Real estate investment companies have traditionally provided a gateway to profits that have increased around 5.4% annually over the last 60 years. This investment is a key economic facilitator of property development, urban regeneration and market liquidity. However, it’s not easy to set up a real estate investment company if you’re not experienced. Obtaining financial advice is crucial while setting up your enterprise or exploring alternative investment strategies. Consulting with a financial advisor can help potential investors make informed decisions about their business structure and financial planning.
Understanding Real Estate Investment Companies
Real estate investment companies, at their core, are business entities that purchase, rent or sell real estate to make a profit. They’re like the gears of a clock, keeping the real estate industry ticking vibrantly and dynamically. A real estate investment company could invest in rental properties, homes they improve and flip, build out large developments or into a fund that invests in a variety of real estate projects.
These companies not only contribute significantly to the economy, but they also serve as important avenues for financial planning. This is done by providing a steady income source through rental gains, potential for capital appreciation and portfolio diversification opportunities. Real estate provides a huge opportunity for companies with enough capital to deploy an asset that can provide income now and opportunities for large growth in the future.
Benefits of Starting a Real Estate Investment Company
Along with the potential for profit from property appreciation, consistent rental income offers another attractive aspect to real estate investments. These earnings serve as a reliable cash flow and can be particularly beneficial during economic downturns when other investments may be underperforming.
Diversification, a cornerstone of investing that reduces risk through spreading investments over various assets, is another key advantage of investing in real estate. Real estate often exhibits negligible correlation with stock and bond markets, making it an ideal contender for investors keen on safeguarding against market volatility.
Many invest in real estate, as well, because of the physical assets that help protect the investment dollars flowing into projects. Even if the investment goes sideways there are plenty of avenues to recoup a large amount of the original invested capital.
Types of Real Estate Investment Companies
There are two things to consider when researching the types of real estate investment companies. The first is what types of investments the company makes and the other is how the company is legally structured.
When looking at the types of investments, these can vary quite widely but each real estate investment company typically has one main type of investment that it focuses on. The company might invest in short-term rentals, long-term rentals, fix and flip projects, commercial real estate or even debt notes in regular family mortgages.
When structuring the business, the world of real estate investing presents various choices, each with unique benefits. Let’s explore three of the most common structures: Real Estate Investment Trusts (REITs), Limited Liability Companies (LLCs) and Partnerships:
- Real estate investment trust (REIT): REITs are essentially companies that own or finance income-generating real estate. In simpler terms, they let you invest in real estate without buying a property directly. They’re publicly traded and offer the convenience of liquid assets.
- Limited liability companies: LLCs are a popular choice for real estate investors as they separate personal assets from business debts, providing a safeguard for owners’ personal assets against possible business liabilities.
- Partnerships: Partnership firms, formed by two or more people who jointly own and profit, pool resources and share risks. They are an attractive choice for investors who prefer shared financial responsibility and accountability in owning real estate.
The right type of formation strategies will depend on your unique needs, which is why you may want to consult with a lawyer or real estate expert.
What You Need to Start a Real Estate Investment Company
An operational plan is an important step in creating your real estate company. An operational plan outlines your business’s structure, strategy and financial forecasts. It guides your day-to-day operations and can also attract investors or lenders. It includes key elements like the company’s mission statement, employee structure and an outline of the core business processes, among others.
Before you can create that plan, however, you’ll need to have a strategic plan for your investments and make sure you have enough capital to deploy in the investments. Once you’re sure your firm is set up for success then you’ll want to establish a specific strategy for identifying, negotiating and closing on real estate properties. Establishing a large network in the space could be vital to this work.
Alternatives to a Real Estate Investment Company
For those balking at the significant commitment required to start an investment company, the good news is that there are other alternatives. Here are four of the most popular:
- Invest in REITs: REITs provide an avenue for investing in real estate without having to deal with property purchasing, management, or financing nuances. They can be traded like stocks and offer potential for income and growth.
- Invest in Crowdfunding: Real Estate Crowdfunding allows the pooling of resources with other investors to fund real estate projects. It’s accessible to individuals and can offer high returns, along with associated risks.
- Invest in Stocks: Real Estate Related Stocks extend exposure to the real estate market without the need to manage properties. They are shares in companies involved in real estate such as property developers, or real estate services firms.
- Invest in Debt: Private Notes are loans anchored by real estate. They can provide a steady income stream and often attract investors in search of fixed returns with lower risk.
Remember, a financial advisor can play a critical role in helping you navigate through these alternative investment options and make informed decisions. Everyone’s investment portfolio should be unique to their individual circumstances and goals.
Bottom Line
The benefits of real estate investment companies, ranging from potential financial growth and portfolio diversification to tax benefits, are undisputed. However, starting one requires careful planning, a substantial investment and acceptance of a certain level of risk. It could be a rewarding venture for those deeply interested in real estate, willing to take risks and patient enough for potential long-term returns.
Tips for Investing in Real Estate
- Whenever you’re considering investing a large amount of money you may want to first consult a financial advisor. They can help you manage your money and effectively grow your wealth. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Make sure you are well-versed in the process of buying investment properties before you take the leap into buying your first real estate investment property.
Photo credit: ©iStock.com/ArLawKa AungTun, ©iStock.com/Eleganza, ©iStock.com/Viktoria Korobova