Investing in real estate can be lucrative enough to provide sole income for proprietors, but it’s a risky venture. Some investors finance properties on their own, while others decide to partner with others to minimize the risks commonly associated with real estate. Regardless of ownership type, property investments present advantages and drawbacks.
Here are the four general types of real estate investments and their associated pros and cons.
Individual owners purchase properties on their own without the help of fellow investors. Sole proprietorship comes with a lot of control, but also a lot of work. Owners must handle everything related to their properties, including unit maintenance, attracting tenants searching for new apartments and managing occupants throughout their leases. Sole owners also take on full liability after insurance.
Experienced individual owners don’t have to worry about consulting partners or fellow investors before making decisions. On the other hand, lack of familiarity with real estate could lead to poor financial decisions. Additionally, the job can be stressful – especially for individuals who don’t hire landlords or property managers to help onsite.
Partnering with trustworthy investors or family members is important for financial support and risk management. Decision-making processes are divided up amongst close associates to prevent financial pitfalls. Plus, having personal history might help ease new investors’ worries of being taken advantage of in their partnerships.
While it’s more convenient to work with a dependable friend, owning and running rental properties
could potentially drive a wedge between close acquaintances. This is a risk partners run in any business/
personal relationship, so be prepared for at least a few arguments over the course of the enterprise.
Limited partnerships allow investors to hold equity in properties – without the responsibility of managing or leasing buildings and units. Basically, investors put full trust (and disbursements) in sponsors who handle the decision-making and capitalizing processes themselves.
These partnerships are beneficial for people who don’t want to deal with due diligence. However, sponsors can be scammers who enter fraudulent partnerships to steal investors’ money. Limited partners can also be held liable even though they have no part in keeping properties safe. Financiers considering limited partnerships should do their research on sponsors before entering into agreements.
Check credit histories, past investments, tax returns and criminal backgrounds to avoid unknowingly bankrolling real estate cons.
Real estate investment trusts (REITs) are run by large companies, often with a history of buying andowning properties. Given these are publicly traded firms, they have audited financial statements to ease investors’ worries of potential fraudulent investments. Also, stakeholders hold no management accountability and those handling the properties are highly experienced. While investors aren’t financially accountable after their initial investments, they can lose their down payments quickly. Depending on the stock market and regional location, share values can diminish regardless of history and familiarity with the industry.
Each partnership has benefits and drawbacks, so individual investors have much to consider. Experienced property managers who have the money to invest on their own might consider sole proprietorship. Those just dipping their toes into the real estate game may be better off in REITs.
Consider personal life and how much time is necessary to devote to each of these investment opportunities before moving forward.