Global real estate is a $2.77 Trillion market and remains one of the safest alternative investment. Most wealthy individuals are heavily invested in real estates (lands and developed properties). Here are some of the strategies to adopt to invest in real estate:
- Land Banking : Land banking is a practice of buying land and retaining ownership of the land for a period of time before selling it for profit. The difference between the buying and selling price represent the return on the investment which will vary depending on factors such as location, general development of the area (due to government or private companies interests), demand, holding period among others. Investors must conduct proper research and strict due diligence to manage expectations and avoid future controversies. In real estate, land banking has the potential to give the highest return. Because of the divisibility, the capital requirement varies from low to large.
- Fix & Flip : Investors execute this strategy by acquiring properties with the plan to renovate or upgrade them, after which the properties are then relisted in the market for a higher price. Flippers usually hope to execute this strategy over a short period of time, usually within 12 months. In developed economies where there is relatively easier access to low interest mortgage (0.78% in Finland as at December 2020), flippers can execute with a combination of debt & equity and quickly take profit in a housing boom. Whereas, it is more difficult in developing economies plagued with high interest mortgage, poverty and eroding middle class.
- Real Estate Investment Trust (REIT): REIT was formally established by congress in 1960. It allows investors with different sizes of capital to own shares in commercial real estate portfolios. This was already available to wealthy individuals brokered through financial intermediaries. REITs are companies that pool capital from a large number of investors to purchase/build & operate income generating properties such as hotels, residential apartments, parks, warehouses, healthcare facilities and so on. Income, which mostly comes in form of rent from these properties are shared to investors. In fact, REITs are expect to share 90% of their taxable income to shareholders as dividends each year. REITs invest their this funds depending on the type of REIT they decide to be: Equity REITs— equity REITs own & operate actual properties. They earn income from the rents receive from tenants. Mortgage REITs — they do not own actual properties, rather, they purchase mortgages from financial institution and receive interest payments from the borrowers. Hybrid REITs — are basically a mixture of equity & mortgage REITS. They own & operate actual properties, while they also keep a portfolio of mortgage securities.
How to Invest in REITs
Some REITs are publicly traded on the stock exchange of the market they operate. Hence, you can invest by merely buying the stock of the company or by buying either a REIT mutual fund or REIT ETF (exchange traded product). You can invest in private REITs through financial intermediaries as they can only be sold to institutional investors. It is worthy to note that public REITs though they offer more liquidity tend to also come with higher price volatility than private REITs.
4. Income Generating Properties : Individuals and firms that have large capital to pursue a rental income strategy for the long-term can invest directly in real estate by purchasing and managing income generating properties (hotels, retail outlets, warehouses, residential apartments etc.) on their own. They can either outsource or handle management of these properties themselves.
Real estate is a broad market and profitability of different strategies differ across different economies. This might be due to fiscal and monetary policies of government, economic development, education, security, regulatory landscape, poverty amidst others. While global trends might have meaning pointers to action, it is important for investors to do proper research and due diligence on indicators that are peculiar to their macro & micro economic environment.