Real estate is a class of real property that includes both land and anything permanently attached to it, whether natural or man-made. Real property should not be confused with personal property. Personal property includes vehicles, furniture, clothing etc which are movable. But real property is non-movable. Thus, real estate includes the physical surface of land, what lies below and above it, what is permanently attached to it and all the rights of ownership. Investing in real estate involves buying, selling and rental of properties for earning profit. There are five main categories of real estate: residential, commercial, industrial, raw land and special use. While the location of the property is a key consideration, there are many other factors involved that will help you decide the property to invest in.
- LOCATION :
The location of the property is the most important factor that determines the profitability in real estate investments. Proximity to services play an important role in the valuation of the property. For instance, closeness to market, warehouses, transport hubs and tax-exempt areas play an important role in commercial property valuations. So, you have to closely review how the area is expected to grow over the investment period, before investing in it.
- VALUATION :
Real estate financing, insurance premiums, taxation and sale price depends on the valuation of the property. Valuation can be done by comparing the sales of properties with similar characteristics, by deducting the depreciation amount from the cost of the land and construction and slos based on the expected cash inflows which is suitable for rentals.
- PURPOSE OF INVESTMENT :
The lack of clarity in purpose may lead to unexpected results. So you must be clarified about the purpose of investment before investing in this field. The purpose of investment could be self use, lease, or sell. Identify your purpose and plan accordingly.
- EXPECTED CASH FLOWS :
Cash flow refers to how much money is left after expenses. Positive cash flow is an indicator of a good rate of return on an investment property. Inflation favors landlords for rental income. The built-in value increases due to long-term price appreciation. Owners enjoy available tax benefits due to depreciation. Renovation before sale can get you a better price for a property.
- INDIRECT INVESTMENTS IN REAL ESTATE :
Managing physical properties over a long period of time is not everyone’s cup of tea. Hence there are alternatives that allow investors to invest in this sector indirectly. Some of these alternatives are Real Estate investment trusts(REITS), Real Estate company stocks, and Real estate sector focussed mutual funds.
- REAL ESTATE MARKET:
Like other varieties of investments, it’s good to buy low and sell high. Real estate market fluctuates and it’s important to be aware of the trends of this sector. So the investor has to be aware of certain trends like home prices, new constructions, property inventory, mortgage rates, flipping activities and foreclosures.
WAYS TO INVEST IN REAL ESTATE :
- RENTAL AND HOUSE HACKING:
It is suitable for people who are willing to manage tenants and have significant capital needed for maintenance. Rental properties can provide regular income. Also, the properties appreciate over the course of time giving a more valuable asset to the landlords. For instance if someone buys a four unit building with a mortgage and lives in one of the units and rents out the other three units. This will cut down the living of expenses and the income generated from rent can be useful for his mortgage, taxes and insurance payments every month. This strategy is called house hacking.
- REAL ESTATE INVESTMENT GROUPS(REIGs):
These groups are like small mutual funds that invest in rental properties. In this group, a company builds apartment blocks and then asks investors to buy them through the company, thereby becoming a member of the group. The company manages all the units, handles maintenance, advertises vacancies and interviews tenants. For performing all these tasks, the company takes a percentage of the monthly rent from the owners.
- HOUSE FLIPPING OR REAL ESTATE TRADING:
It is ideal for experienced professionals in the fields of real estate valuation, marketing and renovation. Real estate traders often try to profitably sell the undervalued properties they buy in less than six months. Some traders buy reasonable priced properties and add value by renovating them. This is a long-term investment.
- REAL ESTATE INVESTMENT TRUSTS(REITs):
A REIT is created when a trust uses the investors’ money to purchase and operate a property. These are bought and sold on the major exchanges like any other stocks. There are two types of REITs, Equity REITs and Mortgage REITs. Equity REITs represent ownership in real estate whereas mortgage REITs focus on the income from mortgage financing of real estate.
Real estate investment requires talent, organisational skills, networking and perseverance. Successful real estate investors have in-depth knowledge of the real estate market and stay updated about the various trends like changes in consumer habits, mortgage rates etc. This helps them to identify opportunities. As the real estate business revolves around people only, successful investors get benefitted in the long run by working with integrity and by showing respect to clients and associates. So, it’s important to carefully estimate the costs such as mortgage payments, insurance, and renovation.
Real estate investment can widen your investment portfolio. As real estate has a low correlation with other major asset classes, so when stocks are down, real estate is often up. It also provides steady cash flow, tax advantages, risk adjusted returns and significant appreciation.