A reliable monthly income stream is one benefit of some of the greatest real estate investments, which also increase wealth over time through asset growth. Therefore, compared to many other investments, real estate investments are very special.
It would be easier for you to create a successful plan to capitalize on these special qualities of real estate investments and steer clear of any potential hazards if you are aware of their distinctive qualities.
Here are six distinct qualities of real estate to consider.
Real estate investments can be extremely durable and build multi-generational wealth.
Unlike other investments that have fixed maturities, there is no fixed maturity for a real estate investment. You can sell it in a few days if you see a good opportunity, or you can hold it for decades. Many of the most profitable pieces of real estate in American cities have been held for several decades, and some of the profitable real estate in Europe has been held by the same trust or family for centuries.
2. Lack of Transparency
Some markets, such as stocks and commodities, are regulated to be as transparent as possible. Investors have access to real-time market information and are able to make immediate changes to their portfolios.
Real estate works very differently. When an investor buys a property, there is a risk that the seller is withholding information, or that the seller is unaware of problems.
Therefore, research and inspections are important when buying real estate. And if you buy a property sight unseen, such as at auction, be sure to take the higher risk into consideration when making an offer.
Location, location, location. All real estate is local, with every property being unique in terms of location, physical structure, and financing.
As a result, investors can leverage the local knowledge of a community to acquire and manage a highly profitable portfolio of real estate investments. This is why the most successful investors have a team in each geographic area of their real estate investments, because of the heterogeneity of real estate.
Real estate is considered illiquid because it can’t be easily sold without a substantial loss in value. Even if you are flipping houses, it takes a substantial amount of time to purchase, rehab, find a buyer, and close. And if you own rental income with tenants leasing a property, it can take much longer.
The lack of liquidity is a good thing, though, when it comes to investing in real estate. The illiquidity of real estate contributes to making it a stable, appreciating asset class for long-term investors.
5. High Startup Costs
The costs of acquiring real estate investments are higher than many other types of investments. Typical costs include purchase and closing costs, rehabbing, and financing. The old adage, “it takes money to make money” applies to real estate investing. But, the reward is high in the form of cash flow and profits.
Like illiquidity, the high cost of acquiring a real estate investment is one reason property investing can be so profitable. The costs limit the number of investors in this asset class and therefore add to stability and long-term appreciation.
6. Investment Vulnerability
Risks associated with real estate make investing in this asset class very profitable for savvy investors who have a proven plan for success. Real estate investments can be fluid at times, and change as cities and neighborhoods change. Therefore, real estate is not a hands-off static investment, but one that requires constant attention.
The best investors either personally manage their investments, or hire an expert team to locate, rehab, and manage real estate investments on their behalf.
Characteristics That Determine Property Value and Desirability
Residential, commercial, industrial, and land properties are all included in the vast and ever-evolving field of real estate. All real estate, regardless of kind, has seven fundamental qualities that characterize both its physical and economic qualities. These attributes include immobility, indestructibility, location, investment permanency, scarcity, upgrades, and uniqueness.
We will examine each of these traits and their importance in the real estate sector in this post.
The first characteristic of real estate is scarcity. The land is a finite resource, and the supply of it is limited. This means that the demand for land often exceeds the available supply, which drives up prices. The scarcity of land also means that real estate is a valuable and desirable asset. The limited supply of land can also create challenges for real estate investors and developers, as they must find creative solutions to maximize the use of the available land while meeting the needs of their clients and customers.
Improvements refer to any modifications made to the land or buildings on the property. These modifications can range from simple repairs to major renovations or new construction. Improvements can increase the value of a property and make it more attractive to potential buyers or tenants. Improvements can also have a significant impact on the surrounding area, such as increasing property values and attracting new businesses.
Location is a critical characteristic of real estate. The location of a property can have a significant impact on its value and desirability. Properties located in desirable areas, such as near good schools, shopping centers, or transportation hubs, are often more valuable than those in less desirable locations. Location also plays a vital role in the success of commercial and industrial properties, as businesses often seek locations that are convenient for their customers or offer strategic advantages, such as proximity to suppliers or competitors.
Real estate is a long-term investment, and the investment permanence characteristic refers to the fact that real estate investments are relatively stable and long-lasting. Unlike other investments, such as stocks or bonds, real estate can withstand economic downturns and market fluctuations. Real estate investments can also generate steady cash flow through rent or lease payments, making it an attractive option for investors looking for a stable and reliable source of income.
Every piece of real estate is unique. No two properties are identical, and each property has its own unique features and characteristics that make it distinct. This uniqueness can make it difficult to compare properties and determine their value accurately. However, the uniqueness of real estate also makes it an attractive and valuable asset, as each property has its own set of advantages and disadvantages that can be leveraged to meet the needs of buyers or tenants.
