How can I make money by investing in rental properties?
Rental properties are real estate properties that you lease out to tenants for a fee. The rent collected from the tenants is your source of income when you own rental properties. There are several ways to invest in rental properties, with most landlords owning properties directly. You can also get exposure to this asset class by investing through real estate investment trusts (REITs).
There are two main strategies to consider when investing in rental properties: owning individual units and buying shares in a REIT that owns them. Each strategy has its pros and cons, and what’s right for you depends on your financial circumstances and risk tolerance.
Let’s take a closer look at the different ways you can invest in rental properties.
Investing in Rental Properties Directly
If you want to become a landlord, purchasing individual rental properties is your best option. This gives you full control over your investment, including the decision on what type of property to purchase. However, it also means that you’ll be fully responsible for managing and maintaining the properties.
Advantages of Investing in Rental Properties Directly
Owning a Real Estate Investment Trust (REIT)
REITs pool funds from investors to purchase properties and generate rental income. This means that you don’t have to select individual properties or manage any of the day-to-day operations. You can buy shares of a REIT that owns rental properties, which will give you exposure to the rental property market without the hassle of being a landlord.
Advantages of Investing in a REIT
Investing in a Real Estate Limited Partnership (REIP)
REIPs are investment vehicles that own real estate properties. You purchase shares in the vehicle and a portion of the profits from the real estate investments. The disadvantage of this structure is that you don’t have direct ownership in the properties. You’ll earn a share of the income from the investment, but you can’t call the shots if the property needs to be repaired or if there are tenant issues.
Advantages of Investing in a REIP
Equity Investment in Rental Properties
You can also buy a partial ownership stake in a rental property through a “friends, family, and fools” financing arrangement. This is similar to peer-to-peer lending, with you investing in a specific property and receiving a monthly return based on the terms of the financing. This is risky because you’re not protected by any investor protections or mortgage terms. If the property owner can’t make the payments, you’ll have no legal recourse.
Advantages of Investing in Equity Investment
There are many ways to invest in rental properties, but they all come with certain levels of risk that investors must understand and manage. Before you decide on a strategy, make sure you understand its level of risk, the potential upside, and the level of due diligence that’s required.