Global recession has come and gone and investments in real estate in most economies around the globe were affected, however, some economies including US and South Africa have started to take shape in recent years.
The recession had left many bad feelings and attitudes towards investments particularly in the real estate industry. Things have drastically improved and many investors have started to channel their money into the real estate. It is important to note that ownership of a house is one thing but investing in real estate another. In essence investing in real estate can be a lot more complicated than mere ownership of a house. It must also be articulated that real estate investment has become increasingly important and popular in recent years. There are various forms of real estate investments this article will look tackle.
The article will also inform you on how to earn a 10% return on an estate property. Remember real estate investment is similar to any other investment and requires proper investigation before you risk your money.
Types of Real Estate Investments
1. The basic rental properties
It is one of the most popular forms of property investments where the owner buys a property and leases it out. The owner collects enough rent to cover the mortgage monthly repayment from the renter. The property owner is also responsible for paying taxes and the maintenance of the property. In most cases the landlord charges more for the rental of the property in order to make a profit. However if rent is too much the landlord may fail to get tenants and subsequently delay receiving rent to cover the mortgage and other related costs. The wise thing to do is to charge enough to cover the costs until the mortgage is fully paid. Once the mortgage is paid, all the money that the landlord will charge thereafter will be a profit after deducting maintenance and other small costs. Apart from collecting rent, the property normally will appreciate leaving the landlord with a lot more expensive property and an asset.
It may sound like a perfect way to invest your money however there are also down side to investing in a real estate property. First of all you may end up with a bad tenant who will damage your property and end up spending a lot of money renovating the property afterwards. Secondly, you may not get a tenant or tenants immediately, forcing you to get money somewhere else to keep up with the mortgage payments. Natural disasters can damage your home and renovations take a while to finish and during that period you wont have rent money coming in and your cash flow will be severely affected.
The other thing is the availability of properties to buy at your chosen area. You will also have to look for properties in an area where vacancy rates are at their lowest and a place where majority of people want to rent a property. If the area has high crime rates and transport and other amenities are hard to find, it may affect rental of your property/ies.
Unfortunately you will have to devote a lot of time and resources to your property if you want it to be an investment. Regular maintenance is essential for the property. Sometimes owners are phoned in the middle of the night to fix things that are not working properly. If for example electricity gets cut off in the middle of the night, your tenants will phone to ask for a solution. Rental properties come with a lot of responsibilities for the landlord. If you are too busy for all that, the solution is to find a property manager to handle the maintenance of your investment. It won’t be free though, you will have to pay a certain fee every month.
2. Real estate investments groups
Some people do not like the hassle of being the landlord and Real estate investment groups will definitely be suitable for them. Real estate investment groups are similar to mutual funds where a group of people pool their resources together and buy or build blocks of apartments or any other blocks of residential units. They will then allow the investors to buy units through the real estate company. When investors buy the properties they become members of the investment group. Investors can own from one to as many single units, however the investment group is the one with the responsibility of overall management of units, interviewing of tenants and takes care of advertising vacant units as well as the maintenance. The investment group gets a portion of rent for the management and other services it renders.
Well, there are various types of investment groups, however the basic advantage is that you will still receive enough to pay your mortgage even if your unit/s are empty. The lease is the (your) investor’s name and all the units pool a certain percentage monthly to protect against infrequent vacancies. This type of investment sounds ideal to first time property investors. The level of quality of an investment group will dependend on the company that has established the group.
3. Property Flipping
According to property investment experts, flipping is a short term cash investment in a property. Also known as property wholesale property or property flipping,it is a type of real estate investment where an investor buys a property with one intention of selling it quickly and for a profit. Properties that are undervalued or are established in the hot markets usually are attractive to property flippers. There are two classes of property flippers. The first group of flippers who are believed to be the true property flippers would not spend a dime renovating the property. The property itself has to sell without any alterations done to it. The second class however buys realistically valued properties that require renovations. They take their time fixing and renovating the property so that its value can appreciate. Once the value has appreciated the property flipper sells it for a huge profit. This type of flipping usually limits the flipper to one or a few properties unless they are multi billionaires.
