Real estate investment involves the purchase, ownership, management, rental and/or sale of real estate for profit.
Forms of Real Estate Investment
Real Estate Investment takes different forms. Let’s look at them.
Buying and Renting: Buying and renting a property is where a person purchases a property and rents it out and uses money from rentals to maintain the property.
Real Estate Investment Trust (REIT): A real estate investment trust (REIT) is created when a corporation (or trust) uses investors’ money to purchase and operate income properties. It is a form of collective investment scheme regulated by the Securities and Exchange Commission (SEC). REITs are bought and sold on the major exchanges, just like any other stock.
The Investment scheme pools capital from investors and uses it in the acquisition of income generating real estate, mortgage loans, or a combination of both. Investors hold an indirect interest in real estate.
Real Estate Investment Groups: Real estate investment groups are sort of like small mutual funds for rental properties. If you want to own a rental property, but do not want the hassle of being a property owner, a real estate investment group may be the solution for you.
A company will buy or build a set of apartment blocks and then allow investors to buy them through the company, thus joining the group. A single investor can own one or multiple units of self-contained living space, but the company operating the investment group collectively manages all the units, taking care of maintenance, advertising vacant units and interviewing tenants. In exchange for this management, the company takes a percentage of the monthly rent. The quality of an investment group depends entirely on the company offering it.
Real Estate Trading: Real estate traders buy properties with the intention of holding them for a short period of time, then sell them later for profit. This is also called flipping properties and it’s based on buying properties that are either significantly undervalued or are in a very high market.
Leverages: With the exception of REITs, investing in real estate gives an investor one tool that is not available to stock market investors: leverage. If you want to buy a stock, you have to pay the full value of the stock at the time you place the order. Even if you are buying on margin, the amount you can borrow is still much less than with real estate.
Most “conventional” mortgages require 25% down payment, however, depending on where you live, there are many types of mortgages that require as little as 5%. This means that you can control the whole property and the equity it holds by only paying a fraction of the total value. Of course, your mortgage will eventually pay the total value of the house at the time you purchased it, but you control it the minute the papers are signed.
This is what emboldens real estate flippers and landlords alike. They can take out a second mortgage on their homes and put down payments on two or three other properties. Whether they rent these out so that tenants pay the mortgage or they wait for an opportunity to sell for a profit, they control these assets, despite having only paid for a small part of the total value.
Real Estate Market Analysis: To know the best form of investment to invest in requires a market analysis. A real estate market analysis is the process of analyzing a certain real estate market, based on historical and current data in order to identify the best potential investment properties to purchase in the market.
Real Estate market analysis involves identifying a location, the kind of property to invest in, finding a data source, property price, comparing other properties and deciding on the best investment property.
Importance of a Real Estate Market Analysis
Helps to make informed decisions: It helps investors make informed investment decisions to ensure the highest return on investment. Knowing the kind of market you are investing in, helps you avoid mistakes that lead to losses.
A real estate market analysis would prevent an investor from making mistakes. For instance, it would prevent an investor from building hostels for rent to students, only to sell them out as homes due to lack of patronage by students.