It’s never too late to invest in real estate. In fact, it’s one of the best ways of generating passive income and can be a seriously beneficial asset for anyone looking to build their long-term wealth. In other words, real estate can be one of the most lucrative ways to invest your money.
If you learn about the market, read up on best practices, and make quick, informed decisions about your next real estate investment, you will create your own passive income source. Here are 3 traditional and alternative methods to help you see big returns on real estate in 2019.
Buying actual Real Estate:
Probably this one is the most popular and commonly known method for Real Estate investments. Let’s take for example buying a rental 54 square meter apartment in Eixample district in Barcelona. Taken example’s price represents the average price of a square meter for buying an apartment in Eixample district.
Image source: idealista.com
Price: 332,000 €
Purchase property tax: 11.5 %
Total purchase price: 370,180 €
Price per square meter: 6,855 €
Average monthly rental price in the area: 1,212 €
Expected Annual yield (Gross): 3,9 %
Agency fee: -0.4 %
Vacancy: -0.4 %
Total expected annual return (Net): 3.1 %
The housing market in Barcelona is very active and the real estate prices still haven’t recovered to the ones before Economic Crisis in 2008-2009. This gives a potential for higher capital gains which with time would compound and could provide really impressive returns. Additionally, you can always use leverage and use this apartment as a mortgage to acquire more properties and maximise returns.
Risks & Challenges:
The problem is that you have to have 370,000 Euros to acquire it. If it isn’t an issue for you, in that case, to reduce the risks and properly diversify you have to acquire even more properties in different cities, to have more tenants and different types: residential and commercial properties. You also have to take into account that if it is the only property you own, you are being exposed to other threats such as having a bad tenant. Actual property in many cases is illiquid and property prices tend to fluctuate and in the end, you might even lose.
REIT (Real Estate Investment Trust) is an investment fund whose aim is to invest in real estate and most of its rental income to pay out to REIT holder. Many of REITs have issued their stocks that they could be publicly traded in New York, London, Madrid, etc. Let’s analyse our favourite example of Empire Realty Trust (ESRT), which owns one of the most iconic buildings of all time- Empire State Building in New York. Owning this REIT you can consider yourself a proud co-owner of this incredible property.
Stock price: 15.30 $
Annualized dividends: 0.42 $
Annual yield: 2.75%
Data source: streetinsider.com
There are many other higher dividends paying REITs, such as Fidelity MSCI Real Estate Index ETF (FREL)- 4.86% annual dividends or Vanguard Real Estate ETF (VNQ)- 4.01%.
REITs are easy to buy and sell, as most trade on public exchanges. This marketable feature mitigates some of the traditional drawbacks of real estate. Traditionally, real estate is illiquid—property can take a long time to sell or purchase while REITs can be sold in a matter of seconds through your investment account. One overlooked benefit of eREITs is how resistant they are to bankruptcy, even during periods of severe economic trouble. From 2007-2010, the US went through the worst recession since the Great Depression and how many publicly traded eREITs filed bankruptcy? One.
Risks & Challenges:
On the downside, REITs don't offer much in terms of capital appreciation. As part of their structure, they must pay 90% of income back to investors. So, only 10% of taxable income can be reinvested back into the enterprise to purchase new holdings. Dividends received from REIT holdings are taxed as regular income. One primary risk for REITs is that they are subject to real-estate market fluctuations. Also, like most investments, don’t guarantee a profit or ensure against losses. Further, some REITs have high management and transaction fees
Real Estate Crowdfunding (P2P)
P2P lending or crowdfunding is a method of financing that allows real estate companies to borrow money without using a bank or credit union as an intermediary. Instead of a bank, crowdfunding platforms take their role. Then, people- investors can invest in real estate projects through the internet. To better understand how it works, let’s take an example.
Total investment sought: 220,000 €
Loan Duration: 12 months
Miminmum investment amount: 100 €
LTV (Loan-to-Value index): 58%
Total expected annual return (Net): 11%
This project was financed on EVOEstate Platform, where you can find many other investment opportunities from different European countries.
This project is especially attractive due to its high 11% returns, and collateral is worth 58% of the expected sale price. Usually, LTVs which are below 65% are considered to be safe, as it protects the investors from property’s 35% devaluation during the recession. This particular project has the first-rank mortgage, which means that in case of insolvency investors will be receiving their capital plus interest first. One of the biggest benefits of investing in such projects is that you can easily diversify because the minimum investment is just 100 Euros.
Risks & Challenges:
Investors have to understand that P2P Real Estate platforms are just an intermediary and they don’t earn from investors success as REITs do. For this reason, investors should evaluate the project’s feasibility and risks. Another setback of P2P investments is the lack of liquidity, in some cases, platforms have secondary market and investors can easily sell their investments at any time, but if that’s not the case investors have to wait until the loan amount is completed.
All three real estate investing approaches are appropriate for somebody. It all depends on your personal preference, understanding of the investments, creativity, and interests.
For most people, we strongly believe real estate crowdfunding and public REITs, are the best sources of truly passive income with the highest potential risk-adjusted returns and the least amount of work required.
EVOEstate’s investments start from as little as 100€ and there are no fees for investors. Sign up today and begin securing your future – evoestate.com