What is Real Estate Investment or Property Investment?
Real Estate Investment or Property Investment is the term used for investments made in the Real Estate or Property areas, where an investor attempts to benefit from the rising prices of the Real Estate or Property. Real Estate is defined as an immovable property like land or something permanently fixed to it, like a building or construction. The Property can be residential or commercial - say for example, it can be a residential building which is coming up in the nearby area or it can be a commercial shopping complex which may be coming up in the business areas of the city.
How can one benefit from Real Estate Investment or Property Investment
There are two aspects which are looked upon by the investor who invests in Real Estate Investment or Property Investment.
First, he/she can make an investment in a property at a lower price today and sell it off later after some time, when the property prices increase significantly or as per the expectations of the investor. For e.g. you may buy a residential apartment for 1 million dollars in a sub-urb in New York when the area is being developed. After 3 years, the price of that apartment may rise significantly as the locality develops and becomes a hot property. Say the price triples in value, and reaches 3 million dollars. Hence, you can sell it and book your profits from Real Estate Investment or Property Investment.
Second option is to RENT out the property to someone and get a continous cash flow in the form of monthly rent. Say you bought a shop in an upcoming shopping mall for half a million dollars and rent it out to a retailer who wishes to open a grocery store. You sign a rent agreement with him and get a continous monthly cash flow in the form of rent. Additionally, you also have the benefit of property price rise.
How is the Real Estate Investment or Property Investment Market growing?
Real Estate Investment or Property Investment has now become a major area or sector of focus in the investments arena. Real estate investment can be attractive if viewed as a business opportunity; it can generate rental income, using it as collateral to secure a loan for a business venture, to offset otherwise taxable income through cash savings on tax-deductible interest rate losses, or simply from the profits garnered from its resale. Notable, in this context is the gains reaped by real estate speculators who trade in real estate futures (by buying and selling purchase options).
What are the benefits of Real Estate Investment or Property Investment
There are plenty of benefits:
- You get REAL assets - like land, building, etc
- You can use the Real Estate or Property as collateral
- You can generate continous stream of money in the form of rent
- You can benefit from favourable price rise in the property prices
- Some countries allow tax benefits on your Real Estate Investment or Property Investment
What are the options available for small investors in Real Estate Investment or Property Investment?
The Real Estate Investment or Property Investment requires a huge value of money if one directly wants to buy the property. Depending upon the location and area, the price may range in millions and billions of dollars, making it unaffordable for many individual investors to buy property as an investment. Say for e.g., you want to buy a house in New York, but you cant afford it. So you can buy shares of the company which is building houses in New York and thereby attempt to indirectly benefit from the price rise of the company.
However, markets have developed with alternative options and there are many available for small investors:
- You can buy shares or stocks of Real Estate Companies
- You can select your real estate companies for share purchase based upon your requirements - for e.g. if you are specifically looking for residential apartment investment, you can select the stocks of companies in residential projects and so on
- You can buy units in Mutual Funds which are focussed on Real Estate Investment or Property Investment
- You have the option of REIT or Real Estate Investment Trust. It is a corporation or body investing in real estate that has the property to reduce or eliminate corporate income taxes. In return, REIT’s are required to distribute 90% of their income among the investors. These incomes are often taxable. REIT’s provide a similar function as does Mutual Funds provide for stocks in the share market. The key statistics to study about the REIT’s are the NAV (Net Asset Value) and AFFO (Adjusted Funds From Operation).
REIT’s provide the opportunity to reap the benefits due to interests in the securitized real estate market. The best benefit that can accrue is the fast and easy liquidation of investments in the real estate market which can be observed in Japan which one of the few economies of Asia along with Hong Kong, Singapore, Malaysia and Taiwan to have REIT legislation in place. J-REIT securities are listed on the Tokyo Stock Exchange and most of the participants are domestic and foreign conglomerates. The legislation for laying out rules for REITs in UK was enacted by the Finance Act of 2006.they have to distribute 95% of their income and have to be publicly listed on a stock exchange which has been recognized by the FSA (Financial Services Authority). In the USA, the REIT’s are required to pay little or no federal income tax but are subject to legislations put forth by the Internal Revenue Code of 1986 whereby they have to distribute 90% of their taxable income in the form of dividends to its shareholders. Increasing demand for REIT stocks will push up the stock prices and entail growth from internal sources which is evidenced by the figures of 2005 where the combined assets of 200 publicly traded REIT companies totaled $500 billion.
What are the risks associated with the Real Estate Investment or Property Investment?
One should never forget the risk part in any investment he/she is making. It all looks good untill the returns are positive and the markets are going up and up. Problem begins when the prices start going down. Real Estate Investment or Property Investment is no different
- One should not forget the Subprime mortgage lending troubles which have hit the world economy
- The reduction in property prices is one of the biggest risk, whether it is residential property or commercial property
- When you make an investment in property, you are betting on the assumption that property prices will rise in that area. There is a risk of unwanted developments in the locality due to which the property prices may fall - for e.g., near a residential complex, opening of a pub or a slum area may lead to price rise. Another case can be due to the development of a polluting & noisy factory nearby.
- Your Real Estate Investment or Property Investment through real estate mutual fund are carrying the risk of performance of your fund manager
- If you are living in a country like India, where legal disputes take decades to be solved, then you bear the risk of conflicts with the builder or other related parties
5 comments:
Excellent writing style;) Real Estate Investment is surely growing and lending so much to the market...
I agree, very well written.
Flying high on the wings of booming real estate, property in India has become a dream for every potential investor looking forward to dig profits.Planning for your future and retirement relies on planning the right kinds of long term investments. There are many different types of long term financing investments, and everyone needs to have some sort of alternative investments for their future.Real estate investments in India yield huge dividends. 70 percent of foreign investors in India are making profits and another 12 percent are breaking even.
------------------------------
Gillberk
SEO
Post a Comment