REAL ESTATE INVESTMENT
Real estate investment entails the purchase, ownership, management and rental or sale of real estate for a financial gain.
Over the past 50 years, real estate investment has gained popularity and become a common investment vehicle. It is a form of asset with limited liquidity compared to other investments. It requires a lot of capital on commencement and to run it. It is also dependent on cash flows.
Real estate is a risky investment in cases where the factors aforementioned are not understood and managed well by the investor. The investor may have an unsustainable negative cash flow for some time and in addition to flipping, this may lead to failure of real estate that in turn forces the investor to resell the property at a loss or claim insolvency. Investing in real estate also comes with more responsibility towards maintaining your investment.
It is quite a task to locate properties to invest in and evaluate their prices. Competition among investors is also highly variable depending on the knowledge of availability. The information asymmetry is common in real estate and increases transaction risks though it also poses opportunities for investors to obtain properties at great bargain prices.
To maximize their returns on investments (ROI), investors seek to reduce their equity requirements and increase their leverage (amount of purchase price financed by debt). One way of reducing equity requirements is by exploring alternate financing arrangements such as seller financing and private equity sources.
Getting into a real investment group is proven to be a safe investment when it comes to real estate investment. These groups are like small mutual funds for rental properties. They save you the hassle of being a landlord such as having to keep up with maintenance. A company buys or builds a set of residential blocks or offices and then allow investors to buy them through the company, and in the process joining the group. The company collectively manages all the units and takes care of maintenance and advertising vacant units. The company gets a percentage of the monthly rent in exchange for their service. Note that the lease remains in the investor’s name.
Real estate trade is very different from the buy and rent business. Real estate traders buy property and hold them for a short period (not more than four months) with the hope of selling them at a profit. This is also called flipping properties where you buy the property when it is undervalued or in a very hot market and sell them after some time at a higher price. There are two classes of property flippers:
- Pure property flippers who will basically not make any improvements on the property. This is a short term cash investment and if caught in a situation that the investor cannot unload a property, it may mark the beginning of his devastation.
- Those investors that buy reasonably priced properties and renovate them. This kind of investment can be long term investment depending on how much and how well improvements have been made. This class is however time insensitive and at times it only allows investors to take on one property at a time.