Real Estate Investing
Real Estate investing
Real estate has, generally, been one of the most reliable investments you can make offering both security and a good return. It can also be one of the most interesting, offering a slightly more hands-on approach. Although there are many ways to invest in real estate it’s likely that you will have a tangible asset, you can see and visit your investment property. You can even be involved in the management of your property. But it’s not for everyone.
What are the advantages of investment in real estate?
Real estate is a great way to build wealth and generate income; usually properties appreciate in value but, while they are doing that, generate a rental income for the owner. And, historically, it has been incredibly reliable.
You could expect a property you bought at the end of 2000 to have doubled in value twenty years later at the end of 2020, while rents have gone up by 85% in the same period.
What are the disadvantages of real estate investing?
Real estate investing is not for everyone. Perhaps the biggest barrier is that it requires a lot of capital and ties it up, usually for a long time. And while the returns over long periods are good, that can’t always be said in the short or medium term. A house bought in 2017, for example, only gained just over 2.5% in value over the next three years, and for most of that period would have been worth less than the purchase price.
The income is not always consistent either, since it is dependent on the property being occupied and the tenants paying their rent, neither of which are guaranteed.
And there can be significant costs, maintenance, routine or emergency, or legal costs, for example, can take a significant proportion of the income.
How do you make money from real estate?
There is no real secret to making money from real estate, it is like any other investment; essentially you need the growth in the asset value plus the income it generates to total more than it costs you to purchase and maintain. It’s seemingly simple, but harder in practice.
There are three ways, each offering its own advantages and disadvantages.
Real Estate Investment Trust
A Real Estate Investment Trust (REIT) is, essentially, using the stock market to invest in residential or operational real estate. A REIT can offer many advantages. It is cheaper than purchasing a property, since you are just buying stock and can adjust the quantity to your budget. It also tends to carry less risk, since the REIT will usually hold a diversified portfolio that helps hedge against market changes in particular sectors. Learn more on Real Estate syndication.
What it lacks, perhaps, is fun. It is, essentially, a stock market investment rather than a real estate investment. So, while your money might be, ultimately, invested in real estate, that will make little practical difference to you.
However, it is a viable way to make money. And just like property there are two ways to profit, either by selling the stock at a higher price than you paid, or by earning a passive income from dividend payments.
Flipping, or buying and selling real estate, is another way of making money from real estate. This largely relies on increases in the individual property’s value, often over relatively short timeframes, either from the general appreciation in real estate values or as a result of renovation or development work undertaken on the property. Depending on the property you are flipping it might also be possible to earn passive income while it is owned.
It does have some drawbacks. Like any real estate ownership it requires, and ties up, a large amount of capital. It also is more susceptible to short-term movements in the real estate market, these may not always work to your benefit. And if you are hoping to realize a profit as a result of improvements you carry out you run the risk that these may prove more expensive than anticipated or uncover problems that require costly remedial works.
Many people, though, find it an excellent way to make money in real estate. It particularly suits those who are looking for something hands on, and many people essentially make the project management their career. If you have a good understanding of construction, renovation and decorating, or even the skills to do some of those yourself it can be very lucrative.
Real Estate investing by becoming a landlord
Rental income is probably the most popular way of making money from real estate investing, both in terms of the cash spent and the number of people who have some income from rent. While the real estate investor will expect their value of their assets to appreciate, they are, generally, interested in the cash flow rather than the capital value. While there will be some work involved in the management of the real estate portfolio the income will, largely, be passive.
Again, the disadvantage is that it requires a large amount of capital. While it is possible to buy investment real estate with a mortgage, and many do, this carries that risk that mortgage payments are due whether or not you are generating rental income. This risk is felt most acutely by those with small portfolios where the risk might be concentrated in just one or two rental properties.
Despite this it is often a profitable and enjoyable activity offering a lot of security. While the income is the prime motivator for most people, they also have the security of a valuable asset, or assets. And it’s usually possible to dictate how involved you are, from directly managing your real estate all the way through to using a management company, you can be as hands-on as you like.
Getting started in real estate investing
If you are considering starting in real estate, it’s important to get proper advice and take an honest look at your situation. For all the upsides, real estate is not for everyone and has some risks and if things go wrong it can prove costly.
First, ask if you can afford it, and ideally have the cash to afford it. The return on real estate can be small compared to the capital outlay required. Make sure you can afford to have that capital tied up for, potentially, a very long time.
If you are using a mortgage to fund your purchase, then you still need to consider affordability; the bank might provide the capital, but you still have to fund the repayments. Many people assume that the rental income a property generates will cover the mortgage, but then fail if the property is vacant for a prolonged period. Ideally, you should be in a position where you can afford the mortgage even if you have no tenants, so there is no risk you will default.
If you are confident it is financially viable, you should thoroughly research any potential purchase. Think about the opportunities that you might have to start small. Many people will begin with just a small duplex they rent out, rather than purchasing a whole apartment block. This gives you the opportunity to learn the ropes at a small scale without an expensive learning curve.
You should also research the area in which you are thinking of buying. Whether you are looking to flip or rent the property you purchase. Make sure you are aware of any planned developments that might affect real estate value. If the local government are planning a new road, for example, it might mean your real estate will accumulate in value because it’s now more accessible, or plummet it the new road means constant noise right outside a bedroom window.
And when you are moving closer to a decision look at your situation in more detail. When you have a specific property in mind you can start making more informed assessments of the likely costs and income you will incur, are rents in the area high enough to cover mortgage payments, for example, or does the age of the building mean that there’s likely to be a fairly regular need for maintenance. These will not be totally accurate but can help you make a more informed decision.
Finally, think about the risks. Make sure you have funds available to cover emergencies, or, if you don’t, use the income to generate it. And think about the vehicle you use to purchase your real estate. Your attorney will be able to advise which option is best for you, but using a legal entity to purchase real estate can help by protecting you against large losses.
A solid investment
Real estate investing is not for everyone. The capital required is too big a barrier for many people and others are put off by the management required. But it has consistently been a safe investment with a good return.
It is a sign of the security it offers that many people who have made their fortunes elsewhere, whether on the stock market or as entrepreneurs, frequently invest significant parts of those fortunes in property. Like any investment you should always seek professional advice from a specialist such as Physis Realty, but real estate is likely one of the best investments you can make.
Zanthe Alexander Bentley is a finance veteran with over 25 years’ wealth management experience advising both family offices and institutions on their corporate finance requirements including capital raises (debt & equity), restructurings and M&A activities. He has significant experience in investment management and investment banking and spent nine years at UBS focused on convertible bond arbitrage and equity derivatives.
Prior to getting involved in Asset Management he expanded a small Spanish brokerage from a handful of staff in Barcelona to a diversified brokerage company with over 150 personnel spread across 9 countries, transacting deals from High Grade to High Yield Fixed Income and Loans; Structured Products through to exchanged traded equities.
After taking time to focus on family office activities in Asia, Zanthe-Alexander now leads an ambitious zero-leveraged fund providing exceptional growth and income to Sophisticated Investors.
Zanthe Alexander Bentley Twitter: https://twitter.com/BentleyZanthe