Definition: Real estate investing refers to the purchase of property as an investment to generate income rather than using it as a primary residence. In simple terms, it can be understood as any land, building, infrastructure and other tangible property which is usually immovable but transferable.
Some of the examples of real estate are a house, office building, agricultural land, commercial plot, etc. It is considered to be a secured form of investment.
Content: Real Estate Investing
Classification of Real Estate
Real estate includes various properties which can be classified by their uses. These are as follows:
Residential Real Estate: The real estate which consists of home, i.e., single, duplex, triplex, township, bungalow etc. used for residential purpose. Whether it is a newly constructed property or a house to be resold by the owner.
Industrial Real Estate: A large scale property utilized to build factories, manufacturing units, warehouses, distribution centres, etc. are categorized under industrial real estate.
Commercial Real Estate: The properties or office buildings such as a complex, are parted into multiple small units. These are rented out or used to run various businesses. Therefore, they are known as commercial real estate.
Retail Space: These properties are used as showrooms, restaurants, shopping malls, retail stores, etc. either individual units or multiple units located in the prime location.
Land: Any vacant land where activities like ranching or farming take place is also a form of real estate.
Fix and Flip Properties: The residential properties which are in a poorly maintained state and are available at a low price are termed as the fix and flip properties. These properties, when purchased by the buyers involved in renovation and repairs of properties to modify them and sell at a high price.
Mixed-Use: A single high-end real estate project which constitutes of different types of properties mentioned above to ensure diversification and minimize the risk of project failure, is termed under mixed-use real estate.
Features of Real Estate Investing
When we talk about real estate, we can say that it requires a lot of foresightedness and capital investment to expect fruitful returns.
Let us now understand the characteristics of real estate investment one by one:
- Tangible: Real estate or properties are one of those investments which have a physical existence and can be touched and seen.
- Immune to Inflation: When economic inflation creates a negative impact on the value of other investments, investing in real estate is a fruitful option. It is the only investment which results in value appraisal in adverse situations.
- Allows Use of Leverage: The financial institutions are attracted towards funding for real estate because of its real or physical existence.
- Uncertain Maturity Period: Real estate investment does not have any fixed maturity period like in other investments such as fixed deposits and bonds. It is the owner who decides whether to hold the property or sell it.
- Value Enhancement: Investing in properties can provide dual benefit to the investors. On the one hand, real estate generates rental income, and on the other hand, its value keeps on increasing in the long run.
- Low Liquidity: One of the essential features of real estate is that it is a capital asset. Therefore, it cannot be frequently bought or sold like stocks or equity.
- Needs Management: Real estate investment is buying a physical asset which involves the expenditure on its maintenance. The investor also needs to manage the source of income so generated.
- Universally Acceptable as Collateral: Financing the properties by taking them as collateral is very common among the banks and other financial institutions.
- Profitable Even During Recession: Real estate investments have been considered as one of the safest investments. If done wisely, they yield profit or generate income even at the time of recession.
Means of Earning Through Real Estate
To make money from real estate, one has various options. The significant ways of investing in real estate are mentioned below:
Appreciation of Property Value: Usually, the value of property keeps on increasing even in the situation of inflation in the economy, therefore investing in real estate is a wise decision.
Rental Income: Renting out premises, whether residential or commercial, is always a good idea for generating a progressive passive income in the long run.
Related Commission: The real estate management companies, agents or brokers can make money in the form of commission by facilitating the exchange of property among the buyer and the seller.
Income from Ancillary Real Estate Investment: Other than regular income from business or salary, one can develop a source of additional revenue by various means. One of these is installing a vending machine in the running business premises.
Real Estate Investment Trusts (REIT): In India, the investors who are willing to invest in the real estate but lack sufficient capital can buy units of real estate investment trusts, listed with the stock exchange and approved by SEBI. The fund so collected are invested in different types of real estate projects.
Benefits of Investing in Real Estate
Investment in real estate can prove to be beneficial in the long run. If done wisely, it may generate lucrative returns.