The immobility characteristic refers to the fact that real estate cannot be moved. Once a property is built or developed, it is fixed in place and cannot be relocated. This immobility can make real estate investments less liquid than other types of investments, as it can be challenging to sell or dispose of a property quickly. However, the immobility of real estate can also be an advantage, as it creates a sense of stability and permanence that is attractive to many investors and tenants.
The final characteristic of real estate is indestructibility. Unlike other assets that can be damaged or destroyed, such as stocks or bonds, real estate is a physical asset that is relatively immune to destruction. Buildings and other improvements may require maintenance or repairs, but the underlying land itself is indestructible. This indestructibility makes real estate a valuable and stable asset that can withstand economic and market fluctuations.
Real estate is a finite and valuable asset that is characterized by seven distinct features: scarcity, improvements, location, investment permanence, uniqueness, immobility, and indestructibility. These characteristics influence the value and attractiveness of a property and guide the decisions of those involved in the real estate industry. Understanding these features is critical for making informed decisions and evaluating properties effectively. By recognizing the importance of these characteristics, individuals can navigate the real estate market with greater confidence and success.
What Are the 5 Golden Rules of Real Estate?
Learning how to purchase real estate as an investment requires time and work, just like anything else in life, but the rewards are well worth the effort. It’s useful to have a few hard and fast guidelines to keep the process moving in the direction of an excellent outcome and to assist lessen the learning curve somewhat.
Many people who have purchased real estate as investments adhere to the following five rules:
1. Pay under market value with add value potential (if possible)
Buying an investment property under market value can be difficult, but it’s not impossible. To get property at a discount consider the following.:
- Why is the vendor selling? Do they have an offer on another property? (could mean they want to sell quickly)
- Study the market; what makes the property desirable? Is there something that I can do to add value and increase my yield? Is the market bearable and sustainable?
- What blemishes can be used as leverage to get a better price?
- Speak with local agents to get a good feel for the suburb.
2. Look for properties with good yields and cash flow
A property for investment should have a rental return that’s higher than the suburb average. Look for an investment property with a yield of at least 5% for the best results. Here’s how to quickly calculate the gross rental yield of an investment property.:
- Weekly rent x weeks in the year = Annual rent/purchase price x 100
- $475 pw x 52 weeks = 24,700/$450,000 x 100 = 5.49% gross yield
Of course, your true (net) rental yield will deduct your investment property expenses such as strata fees, utilities, property management fees, etc. from the annual rents.
Annual rent – costs (excl. interest)/purchase price x 100 = net yield
So as you can imagine, the higher your gross yield, the better your net yield will be.
3. Buy property for investment in other states
Australia does not have a single property market. We have many markets all across the country, each of them with their own individual nuances (e.g. popular suburbs, employment outlook, demographic, etc.).
This is why it’s so important not to get caught up in the claptrap and gloom and doom that permeates so much of the information we come across.
If your backyard is on the tipping point of growth, then by all means invest where you know, but if you really want to experience faster growth, you’ve got to learn how to invest across state lines.
4. Outsource where practical
You’re not simply buying property for investment, you’re building a business.
That’s why it’s vital you make the most of the time that you have available by outsourcing tasks; especially time consuming ones that can be done by someone else.
Following are some examples of tasks you can outsource.:
- Property management
- Cosmetic renovations
- Home staging
- Cleanup and removal services
5. Consider “rent-vesting”; renting while buying investment property
There are both advantages and disadvantages to renting while buying a property for investment.
Following are some pros and cons surrounding this strategy.:
|A smaller deposit can put you into the real estate market faster.
|The flexibility of moving when and where you want – without incurring fees like stamp duty or loan penalties.
|Buy where you can afford, live where you want.
|You can’t make changes to your rental.
|Tax/income advantages that owning your own home doesn’t offer.
|Build wealth through capital gains.
|Flexibility of moving when and where you want – without incurring fees like stamp duty or loan penalties.
These were just some of the tips and strategies that property investors need to learn to grow a strong investment property portfolio. One of the best things you can do for your property investing business is to find a successful property mentor to help ease the learning curve.
This can speed up your results because you’re not traveling down the wrong path and making mistakes that cost you in both time and money.
Your portfolio might be more diversified with real estate. Real estate typically appreciates during stock market declines because it generally has a low correlation with other main asset types. A wise investment is one that offers tax benefits, consistent cash flow, significant appreciation, and competitive risk-adjusted returns.
Of course, whether you want to invest in physical real estate, REITs, or something else entirely, it’s crucial to take into account certain factors, such as the ones mentioned above, before making any kind of real estate investment.