Understanding the Concept of Real Estate

Have you ever wondered what real estate  investments are all about? Most people see real estate investments as the buying and selling of landed properties others see it as the renting out of landed properties to tenants. 

Is there more to real estate than this? 

The answer is Absolutely? 

Real estate is not just a type of investment but it is one investment every investor should have in his/her portfolio. 

1.     It can be funded continually by debt

There are few investments that you can acquire through loans. Most banks discourage borrowing to start-ups due to their high failure rates. Most of their credit policies also don’t allow them to borrow you funds to use for stocks/Forex etc This is primarily due to the high risk involved in such investments.

However for Real Estate investments one can borrow money from a bank to buy a house (mortgage) and rent it out as the owner to a tenant,  pay the my monthly mortgage principal and interest and own the house. These properties can even be used as a collateral in most cases.

2.     Appreciating Value

Real estate and landed investments naturally appreciate in value irrespective of location as far as there is peace in the area. This is primarily because it is limited in supply.  The amount of land available in an area is constant while demand grows daily.  This is one of the reasons banks agrees to use them had collateral for debt. 

The appreciation rate is known to typically be between 5% to 7% annually. 

So let's  say you are planning to borrow to buy a home for $1000.  After 10 years the home will be around $1790 at 6%.

That's great value if you are looking to resale. 

3.     Attractive cash flows

The streams of income from Real Estate investments can be very large. This is especially through for countries that pay rent on a monthly basis. More so, it is an established fact that all landed properties tends to appreciate in value over time. This can be achieved though debt by continual purchasing of rentable properties so that the Monthly income is sufficient to repay ones property investments instantly. One has to have good money management skill though as one can be easily spoilt with large streams of cash.

4.     Has derivatives 

Yes,  most people don't know real estate have derivatives.  (That is an investment instrument derived from another.)  

a.     REIT (Real Estate Investment Trust) are the equivalent of mutual funds in Real Estate. .  It allows you to invest your money to an estate fund manager that invests it  series of estate and gives you the proceeds at a fixed interval. 

b.    CDO's  (Collateralized Debt Obligation),  This is a financial product  that pools together cash flow generating assets usually debts into discrete pieces that are then traded to investors.  Such debts are traditional lay owned by banks.  They include loans, mortgages etc.  So these banks practically do is to  act as an intermediary and use  investors money to lend money to prospective home owners. Investors are then entitled to the proceeds that the bank were receiving. This is very nice as you can earn the bogus profits banks earn from mortgages. 

5.     Fairly liquid

Houses are quite liquid(easily sold) than many people believe.  The rapid globalization around the world is making it increasingly possible to sell Real Estate Investments Properties than before.  There are now apps, websites that link prospective buyers to sellers.  There are several agents that are ready to market your Real Estate Property to whoever is looking to buy. 

The fear of getting stuck to a bad Real estate investments property is increasingly easing away.  Unless you mistakenly buy a haunted house, you should no have problem selling your investment property.  I envisage 1 to 3 years max. 

Recommended approach to buying of properties

·                      Buy soon to be populated areas. 

A general rule is to buy properties around areas where population is going to Increase to very soon.  This is the best place to get deals that will rapidly yield 20% to 100% plus returns.  The earlier you can anticipate this population deals the better for you. 

·                      Buy properties in low crime areas

Never buy properties in areas where crimes are high.  You may say this is contradicting with buying in high population.  However this is not true. Even in high populated areas there are areas with low crime rate.  Not adherence to this route will get you are property no business will want to rent or buy and no family will want to rent because of robbery. 

·                      Buy semi deteriorated properties 

Semi deteriorated properties will get you buildings at a really good building a at good locations at a very low price.  This is because deterioration grater reduces property prices.  You can then renovate it at a subtle amount an resale at a feat price. 

·                      Use debt whenever possible to accelerate your cash flow 

You will not enjoy real estate without maximizing the cash flow benefits. To fully enjoy this feature you need to purchase multiple properties.  This often need you to borrow to fund the property. You can then repay the debt from the rent cash flow and own the building.  If you do this repeatedly you could soon be earning millions from rent we without using your money.  More on this later 

Conclusion 

Real estate is a great investment for any investor. The complications you may encounter are largely legal and troublesome tenants that either wouldn't pay or will damage your property. 

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