Real estate investment is a great way to secure future funds, either for retirement or for your children. Yet not everyone can afford to invest in real estate purely out of their own pockets, and as such, investments in residential property have been out of reach for most people. Recently, however, that has changed. It is possible now, with the advent of the Internet, to find groups of people willing to invest alongside you.
How Does Real Estate Investment Work?
Real estate investment, at its core, is when an individual or group purchases real estate (or residential property) in the hope that it increases in value as time goes on. For most, however, a property is a very expensive item and they will have to take on a mortgage. To cover this mortgage alongside a host of other payments while the property increases in value, the property must be rented out. If the rent is less than the mortgage and the property does not significantly increase in value, the investment has not paid off.
Investment agents who specialize in real estate use a particular set of financial tools when attempting to assure sound investments. The average yearly costs are estimated: Projected vacancies usually account for 5 to 10 percent of the annual rent, property insurance, repair costs and real estate taxes are all taken into consideration, alongside utilities you decide to pay yourself. Once this has been totaled, estimate your annual rent. Take the cost away from the income and you have your annual net income.
That is not the last of it, however. You must then divide your annual net income by the price initially paid for the property and convert the decimal into a percentage. This is what investment agents call a “cap rate.” If the percentage is less than one percent, you are making a loss on the property. Four to 10 percent is considered reliable and realistic.
Why Make a Group Investment?
Of course, you may have found an incredible property from reputable real estate brokers, with a high cap rate and a high projected return on investment. Yet, if you cannot afford it, then there is no way to capitalize on your opportunity. This is where group investments can come into play. Multiple investors can all put smaller sums of money towards a greater purchase and then split the profits proportionally.
The risk associated with investment is not as great. If a property depreciates or it begins losing money, the burden of this will not be exclusively on your shoulders and there is less at stake. In addition, if you begin to have doubts about the property, your shares can be sold to another investor.
These groups can often be found online either through specific websites or social media. This crowd financing strategy effectively bypasses the need for debt and equity products that so much of traditional real estate investment has been built upon. If you can afford to pay up front, out of your own pocket, then you negate interest charge by banks on mortgages.
Effectively, group investment is a great way for those without the immediate funds of their own to invest in their future interests.