Real estate includes land, buildings and structures that generate income through rental or increase in value over time. This is a stable and conservative type of investment that has low volatility compared to stocks or cryptocurrencies.
Types of real estate for investment
This market segment offers a variety of assets, each with unique characteristics and opportunities for the investor.
Residential real estate
Includes objects intended for living – apartments, houses, multi-apartment residential complexes.
Investment opportunities:
- Renting: Purchasing properties for subsequent rental is a popular strategy that allows you to receive regular passive income.
- Resale: Investments for the purpose of resale after an increase in the value of the property or its renovation.
Risks: Managing and maintaining property requires time and resources.
Commercial real estate
This category includes offices, retail spaces, warehouses and industrial buildings.
Investment opportunities:
- Long-term lease: Commercial properties are often leased for a long term, which provides a stable income.
- Infrastructure development: Investments in the development of a property can significantly increase its value.
Risks: Commercial real estate is sensitive to economic cycles.
Land plots
Undeveloped land plots that can be used for the construction of new facilities.
Investment opportunities:
- Speculation: Buying land in the hope of increasing its value.
- Project development: The land can be used for the construction of residential or commercial projects.
Risks: Investing in land involves high risks due to possible zoning and regulatory changes.
Real estate investment trusts (REITs)
These are funds that own and manage real estate, and the income from such activities is distributed among investors.
Investment opportunities:
- Diversification: REITs provide the opportunity to invest in portfolios of different types of real estate, thereby minimizing risk.
- Liquidity: REITs are publicly traded, making it easy to get in and out of investments.
Risks: Market fluctuations may affect the stock price of REITs.
Safe tools for investing in real estate
Direct investments
Direct investment in real estate involves the purchase of properties for subsequent rental or resale. This method is one of the most traditional and understandable, implying direct ownership of real estate. Investors make money from rental payments and the increase in property value over time, which represents a stable source of income and the opportunity to capitalize on market growth.
An important aspect when choosing real estate is location. When building a portfolio, if more than one property is selected, it is often advisable to consider options not only in a familiar jurisdiction, but also to diversify the portfolio by investing in foreign real estate.
This task is more complex than investing in your own country because it will require significant effort to assess a large number of factors, starting with the ratio of the level of profitability and the minimum investment threshold, as well as the additional costs associated with these investments and ending with a detailed analysis of the legal framework and other legal restrictions, imposed on the ownership or rental of real estate in a particular country.
Often, not in every country, foreigners have the opportunity to purchase real estate as their own, and in many countries, the rights to own real estate for Foreigners are limited to long-term leases, which can be for a period of 25, 30, 80 years, and so on, depending on the jurisdiction; also, such contracts may provide for unconditional or limited right to extend the lease.
Mortgage-backed securities
Mortgage-backed securities are debt obligations that are secured by a title to real estate. They allow investors to receive income in the form of interest, without having to manage the property itself. This makes mortgage-backed securities an attractive choice for those seeking lower risk and stable income.
REITs (Real Estate Investment Trusts)
REITs offer investors the opportunity to participate in real estate ownership without directly purchasing the properties. These funds invest in various types of real estate, from residential complexes to commercial buildings and even hospitals. Investments in REITs provide portfolio diversification and good liquidity since the fund’s shares are traded on the open market.
Ways to invest in real estate
Long-term ownership
Buying a property with the intention of holding it long-term and earning rental income is a time-tested way of investing. It involves investing in quality properties that will generate stable and predictable income for many years.
Flipping
Flipping, or quickly reselling a property after it has been renovated and improved, is a riskier but potentially more profitable way of investing. Investors using this method seek to quickly increase the property’s value through improvements in order to sell it for maximum profit.
Crowdfunding
Crowdfunding platforms allow investors to invest in large real estate projects, even if they are not able to invest large sums themselves. This method expands access to real estate investment, making it accessible to a wide range of people.
What mistakes should be avoided
Revaluation of potential profit
One of the most common mistakes is misjudging the potential returns from a real estate investment. Investors often ignore or underestimate expenses that can significantly reduce income:
- Repairs and Updates: Even if a property appears to be in excellent condition, there may be hidden defects or a need for modern updates to attract tenants or increase the property’s value.
- Taxes and Insurance: These mandatory fees may vary and sometimes increase significantly depending on the location of the property.
- Property Management: Effective management takes time and resources, especially if the property is not within your immediate reach.
Underestimation of risks
Ignoring legal and economic market conditions can also lead to serious financial losses:
- Legal restrictions: The legislation governing real estate may change, which will require additional investment or make it impossible to use the property for its intended purpose.
- Economic instability: Recessions, changes in mortgage rates and other economic factors can reduce the value and profitability of real estate.
Lack of diversification
Investing all capital in one object or one type of real estate increases the risks:
- Geographic concentration: Investing in real estate in one region increases dependence on the economic and political situation in that location.
- Similar properties: A variety of property types (residential, commercial, industrial) can reduce potential risks and provide a more stable income.
Alternatives
Real estate is a good tool for portfolio diversification and protection against inflation. However, alternatives should be considered:
- Stock market: Investing in shares is attractive because it allows you to invest funds with the ability to quickly withdraw them. However, high stock volatility implies greater risks.
- Bonds: Bonds, government or corporate, provide lower risk and stable interest income. Investing in bonds provides regular income through interest payments, offering a predictable and reliable source of income without significant risks.
- Precious Metals: Gold and other precious metals have traditionally been considered a safe haven for capital, especially during periods of economic instability and inflation. They help maintain the purchasing power of money over the long term. Although such investments do not provide monthly income like stocks or bonds, they are critical for portfolio diversification and protection against financial crises.