The advantages of pooling money in real estate are as follows:
- Hedge Against Inflation: Unlike other assets, real estate is not adversely affected by inflation. Instead, its value and income increase with the rising economy.
- Rent Pays Off for Mortgage: Residential and commercial properties are the only assets which have the capability of generating income through rentals to pay off the interest on their mortgage.
- Stable Income: It can be seen as the most significant source of generating passive income. The investors can rent out their property to ensure regular and steady cash inflow.
- Tax Benefits: Real estate investors relish tax exemptions on the rental income up to a specific limit. Even the tax rates for such investments when made for the long term, are quite low.
- Self Decision Making: A real estate investor is free to make his or her own decision, similar to running any other business entity. In short, the investor is his or her boss.
- Financial Security: As we know that putting money in real estate is a long term investment. The investor has the possession of a physical asset, hence providing financial security to the person.
- Value Appreciation: Real estate investment is the purchase of property which encounters capital appreciation in the long run.
Drawbacks of Investing in Real Estate
When real estate is a profitable investment, it has some limitations which are discussed below:
- High Maintenance and Management: Real estate investment is buying a physical asset which involves the expenditure on its maintenance. The investor also needs to manage the source of income so generated.
- Huge Transaction Cost: Buying and selling of properties is a costly affair. The transaction cost, including registry charges, legal expenses, diversion, etc. are so high that the cost of investment increases for the buyer.
- Creates Financial and Legal Liability: The investor may become overburdened by the financial liability if he or she buys a property on loan. Even the transfer of ownership at the time of property purchase creates a legal obligation on the investor.
- Less Liquid in Nature: Unlike other investments like stocks, real estate cannot be easily bought and sold regularly. Therefore, it may not prove to be a suitable investment option for investors seeking short term profits.
- Requires Dealing with Market Inefficiencies: Sometimes, the investors who lack the necessary information about the prospective real estate project, pool in their money at not so profitable projects.
- No Fixed Maturity: Real estate appraisal does not take place at a fixed rate in a defined period. The capital appreciation in case of properties is a long term process; it is though presumed but not pre-defined.
Reasons for Failure in Real Estate Investing
If not done wisely, real estate investment may even lead to poor returns or depreciation of the investment value.
Following are some of the primary reasons for which the real estate investing goes wrong:
- Lack of Knowledge: Before investing in real estate, one must have ample knowledge and information about the project he or she is planning to spend in. Most of the investors fail to analyze the right time of investment or potential of the property and are unable to generate good returns on their sum.
- Poor Management: Buying of a suitable property or real estate project as an investment is an art. But the investor needs to equally pay attention towards the management and maintenance of that property, contractors, budget and tenants. In the case of a real estate which is poorly managed, the returns may deplete.
- False Calculation: Real estate investing requires a calculative approach and mathematical skills to determine the future profitability of a project. Sometimes, investors lack these particular skills and fund in less beneficial projects.
- Giving Up Early: One of the most common mistakes made by an impatient investor is expecting a high return from a real estate investment in a short period. And if it does not happen, they lose hope and give up easily. Such people need to understand that these investments yield high returns in the long run.
Tips for Investing in Real Estate
Investing in real estate is a long term approach and yields high profit in future at a low-risk level. These investment decisions are irreversible.
Therefore, the following tips will help you in making real estate investments even with minimal capital:
Collaboration or Partnership
If an investor lacks sufficient money for investing in a property which can prove to be a cash cow in future; he or she can convince a friend, family member or any other known person to invest in a partnership.
One may even opt for loans and advances from the bank or other financial institution. Here, the property itself can be kept as collateral, and the interest can be paid from the rent earned.
Location of the Property
People are usually looking for the real estates which are well managed and sounds appealing to them. However, one must focus on the site of the property more, instead of its appearance. An old ugly looking property at a prime location can be availed at a reasonable price and renovated or reconstructed to generate high returns.