Investing in real estate: where to start?

Real estate investment goals

Each investor will have to answer the question: what is the main goal he pursues, going to invest in real estate? The investment strategy, the choice of the object, the time for which finances are invested, as well as the risks, profitability and payback of the project depend on this. Find out more where you can buy vacation rental property.

Research shows that no more than 20% of potential investors set specific goals. This explains why investment often falls short of expectations. Make sure that:

• You understand what resources will be needed.

• You have sufficient financial capacity to implement your plans.

• You have enough time to achieve your goal.

• You understand what obstacles can arise and you know how to cope with them.

By choosing real estate as an asset, you can:

• Save money from inflation;

• Save on rental payments. Instead of renting a room, you can get a mortgage and become an owner. This idea is suitable for those who do not know how to start investing in real estate from scratch, without starting capital;

• Provide passive income from renting real estate;

• To make a profit by reselling the object.

You can invest in overseas property in order to obtain economic citizenship in return. This opportunity is offered by Cyprus, Malta, the Caribbean states. In this case, we are talking about investments measured in hundreds of thousands of dollars. Such investments require competent legal support: the investor has to cooperate with specialized companies.

Ready to invest in real estate - where to start?

A novice investor will have to figure out:

1. What types of investments are there?
2. What profit and in what time frame can you expect?
3. What objects are there and how to choose them?
4. What are the legal financing schemes (own funds, credit, by buying targeted bonds, making a deposit when buying a home in new buildings, etc.)?
5. What risks are important to consider before investing?

Types of investments in immovable spine

Before you start investing in real estate, compare the investment options available:

1. Investment in residential or commercial buildings. Residential real estate usually requires lower costs, which is why most of the novice investors choose it. A more complicated and often more expensive option is investments in non-residential properties such as offices, retail, warehouse, hotel complexes and other locations.

2. Types of investments in real estate are distinguished depending on the stage of readiness of the object at the time of the transaction. This can be the purchase of a fully finished premises, or an investment in construction. Having made this choice, you can count on high incomes, however, the risks when financing unfinished projects are higher.

The easiest option is to buy a finished residential property. When dealing with an object that is being built (especially at the initial stages of construction, for example, at the stage of digging a foundation pit), you need to be prepared for the following risks:

• Freezing of construction;

• Problems with the commissioning of the facility;

• Problems with connecting the building to municipal communication systems.

The purchase of commercial real estate is associated with large amounts of investment and additional costs associated with the maintenance of objects. By investing in retail space, you will most likely have to constantly deal with the property in order to control the tenants and the condition of the premises.

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Investment terms

When using real estate as an investment tool, tune in for the long term. Investments can be returned on average within 7-12 years after purchase.

• Let's say you bought a finished apartment worth $ 30,000 for rent. The tenant pays $ 200 every month. It will be possible to return the invested amount in 12.5 years. Since the rent is constantly changing, the actual payback period may be different. It is necessary to take into account the associated costs - for tax payments, repair work.

• The second option: you buy an apartment in a new building for $ 120 thousand, additionally invest $ 30 thousand in repairs and rent it out to tenants for $ 1300. The estimated payback period is less than 10 years, after which the object will begin to make a profit.

The situation is much the same with commercial real estate. For most transactions in the real estate market, the payback period is on average 7-10 years, but this is not a static value, since it is influenced by many factors. The rental price can significantly increase or decrease, and then the figure will be completely different.

• It is possible to return investments faster and make a profit in cases when the object is acquired for the purpose of resale (speculative investment). For example, investors who have free money in their hands buy real estate at the construction stage and then resell it in a finished state - with repairs, etc. In this case, the payback period decreases to 1-5 years, and the capital gain can reach 10 -fifty%. The yield depends on the type of real estate, market situation, macroeconomic, regional and other factors.