7 Reasons you should Invest in Real Estate
1. Exciting asset value
Investment in real estate is to some extent better compared with stocks and bonds because it is supported by “high level of brick and mortar”. In essence disagreements between an agent and principal are reduced because of this. Again, the significance of the investor does not depend wholly on the reliability and capability of managers and debtors. Also, Real estate investment trusts (REITs) usually have laws that necessitate payment of a particular minimum percentage of earnings as dividends.
2. Stable and attractive earnings
The significant element of real estate investment is the huge amount of total income that accumulates over a period of time. The key difference is that volatility is reduced by investments that are reliant “more” on income earnings compared to those that rely on assets value earnings.
3. The Bottom Line
If there is an asset that is easy to understand is a real estate property. It also improves the investor`s risk and return portfolio profile. Alone real estate provides very reasonable risk- accustomed earnings that reduce agent vs principal disagreements with a potential of attracting very good income flows. As mentioned below, Real estate has the potential to reduce portfolio instability via diversification. Most people are usually concerned with illiquidity when investing in real estate; however there are customs that can be explored to reduce illiquidity. It can also be brought on par with that of conventional asset class.
4. Portfolio diversification
Apart from aforementioned benefits of investing in real estate, there is also an opportunity for diversification. Real estate is an asset class that vary with other classes, and does not have a positive “correlation” with other big asset groups. It is a benefit in a sense that when you add real estate to your portfolio of “diversified” assets it will or has a potential to reduce portfolio volatility thus providing higher earnings per unit of risk.
5. Draw back illiquidity
Unlike other assets class, real estate investing has a specific drawback known as illiquidity. In other terms illiquidity is the difficulty in converting an asset into cash and visa versa. Those investing in stocks or bonds will attest to this, it takes a few seconds for a transaction to be completed with those investments whilst it can take a few weeks to months to complete a real estate transaction. With or without the assistance of a broker it is very tricky to discover the precise “counterparty” and it may take weeks on end and a lot of work. The good news is that the current financial innovations have offered solutions to the thorny issue of illiquidity. This has been achieved by the availability of listed REITs and real estate companies. The two offer circumlocutory ownership of real estate assets and their structuring allow them to be listed as corporations. Their advantages include presenting liquidity as well as market pricing. The down side is that they reduce diversification benefits and increase volatility.
6. Inflation Hedging
Due to the supposed good relationship between GDP growth and the demand for real estate, real estate has the inflation hedging ability. In essence, when there is economic growth, the demand for real estate increases rents and subsequently higher capital values are achieved. Consequently, real estate keeps the purchasing power of capital through out when it shares some of the pressure brought by inflation on the tenants as well as integrating part of the inflation pressure as capital increase.
7. Competitive Risk-Adjusted Returns
Private market commercial real estate returned an average of 8.4 percent in a period between the year 2000 and 2010 according to a property website. The performance was hailed as one of the best achievement by the real estate industry in the US. This was not the only achievement but low volatility prominent for bonds and equities was also a notable achievement during this period for “extremely economical risk-adjusted income”. It is believed by some reviewers that low volatility in real estate is due to the occasional dealings in the real estate industry in contrast with other investments. To this end, it simply means property prices are dependent on “third-party” evaluations. Consequently, the occasional dealings and reviews flatten the earnings since accounted property prices undervalue market prices in the upsurge and overvalue during the recession.
How to Earn a 10% Return
It has been publicly pronounced that in the past 100 years investors in real estate as stock market have enjoyed ten percent annual returns on their investments. This is how it works; first of all, when you buy a house you need at least a 20 percent down payment. However many first time buyers struggle to put together a 20 percent down payment. If you put down more money for down payment, it will benefit you in the long run. Pay more deposit with your own money and borrow less and it becomes a risk free investment. It is imperative that you have insurance on your property as well. The advantage of paying a bigger down payment is that at later years when you will be required to pay principal with interest your payments will still be reasonable than when you have borrowed more. In essence, If you have the required twenty percent and extra money it is advisable that you put as much as possible as the down payment for the property. However, you may prefer to pay only twenty percent and invest your money elsewhere that is also acceptable. Money invested in bonds and other real estate will give you good annual returns and hopefully the most important 10 percent annual returns. Do not keep more money than you need in savings accounts. Annual returns are also tax deductible. All investments carry some risks.