Investing in a real estate property can be a real headache. You have to think about inspections, appraisal, advertising, renters, renovations, etc. If you don’t want to deal with all of this, consider investing in real estate-based financial products.
Investing in a real estate property can be a real headache. You have to think about inspections, appraisal, advertising, renters, renovations, etc. If you don’t want to deal with all of this, consider investing in real estate-based financial products. Three of them will be discussed here: REIT, MBS, and Self-Directed IRAs
REITs
REIT stands for Real Estate Investment Trust. This is one of the oldest real estate investment products and is made up of mutual funds that invest in actual real estate properties as well as mortgage portfolios. Similar to other securities products, they are traded on the major exchanges. REITs are managed by professional firm, allow investors special tax considerations as well as higher yields. They also offer the investor better liquidity than if he were to invest directly in a property.
There are three types of REITS, Equity, Mortgage and Hybrid. Equity REITs pull the revenue primarily from rent on properties that are owned by the fund. Mortgage REITs generate their revenue from interest on loans on mortgages. Hybrid REITs are a combination of both.
REITs are closed-end mutual funds and the shares are traded the same way corporate stock is i.e. shares are sold to other investors through a broker. REITs pay out at least 90% of their profit to shareholders in the form of dividends. They are similar to small-cap stocks and have about two third of their return on investment coming from dividends. While REITs can have high yield, they are sensitive to interest rate changes.
MBS
MBS are Mortgage-Backed Securities. They are bonds which are backed by mortgage loans. In the United States, almost $3 trillion dollars are mortgage loans and about 80% of them are covered by mortgage-backed securities. These bonds are usually more stable because mortgage loans are pooled, protecting the investors’ investment from default or pre-payment of the mortgages.
MBS work like other bonds and offers investors a coupon rate of interest. However, unlike other bonds, MBS are not repaid as one large lump sum payment at maturity but rater gives investors repayments of the principle in increments over the life of the security. MBS are sensitive to interest rate changes and can therefore be a little risky for investors. If you feel that interest rates are likely to fall in the future, it is best to avoid pre-payable MBS. Closed MBS may be a better option.
SELF-DIRECTED IRAs
In the case of Individual Retirement Account, you can take advantage of your real estate knowledge by adding assets such as land, residential homes, apartment building or commercial buildings in your portfolio rather than straight cash. This allows you to invest in real estate without having to actually manage the properties.
Regardless of the type of investment paper you choose, make sure that you do your homework and seek the advice of a financial professional. Failing to do so, could cost you a lot of money. However, with the right advice and a little bit of leg work, you too can make money with real estate-based financial products.
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