Several things come to our mind when we think of the term investment. In simple terms, investment is just an asset or savings for present and future use. It could be invested in various ways such as in stock markets, mutual funds, real estate investment, and lots more.
Significance of investment
It is the value of assets which can later bring in profit. People invest in instant savings to generate wealth. It can provide cash flow from rental properties. Real estate investors enjoy the benefit of steady income flow, making them financially stable.
Importance of investment
One cannot fulfill the basic needs of daily life only through the savings account. We should always think of other alternatives of cash inflow for a secured future. This will help in long term goal-achievement. Let’s have an overview of real estate investment for all real estate investors
Overview of real estate investment
The land is considered as real estate. The property consists of buildings, apartments, farmlands, etc. Real estate investment is one of the asset class in investing worldwide. It is also the most common and long term investments. The liquidity in the real estate investment is very low, unlike equity or other asset classes.
Types of real estate investments
There are a few types of real estate investments. Some of them are listed below.
Residential – In this type, the owner lends out the houses, apartments, buildings to a family or individuals for a certain time. The duration is based on the rental agreement, widely known as the lease agreement. The residential leases may be for twelve month time. The most common categories are townhouses, duplexes, vacation homes, etc.
Commercial real estate – Structural buildings such as offices, skyscrapers, medical and educational buildings, hotels, shopping malls, etc. are generally categorized under commercial types of real estate investments. The companies pay the rent for property usage. The investor can invest either in commercial or residential property. The residential apartment is mostly used for the end user. Commercial part is most commonly used for renting and leasing purpose.
Industrial real estate – This could be a long-term agreement for storage, warehouses, and manufacturing buildings. These buildings are used for storage or goods distribution. It is also used for research laboratories and other purposes.
Land – It includes vacant land, farmlands, and ranches.
Real estate industry comes under a certain institutional framework. Any investor who wants to invest in the real estate industry must check the approval from various government departments. The construction of a shopping complex or residential apartment is used either for sales or lease purpose.
The construction of residential apartment can be made in various modes. These are listed below.
- Joint venture – This can be made between the landowner and the builder.
- Builder construction – Builder, can purchase the land and construct the apartment.
- Sub mention scheme – This can be made between three parties – builder, buyer, and bank
Investment process
The investor can invest in various stages. They can do it at the time of launch of the project. The benefit can be at a low price. The investment amount is less at the time of the launch of the project and increase gradually during the construction stage and after completion of the construction.
Most factors are considered while investing in it. Will the house or land value rise when still alive? Many people own houses and then rent them out to make money. Equity: If a loan is taken to buy a property or apartment. The mortgage can be paid from the money paid by the tenants.
Advantages and disadvantages of real estate: There are certain pros and cons of real estate investment.
Advantages:
- Real estate can be financed and leveraged. You can get a regular income from the rents.
- Easy to understand, as it involves the purchase of the physical property. Most of the people are familiar with real extend to some extent.
- With good management and maintenance, real estate properties can always be improved. Henceforth, the value can also be increased.
- Real estate is a hedge against inflation. With an increase in the inflation rate, the price value of housing and rents too will go up.
- We can always leave the real estate as a will to the family members.
Disadvantages
- When purchasing real estate, the transaction costs are considerably higher.
- Real estate has low liquidity.
- If you do not sell or rent out on time, you will end up with a huge sum to pay off the debt.
- Investors have to keep the property for months and years to get a profit.
- Finding a loan for investing in real estate is sometimes a problem. Everybody may not meet the eligibility criteria.
- Real estate requires maintenance and management. If the property sits empty for a certain time. The management and maintenance costs can add up quickly.
- Properties can’t be quickly and easily sold.
- Real estate investment causes a great deal of financial an legal liability
Risks in real estate investment
- If we tell the client that the property is in a great locality. The price value will go likely high up in the coming decade. But if it turns out to be the other way round, the client can file a lawsuit.
- There are few risks associated with the investment in the initial stage. An investor needs to check all; the necessary documents of the builder and track record of an earlier project
- In an open house, more members move in and out. If in front of your watch a child gets injured by tripping on the stairs and breaks his arm realtors could be sued.
- If you fail to reveal a neighborhood problem being a noisy area, you could also be sued for violating professional standards.
- With the economic conditions, the real market has its ups and downs. Hence it has no surety of profit while investing the money.
- Vacancy of the property is also a huge risk. If we rely on the tenant for rental payment to pay off our mortgage.
- Risk of ending up with the bad tenant. If the tenant fails to pay the monthly rent is even worse than not getting tenant at all.
- If the investors are unable to pay off their mortgage on time or for a few months. Their property could be taken up by the bank
- Lastly, the most common and derived investment is in the land which is the least liquid asset class
The takeaway
Real estate investment is one of the best ways to make money. There are although few risks involve it. So, you should be wise enough to know where and how to invest. You should also keep in mind while investing the rate of return income. You can build equity, which is a part of an asset. As you build equity, you now have the leverage to acquire additional rental properties and an increase in cash flow
