An ordinary investor is often confused and confounded where to put in his hard-earned savings for good returns. According to Jeff Adams, a veteran real estate investment advisor, buying real estate property is “the most priceless investment”.
Investing in real estate can be done by buying housing properties or pieces of land at strategic places. Individual preferences come into play if the property is bought for self occupation or use. In such cases the assistance of real estate agents is sought in identifying a property that meets specific requirements.
The properties bought and retained for investment purpose, however, do not have such constraint. What matters most is that such property should have a future demand and should fetch a good price.
Appreciation in the Value of Real Estate Property
According to the data gathered by the U.S. Census Bureau, the value of real estate has consistently increased during the period from 1940 till the year 2006. Thereafter, it dipped temporarily for two years before rebounding again. This shows that investment in real estate is the best option in the long run.
Rental Income out of Real Estate Holdings
The biggest hurdle in holding real estate for investment purpose is the amount of time, botheration and the cost involved in maintaining it. It is a good idea to rent out such property in order to raise the funds for periodic mortgage payments, maintenance cost, tax liability and marginal profit. Eventually, after the mortgage is paid off, the property becomes self-owned and, all the while, steadily appreciating in its value.
However, the paucity of tenants can compel you to keep the property idle and might strangle you for funds required for recurring pay outs. Some irresponsible tenants can also be destructive to the property.
Real Estate Investment Groups
These groups buy, build and manage large real estate complexes collectively, thus freeing the individual investors from the hassles of being direct landlords. The individual real estate investors can own one or more self-contained living spaces in such complexes.
The group managers charge the investors a percentage of the rent receivables as fees for their service. Some groups have an arrangement to pool a portion of the rent as a safeguard against some units remaining vacant, thus hindering mortgage payments.
A Real Estate Investment Trust (RETT) is a trust incorporated for the purpose of using investors’ money to buy and operate real estate properties. RETT units are bought and sold at major exchanges just like any other stock. This is an innovative way of turning real estate into an invisible exchange traded instrument accessible to common public.
Investing in real estate needs to raise huge funds, which is beyond the capacity of small, fixed income group of investors. Fortunately, they need not wait till they accumulate the required funds, by which time the prices might further escalate. They can take advantage of various types of home loans that are available upon 10% to 20% down payment against the mortgage of property, such as:
- Fixed Rate Mortgages where the interest rates remain constant.
- Adjustable Rate Mortgages where floating rates of interest are applied in consonance with the money market.
- Hybrid Loans: These are a combination of the above two.
The Interest Rate Cycles
The interest rates depend on the overall state of a nation’s economy and corresponding money supply with the public. The central monetary body of the government too regulates the interest rate in order to direct the money supply into developmental activities. The current low interest rate regime is favorable for investing in real estate with borrowed funds.
The recessionary period affects real estate market along with other economic activities. The defaults on mortgages become common resulting into foreclosures or confiscation of the property by the lenders. The lenders auction the foreclosed properties in order to recover a part of the outstanding dues.
This throws open great opportunities to buy cheap properties at such auctions. Of late, hedge funds have increasingly started entering into the real estate market because of this opportunity to make quick profits.
The hedge funds constitute a group of high net worth investors aiming to make quick money out of their investments. The availability of technology and well-researched information enables them to concentrate on lucrative properties and they buy them en-bloc precluding the access to small investors.
They usually do not hold on to those properties for long and avoid blocking their investors’ money. They offload them as soon they are able to get expected returns and move on prospecting new opportunities elsewhere.
The arrival of hedge funds is an indication that the property market is lucrative under the current circumstances. The small real estate investors can take a cue from them and buy reasonably priced good properties still available within the same or adjacent areas. Unaffected by the limitation of the hedge funds, they can hold those properties longer for better returns.