real estate is also a good way for a savvy investor to diversify their portfolio. The real estate market has its own whims, so it might perform well when the rest of the stock market isn’t.
Rent is where you’ll see most of your real estate earnings, whether you invest in commercial or residential property. How much cash you collect depends on many factors (local market, property type, whether you’re paying a management company or contractors, etc.). Loans are passive investments where you (the investor/the REIT you buy shares in/the investment group you join) lend money to a real estate developer, then earn cash on interest payments.
Appreciation is the increase in a property’s value over time. If and when you sell your investment, appreciation ensures you sell for more than what you originally paid. Investors who focus on appreciation profit, like property flippers, should be comfortable with risk – unlike with cash flow, there’s no guarantees.
But real estate investment is best for people in good financial health who have the basics covered—retirement, emergency savings, debt management, and more. Plan to put aside more money than you think you’ll need, especially if you’re going to be involved in property management and maintenance. They’ll make your taxes more complicated for sure.
In 2018 the tax rate was around 39. 6 percent for active investors and 43. 4 percent for passive investors. If you profit from property appreciation, these profits are considered capital gains, and you’ll pay a capital gains tax. Deductions are where you really save. You can deduct certain real estate-related expenses like repair costs or property taxes.
These deductions come with pretty strict regulations. The property should have a "determinable useful life" (which just means it will wear out eventually) and be expected to last more than a year. Real estate investment can be exciting and lucrative, but it takes practice and a lot of money. There are tons of options when it comes to real estate, so you’ll need to think through which investment would be best for you before signing on the dotted line.
Office, retail and hotels have been out of favor, but real estate managers are still looking for deals.
Mark is a Senior Managing Director and Head of Real Estate Investors. He is responsible for public and private real estate debt investments and private real estate equity investments. The group's primary activities include commercial mortgage lending, commercial mortgage-backed securities investing and the acquisition/disposition of commercial properties for both New York Life and third-party investors.
Mark began his career in the financial services industry when he joined the firm in 1985. Previously, he was co-head of commercial mortgage production and managed the Structured Investments area within Real Estate Investors. Mark earned a B.A. from Lake Forest College and an M.S. in Real Estate from New York University.