Those who want to learn how to objectively assess the prospects for real estate investments will be helped by the formula of Robert Schiller. The Nobel laureate in economics offers a fairly simple way of assessing: before buying, calculate the average ratio of the price of housing or other property to the amount of annual rent. To do this, study the price offers on the market and divide the requested property value by the estimated income for the year. Approximate calculation:

• Housing costs $ 25 thousand. Estimated rental income - $ 150 per month, or $ 1800 for 12 months. In this case, the ratio of cost to income = 13.9 (25,000: 1800). According to Schiller's formula, anything in the 10-15 range is considered an adequate property valuation. If the ratio is less than 10, it can be assumed that the property is undervalued - this option is the most promising for investment. If the calculated indicator is> 15, the object, on the contrary, is overvalued and it is most likely not profitable to buy it.

This is a rather crude calculation and does not take into account inflation, demand and market competition. However, the formula is quite suitable for a baseline estimate.

When is the best time to invest

There is no definite answer when it is best to buy real estate.

On the one hand, during the pre-New Year holidays and summer vacations, there is a slight decrease in market activity. Therefore, there is a chance to acquire an interesting object at a bargain price. On the other hand, many other factors, such as the economic and political environment, as well as regional characteristics, have a significant impact on supply and demand.

According to the statistics of realtors, the highest real estate prices are usually recorded in April-October. But even at this time, you can purchase an object at an attractive cost, since the owners sometimes sell assets on an urgent basis. Try to regularly monitor the situation and take into account the peculiarities of different types of real estate. For example, in new buildings in December, they often offer holiday discounts of 10-15%.

Real estate investment strategies

There are a large number of investment options for different types of properties. For example, those who are interested in objects in the secondary market can:

1) buy housing in good condition and immediately rent it out;

2) buy an apartment in need of renovation. After putting the housing in order, you can: a) rent out square meters at a higher price, b) resell the object and immediately receive income. The profit in the second case can reach 10-50%, but the investor must be able to give a competent assessment of real estate and have certain skills in the field of repair and construction. Situations are not excluded when the cost of repairs, in the end, will not pay off;

3) buy a large apartment and make two studio apartments out of it for subsequent renting. You can, on the contrary, buy two apartments and turn them into one larger, more comfortable one - for rent or resale.

The second and third options allow you to get more income, however, the repair work will take some time, plus you will have to invest additional money. These are the costs of the repair itself and the costs associated with redevelopment registration. The proposed strategies are relevant for both commercial properties and new buildings. One of the ways to increase the value of commercial properties is to convert them to housing and furnish premises in the loft style.

Those who choose properties in the primary market can contribute at any stage of construction. The earlier the money is invested (the less is built at the time of investment), the more profit you can expect. As in the case of secondary real estate, an investor who has bought square meters in a facility under construction can later use this property for renting and resale. Moreover, you can also resell an apartment at any stage of construction. One of the options is the purchase of an apartment at the initial stage of construction for credit funds and its further resale after the building is put into operation. Such a transaction, under favorable market conditions, can bring a good yield - from 35% and more.

Pros and cons of real estate investment

All types of deposits have their own advantages, disadvantages and features. Real estate is good in that it can provide a stable income in the form of rent for a long time (at least decades). At the same time, the value of the asset itself increases in the medium and long term. The owner can improve the condition of the object and increase its liquidity. Compared to real estate, securities are a more risky investment option: the risk of a decline in value to zero in the case of real estate is minimal. A large selection of objects and strategies speaks in favor of investing in real estate: choose an asset in any price segment, for various purposes - for living or doing business.

One of the drawbacks is the long payback period. For comparison: financial investments in business often bring profit within the first 1-3 years, while buying real estate will have to wait 7-10 years. Another disadvantage is the high entry threshold: hundreds of thousands of hryvnias (tens of thousands of conventional units). Keep in mind that real estate is an asset with low liquidity: in the event of an urgent sale, the owner can lose a significant amount. Finally, we must not forget that real estate requires attention and ongoing maintenance costs. To make your investment meet expectations, set a clear goal and choose the right object, taking into account your capabilities and tasks.