The real estate market is a large portion of the portfolios of many investors, both
institutional and individual. Since property markets aren't fully correlated with
traditional investment options, these investments are typically added to portfolios
for the primary reason of diversification. Real estate investments come in many
kinds that range from investments in private equity property and public traded debt
investments. In the article below we'll briefly discuss the various types of real
estate investment as well as some of the benefits and expenses that come with
directly owned property or development.
Real estate has the capacity to offer investors high-quality long-term returns that
are competitive from various sources. The physical property bought by an investor
can appreciate as time passes – capital appreciation is the main goal of flipping
properties in the short term. Another source of income is the income generated
from leasing or renting the property. Investors love seeing the tenants guaranteed
long-term, multi-year leases, which will provide cash flow for several years to
secure investors during recessions in the economy. Another benefit that is not
widely known about purchasing real estate is that it can provide inflation hedges, in
the event that the regulations and rules of the local market allow the proprietors of
the property to adjust rents in line with the rising cost of items, they are able to
prevent losing their real income.
Real estate investments can be classified in two ways either equity or debt-based
and also in public or private markets. The equity-based investments made in the
real estate market that is carried out in the private market are usually described as
direct real estate investments. The money needed to finance the purchase of real
estate properties originates from various sources. The most well-known type of
financing using debt for purchases of real estate is mortgages. Private investors –
both institutional and individuals as well as real estate corporations or REITs
(REITs) can be able to provide equity financing to finance the purchase.
Direct real estate investment is a type of purchase in REIT shares. These are
public traded securities for investment, and they represent an indirect ownership
interest in the physical properties that investment funds own as part of their
portfolio. If these funds decide to sell their shares in the public markets they use
the proceeds to buy physical properties to be used in their portfolio. Another
indirect investment in real estate is through asset-backed securities, which are debt
instruments that are created by combining a variety of mortgages into a single
investment product, referred to as collagenized debt obligation. The buyer of these
securities has the option to receive cash flows in the future from the portfolio of
physical assets that these securities represent.
Debt Equity
Private Mortgages
Ownership direct of the real
property. (Sole ownership, joint ventures,
limited partnerships)
Construction Lending
Public
Securities backed by mortgages
(residential as well as
commercial)
Real estate companies have shares
Mortgage obligations with
collateral
Shares of REITs, real residential
investments trusts ( REITs)
Shares of REITs, real residential investments trusts ( REITs)
The option of investing in physical properties is a great source of income as well as
an option to diversify your investment portfolio, but it comes with certain expenses
that can amount in thousands over the life of your investment. Before making any
investment, it's wise to conduct a thorough study of costs associated with the
transaction to determine the viability of the investment. Below, we'll look at some of
the initial expenses associated with the direct ownership of physical property for
investment purposes.
Legal fees can be the largest expense in the realm of real estate investments,
particularly when the transaction is complex and includes multiple entities. It is
crucial to hire an experienced lawyer early to avoid costly errors that could impact
how the transaction later. Complex multi-entity agreements require the proper
contract writing to safeguard investors from any future problems as well as legal
actions. Legal assistance can be enlisted for the due diligence in the initial stages
of project's planning. Attorneys who specialize in local permits, restrictions and
zoning regulations. They can be asked for advice on what changes to the structure
could be made on the property in order to enhance its value. Engaging an attorney
for the title search is an essential aspect of the purchase of any physical
property. It is important to ensure that you are the sole owners of the land. for that
you must determine if the tile is clean and free of any obstructions and
unencumbered by legal or financial liens or any other legal hurdle.
Costs for environmental and engineering are essential to any renovation or ground-
up development project. A majority of reports on environmental and engineering are
subject to strict local laws. A lot of institutional investors are looking to invest in
eco-friendly projects that are beneficial to the community in the area or at the very
least, don't contribute to pollution or impact the lifestyle. This is where
environmental due diligence is required and hiring seasoned professionals on the
subject can assist you to navigate through the web of rules and regulations to
create the most environmentally sustainable project.
The investment in real estate, just like every investment, is susceptible to failing to
live up to expectations. The value of the property is susceptible to fluctuations in
price based on global and national economic and local conditions in the real estate
market. Rates of interest always create an increased risk in borrowing costs. Local
government regulations have always significant influence on any investment made
in physical property. Since real estate is nearly always thought of as a long-term
investment, all of the above elements are likely to dramatically affect the end result
of the investment. Investors must consider all of the factors listed in the article as
well as other macroeconomics aspects prior to investing in any public or private
real estate investment.
