Debt Versus Equity Real Estate Investing
All investors want to earn money through their investment choices. The wide variety of investment options can be confusing, however, and not all investments will return the same rate of value.
Some investments offer a fairly secure promise of a return (low risk), but may take a long time to achieve that end result (low performance). Other investments may promise a higher return (high performance) but also offer a higher risk of loss (high risk). The wisest investors have a “diversified” portfolio of investments — a variety of financial assets that include both high-risk/high-performance investments balanced by low-risk/low-performance investments. That way, they have a fairly stable revenue stream through their low-risk assets even if some of their high-risk investments don’t work out as planned.
Owning real estate offers income options
Real estate is most commonly understood as land or buildings. The way a person possesses real estate determines how much control they have over it. Owning real estate means you hold title to the property and can do with it what you like (as long as it’s legal, of course). Owning real estate often comes with obligations, though, such as the payment of property taxes.
On the other hand, leasing or renting real estate gives you the right to access it according to the lease or rental agreement. Most lessees have the obligation to pay rent and not damage the property, while the obligation to maintain the property remains with its owner.
Real estate investments offer diverse return/risk options
For many people, owning a piece of real estate and renting or leasing it out offers a fairly stable income opportunity. Monthly rent payment ensures a steady cash flow, and can be set at a rate that covers monthly maintenance costs as well. Increases in the value of the property belong to the property owner, too, and many people enjoy significant financial returns when the value of their real estate goes up. Note, though, that any significant challenges with the property, such as burst pipes or appliance failures, are often the responsibility of the building owners.
Real estate investments offer varied risks and returns based on whether they are investments in privately held or publicly held accounts, and whether they represent a loan to the owner or are a piece of property ownership themselves. Holding a variety of real estate investments — a diverse portfolio — offers the best chance for minimal losses and optimal gains.
Private real estate investments
For many people, investing in real estate in the private market starts with the purchase of their own home. As a private real estate investor, you hold a direct interest in the property itself and can do with the property what you choose. The return or loss on your investment will be determined when you sell the home for more or less than the price you paid to purchase it.
Some investors invest in apartment buildings or condominium blocks. With these investments, investors own the building and the land it sits on and may gain a high return if and when they eventually sell it. An
investment in this type of privately held real estate property can also generate regular monthly income when it is rented or leased out. These investors, as owners, retain the obligation to maintain the building, however, which could prove expensive if any of its systems fail.
Public real estate investments
The public real estate market offers a different investment opportunity. For many of these investments, the investor is one of many who contribute to a common fund that owns the property. Each investor is a shareholder in the property. Rather than waiting for a financial return at the sale of the building and assuming the obligations of the owner, the fund will assume management of the property and pay the investors dividends according to the value of their share. Share prices will rise and fall as the property value rises and falls.
Equity or debt
Another way to choose a real estate investment is to elect to make either a loan to the property owner (invest in debt) or purchase an ownership share (invest in equity).
Debt-based investments, which can also be called mortgages, earn interest over time, and when the loan comes due, you’ll get your investment back. Equity-based investments mean you become a part-owner of the property, according to the value of your share. Like other owners, you will be required to assume the costs of keeping the building in repair, especially if it has renters or lessees. If the value of the property goes up, so will the value of your share.
Each manner of holding real estate creates both the possibility of a financial return and the risk of financial losses. A general rule of thumb for every investor is to hold a variety of investment accounts, some that offer better returns but with higher risks of loss, and others that offer steady and reliable returns but a lower return value overall. By carefully selecting your real estate investment accounts, you can develop a steady monthly revenue stream as well as the opportunity for a bigger payday when you sell your property for a profit.