Real estate investment goals
Every investor should answer the question: what is the main goal they set for themselves when they are going to invest in real estate? This determines the investment strategy, the choice of the object, the time for which finances are invested, as well as the risks, profitability and payback of the project.
Research shows that no more than 20% of potential investors set specific goals. This explains why investments often don’t meet expectations. Make sure that:
- You understand what resources will be needed.
- You have enough financial resources to implement your plans.
- You have enough time to reach your goal.
- You understand what obstacles may arise and know how to deal with them.
By selecting real estate as an asset, you can:
- save money from inflation;
- save on rent payments. Instead of renting a room, you can get a mortgage and become the owner. This idea is suitable for those who do not know how to start investing in real estate from scratch, without having a start-up capital;
- provide passive income from renting out real estate;
- make a profit by reselling the property.
You can invest in foreign real estate in order to get economic citizenship for this. This opportunity is offered by Cyprus, Malta, and the Caribbean states. In this case, we are talking about investments measured in hundreds of thousands of dollars. Such investments require competent legal support: the investor has to cooperate with specialized companies.
Ready to make a real estate investment ― where to start?
The investor needs to figure it out:
- What types of investments are there?
- What kind of profit can you expect and in what time frame?
- What are the types of objects and how do I choose them?
- What are the legal financing schemes (own funds, credit, by purchasing targeted bonds, making a deposit when buying housing in new buildings, etc.)?
- What risks are important to consider before investing?
Types of real estate investments
Before you start investing in real estate, compare the available investment options:
Investment of capital in residential or commercial buildings. Residential real estate usually requires less money, so it is chosen by most novice investors. A more complex and often more expensive option is to invest in non ― residential properties, such as offices, retail, warehouse, hotel complexes, and other locations.
Types of investment in real estate are distinguished depending on the stage of readiness of the object at the time of the transaction. This can be the purchase of a fully completed room or an investment in construction. Having made such a choice, you can expect high incomes, but the risks of financing unfinished projects are also higher.
The easiest option is to purchase ready ― made residential real estate. When dealing with an object under construction (especially at the initial stages of construction, for example, at the stage of digging a pit), you need to be prepared for such risks:
- freezing of construction;
- problems with putting the structure into operation;
- problems connecting the building to municipal communication systems.
The purchase of commercial real estate is accompanied by large amounts of investment and additional costs associated with the maintenance of objects. By investing in retail space, you will most likely have to constantly deal with the property in order to monitor the tenants and the condition of the premises.
Terms of investment
When using real estate as an investment tool, tune in to the long term. On average, you can return your investment 7-12 years after the purchase.
Imagine that you have purchased a ready-made apartment worth 3 30 thousand for rent. The employer pays щомісяця 200 a month. You will be able to return the invested amount in 12.5 years. Since the amount of rent is constantly changing, the actual payback period may be different. You also need to take into account the associated costs ― for tax payments, repairs.
Another option: you buy an apartment in a new building for 1 120 thousand, additionally invest 3 30 thousand in repairs and rent it out to tenants for. 1300. The estimated payback period is less than 10 years, after which the object will start to make a profit.
It’s about the same with commercial real estate. For most transactions in the real estate market, the average payback period is 7-10 years, but this is not a static value, since it is influenced by many factors. The rental price may increase or decrease significantly, and then the figure will be completely different.
You can quickly return the investment and make a profit in cases where the object is purchased for resale (speculative investment). For example, investors who have free money on hand buy real estate at the construction stage and then resell it in a ready ― made state-with repairs, and so on. In this case, the payback period is reduced to 1-5 years, and capital gains can reach 10-50%. Profitability depends on the type of real estate, the market situation, macroeconomic, regional and other factors.
For those who want to learn how to objectively assess the prospects of investing in real estate, the Robert Schiller formula will help. The Nobel laureate in Economics offers a fairly simple way to estimate: before buying, calculate the average ratio of the price of a home or other object to the amount of annual rent. To do this, analyze the price offers on the market and divide the cost of real estate by the planned amount of income for the year. Approximate calculation:
Housing costs 2 25 thousand. estimated rental income is 1 150 per month, or.1,800 for 12 months. In this case, the value-to-income ratio = 13.9 (25,000:1800). According to Schiller’s formula, anything in the range of 10-15 is considered an adequate valuation of real estate. If the ratio is less than 10, we can assume that the property is undervalued ― this option is the most promising for investment. If the calculated indicator is >15, the object, on the contrary, is overvalued and it is still not profitable to buy it.
This is a rather rough calculation that does not take into account inflation, demand and competition in the market. However, the formula is quite suitable for a basic estimate.
When is the best time to invest money
There is no clear answer when it is best to buy real estate.
On the one hand, during the new year’s Eve holidays and summer holidays, there is a slight decrease in market activity. Therefore, there is a chance to purchase an interesting object at a favorable price. On the other hand, many other factors, such as economic and political circumstances, as well as regional characteristics, significantly affect supply and demand.
According to realtors ‘ statistics, the highest possible real estate prices are usually recorded in April-October. But even at this time, you can purchase an object at an attractive price, since the owners sometimes sell assets urgently. Try to constantly monitor the situation and take into account the features of different types of real estate. For example, new buildings often offer holiday discounts of 10 – 15% in December.
Real estate investment strategies
There are many investment options available for different types of real estate. For example, those who are interested in objects on the secondary market can:
- buy a house in good condition and immediately rent it out;
- buy an apartment that needs to be renovated. After putting the housing in order, you can: a) rent out square meters at a higher price, B) resell the object and immediately receive income. The profit in the second case can reach 10-50%, but the investor must be able to give a competent assessment of real estate and have certain skills in the field of repair and construction. It is possible that the cost of repairs in the end will not pay off;
- buy a large apartment and make it into two studio apartments for further rental. You can, on the contrary, buy two apartments and make one of them larger, more comfortable ― for rent or resale.
The second and third options allow you to get a higher income, but the repair work will last for some time, plus you will have to invest additional money. These are the costs of the repair itself and the costs associated with the design of redevelopment. The proposed strategies are relevant for both commercial properties and new buildings. One of the ways to increase the value of commercial properties is to transfer them to the housing stock and arrange loft ― style premises.
Those who choose real estate on the primary market can make a contribution at any stage of construction. The earlier you invest money (the less built at the time of investment), the more profit you can expect. As in the case of secondary real estate, an investor who has bought square meters in a property under construction can continue to use this property for rental and resale. In addition, you can also resell the apartment at any stage of construction. One of the options is to purchase an apartment at the initial stage of construction for credit funds and then resell it after the building is put into operation. Such a transaction, under favorable market conditions, can give a good yield ― from 35% and above.
Pros and cons of investing in real estate
All types of deposits have their own advantages, disadvantages and features. Real estate is remarkable because it can provide a stable income in the form of rent for a long time (at least decades). At the same time, the value of the asset itself increases in the medium and long term. The owner can improve the condition of the object and increase its liquidity.
Compared to real estate, securities are a riskier investment option: the risk of reducing the value to zero in the case of real estate is minimal. Investing in real estate is supported by a significant choice of properties and strategies: choose an asset in any price segment, for various purposes-for living or doing business.