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Tips on how to invest in real estate

Updated on July 11, 2010

Investment Real Estate

shopping malls are the number one investment real estate chosen by investors
shopping malls are the number one investment real estate chosen by investors

Real Estate Investment

Is real estate investment a safe alternative to stocks and bonds

Real Estate is an economic good just like any other product or service which can satisfy human needs and is scarce relative to its demand. Comparitive to stocks and bonds, investment in real estate is still a tangible product and can be sold and raded with relative ease whilst maintaining its ability to generally increase in value over time.

Putting aside the tax benefits of owning real estate and the administrative involvement that is usually associated with real estate, we can take pride in the fact that anytime we want to, we can climb in our car and drive to our investment and see and touch the bricks and mortar which still keeps a high note with many an investor.

The scarcity factor of good investment real estate does not imply rarity, but merely that when traded as a commodity amongst investors, the price will be determined by the price that an investor will be prepared to pay for the property in relation to the productivity that it will be percieved to offer him and its ability to offer functional utility to a user in the market place.

These two factors may be said to be more important than any current rates of return as investors are usually looking for hidden equity which is still to be realised by a few small changes.

How do we assess value in investment real estate

Apart from the traditional method of comparisons used to dtermine real esate value by looking for similarities in recently sold real estate in the geographic location of the subject property, there are a few other methods by which a valuer may determine value.

With investment property, it is mostly a case of analyzing the potential cash flow generated by the investment over a predetermined time, usually in increments of 5 years or 10 years as this is usually the term by which funding is put into place for the acquisition of the investment protfolio.

The number one determining factor for an investor is the ability for the cash investment to outperform alternative investment vehicles relative to return on investment. If for example a property is utilised by a tenant who pays a rental stream or $120 000 per year to the investor and his investment is calculated to be $100 000 for that particular year, then iit can be said that his return on investment is the $20 000 difference being 20%.

What most folk don't realise with investment property is that there are usually external factors at work such as rental increases from year to year as well as a capital appreciation in the bricks and mortar value of the buildings which reduce the overall costs of the investment on a year to year basis.

So the question becomes. Can the invested funds be stable enough in a marketplace for a particular property to outperform the other traditional investments. Historically speaking the marketing will bubble every 10 years whereby the naive investor will be caught by a sudden turn in the market due to macro-economic conditions and not be in a position to ride it out for the approximate 12 months that it takes to recover.

The reason for the loss of many investment properties by investors during recessionary times is mainly due to their gearing strategies. By gearing we mean the relationship of own funds risked in realtion to borrowed funds form an institional investor or bank. To combat this phenomenon, the norm is usually a maximum of 50% gearing which allows for the returns to be ploughed into the deficit in any maintenance or other costs that may be experienced in maintaining security of the tenant or the cost of finding a replacement tenant.

So in order to assess value in investment real estate, we need to have cogniscance of any potential shortfalls in the marketplace and have some form of safety mechanism in place to combat this. So an assumption based purely on a rate of return may work in some cases, provided there are no borrowed funds involved.

It is for this reason that returns sometimes drop in property loan stock dividends as they have a diverse portfolio and can afford to have substantially higher vacancy factors as the returns from some properties are used to support the non performing properties before any dividends are declared.

Investment Real Estate if treated correctly will yield profitable returns

So in conclusion, if an investor uses real estate as part of his investment portfolio, the capital growth should mostly improve over time and the returns are usually good enough to substantiaite the reason for investment in the first place - to outperform other investment means.

Residential real estate in my opinion is not a true investment property as it can not support a return on investment in todays day and age. For the traveller to multiple countries spending vast amounts of time on business paying for exhorbatant hotel fares, then i can maybe understand the need for multiple residences, but it needs to be said that the who chooses to acquire large amounts of residential property for his retirement portfolio is not the same as the investor looking at internal rates of return in commercial, retail and industrial sectors.

I hope you found this article of a little help in determining whether investment real estate is something that you wish to add to your portfolio. if so, my first suggestion would be to sit with an accountant and ascertain the different benefits and tax advantages associated with the various ownership choices like companies and family. The accountant would also be able to give you some direction on your pricing strategies relating to gearing before consulting wiht an experienced real estate broker in finding the right tenant mix and location for your first investment property. A last rule that i have used throughout my investment strategies is to never look at any sites that are more than 1 hour drive in any direction form my base office for convenience.

Become a foreclosure expert in real estate investment


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    • Jokylu profile image

      Jokylu 6 years ago from Waratah North, Victoria.

      An excellent and well written hub on real estate investment. It is straightforward and very sensible. Thankyou for sharing.

      I am going to link it to one I am in the rocess of writing

    • Dale Nelson profile image

      Dale Nelson 8 years ago from South Africa

      Thanks for the feedback Abinavis.Hope there was something you can use for Property Investment.

    • abinavis profile image

      abinavis 8 years ago from Bat Island

      Very valuable articles for those who will invest their money to properties for long term investment. Good articles anyway. Thanks for sharing to everybody.