Basic definition of real estate is “an interest in land’. The word interest can either mean an ownership interest or a leasehold interest. When you are planning your investments, you should find out what kind of exposure is appropriate for your situation. Different exposures produce varying levels of risk and return.
Different types of real estate are:
Private market
Public market
Equity and Debt Investments
Investment Selection Matrix
Investment can generate income in the form of rent, lease or achieve capital appreciation. Involves immovable property like land and everything that is permanently attached to it, such as buildings.
There are five ways to participate in market.
Investment is done with an aim to rent the property to tenant. Owner can earn money in the form of rent from the tenant but owner is responsible for paying the mortgage taxes and other costs attached to the property. In addition, owner also gets capital appreciation.
Real estate investment groups are similar to small mutual funds. They are set up for rental properties. Real estate traders buy properties and hold them for a short span of time (less than four months) with an aim to sell the profit. This process is called flipping properties. Investors significantly purchase undervalued or very hot properties. Real estate investment Trusts (REITs) is a corporation that invests in real estate. REIT uses investors’ money to acquire and operate properties. They provide regular incomes and highly liquid. Investors gain exposure to non-residential investments.
Characteristics of real estate investments:
Capital appreciation:
Capital appreciation of a property is determined by having the property appraised. If the appraiser thinks your property would sell for more than you bought it for, then you’ve achieved a positive capital return.
Tangible:
You can have a look at your investment; show it to your family and friends. You can see and touch it. You can have a certain degree of physical control over the investment-if something is wrong with it, you can try fixing it.
Requires Management:
Your property has to be managed properly. Tenant complaints must be addressed. Landscaping must be handled. And when it starts to age, it requires renovation.
High transaction costs:
Private market has high purchase costs and sale costs. On purchases, there are real-estate-agent-related commissions, lawyer’s fees, engineer’s fees and many other costs that can raise the effective purchase price well beyond the price the seller will actually receive.
Underlying Tenant Quality:
When assessing an income producing property, an important consideration is the quality of the underlying tenancy. This has to be considered because when you purchase the property, you’re buying two things: physical and the income stream from the tenants.
Variability among regions:
Location is considered an important aspect in investment. Selecting proper location is important to invest as it can create a huge impact on your eventual returns.
