A Real Estate Investment is the purchase of property to generate income from it. Real estate is a tangible asset. It can be seen, touched, and used in everyday life. It gives the investor a sense of stability in their investment decision, which is relatively lacking when you invest in equities or securities that can be susceptible to whims of demand and supply rather than being based on actual usage.
Property has been a highly sought-after asset class since the dawn of time. Initially, physical property in the form of the land was widely prized and often fought over. As societies worldwide evolved from hunter-gatherers to agriculturalists, properties took on new structures, including residential and commercial buildings and infrastructures such as roads and bridges, necessary for transportation and trade.
Despite the significant progress in technology and trade, the land remains a long-term store of wealth that people risk their lives to obtain. For example, properties are not only at the heart of most major wars fought over the centuries. It is also deeply embedded in our languages and cultures, from common English sayings such as “Land of milk and honey” to the words we use every day such as “property” and “real estate.”
Property is a tangible asset class that has proven its staying power over thousands of years. The United States market cap now exceeds $33.6 Trillion, which is a massive difference from the value of all listed companies on the Australian Securities Exchange (ASX) at $9 Trillion. For all the growth of the ASX over the years, it could only achieve about 1/3 of its American counterpart. It is because people in America have always placed a higher value on owning real estate than Australians.
Current information shows just how surprising Australia’s great property divide is, with Melbourne, Australia, and Sydney Australia’s residential property markets individually worth more than the territory’s capital city and the rest of the state markets combined.
What is the Definition of Real Estate Investment?
Real Estate Investment is a single investment in any property or an investment in land and commercial buildings. Usage of real estate investment can apply to different ways of buying, holding, and rehabilitating properties. For example, the real estate industry includes office buildings for rent or sale, residential homes for sale or rent, commercial spaces for rent or sale, or warehouse spaces for lease.
Real estate investment is important because it is a tangible asset. The property can be seen, touched, and used in everyday life. It gives the investor a sense of stability in their investment decision, which is relatively lacking when you invest in equities or securities that can be susceptible to whims of demand and supply rather than being based on actual usage.
Some of the things that we can consider as real estate investments are listed below.
- Buying a piece of land or a house
- Purchasing a building
- Investment in infrastructures such as roads, bridges, and railways
- Manufacturing facilities
- Commercial property rental
- Hotel management or hospitality industry
- Resorts and recreational tourism
What are the Types of Property Investments?
Here are three types of real estate property investments that can benefit different investors depending on their objectives and goals.
1. Residential (Rental) Property Investment
2. Raw Land Property Investment
3. Mixed-Use Property Investment
1. Residential (Rental) Property Investment
Residential (Rental) Property Investment is purchasing a house to use as a residence for you and your family and renting out any spare rooms to generate income. An example of residential property investments is buying a residential house and renting out spare rooms.
The market cap of residential property investment in the U.S. is about $13 trillion, more than 30% of the total U.S. market cap. Its popularity level is about 50% of the population in the U.S. The average investment range for residential property investments ranges from $50k to $5 million.
In Australia, the market cap of residential property investment is about $8.1 trillion, which is about 90% of the total Australian market cap. The popularity of this investment is about 85% of the population in Australia. The average investment range for residential property investments ranges from $50k to $5 million.
Its advantage over other types is that you are using your own home as an asset. However, its disadvantage to other properties is that it takes quite a lot of effort and time to manage as you need to shift from a tenant to an investor.
2. Raw Land Property Investment
Property in its most natural form is known as raw land. The area has never been used to grow crops or raise cattle. Walking routes, residences, and fences are not present. People haven’t given raw land much consideration or time for years. Real estate developers usually undertake Raw land property investments in the early stage of development before building housing or other facilities. An example of raw land property investments is purchasing a large piece of land and then selling it to someone who wants to develop it.
The market cap of raw land property investments in the U.S. is about $27 billion, less than 1% of the total market cap. Its popularity level is relatively low at only 8%. The average investment range for raw land property investments ranges from $10k to $5 million.
In Australia, its market cap reached about $2.5 billion. Its popularity level is also relatively low at only 8%. The average investment range for raw land property investments ranges from $10k to $5 million.
Its advantage is that it requires minor capital, although it requires more effort and time to find out whether you can sell your property or not. Its disadvantage over other types is that there is no guaranteed return on investment, and it takes quite some effort to find suitable buyers.
3. Mixed-Use Property Investment
Mixed-use property investment involves an interweaving of commercial and residential uses on the same plot. An example is purchasing a piece of land for your purpose, then leasing it to other people who want to develop it or sell houses/apartments there.
The market cap of this real estate investment in the U.S. is about $300 billion, which is about 6% of the total U.S. market cap. Its popularity level is relatively low at only 8%. The average investment range for mixed-use property investments ranges from $200k to $100 million.
While in Australia, the mixed-use property investment’s market cap is around $120 billion. The property level of this investment is also relatively low at only 8%. The average investment range for mixed-use property investments ranges from $200k to $100 million.
Its advantage is that it offers diversity, as investors can gain from rental income, capital gains, and price appreciation. Its disadvantage is that it can be difficult to manage, and there is a greater chance of tenant or user conflict.
How to Finance Investment Properties?
Financing investment properties is the process of raising funds for your property purchase and helping you meet day-to-day expenses and longer-term capital growth. It is essential because it can give you more time to focus on running your properties or expanding your investment portfolio.
Financing investment properties’ inception reason is to help investors receive faster returns on their investments, and financing investment properties come with a high preapproval rate.
Borrowers must be able to fulfil specified criteria for investment property financing, which can take numerous forms. Because choosing the wrong type of loan might have a negative influence on your investment’s performance, it’s critical to understand the criteria of each type of loan and how the various options function before approaching a lender.
Here we need to explain ways to finance investment properties.
According to a mortgage broker and CEO of Huettner Capital in Denver, Todd Huettner, mortgage insurance does not cover investment properties. Therefore, traditional financing from a lender will require you to pay at least 20% down. You may be eligible for a higher interest rate if you can put down 25%.
What are the Methods of Investing in Real Estate?
Investing in real estate is an exciting venture, but it requires research and hard work to ensure your success. Here are some of the more common methods of investing in real estate.
The first method of investing in real estate is equity investment. Equity Investment is buying a property directly or through joint ventures with others who provide the capital while you do the management. Another method to invest in real estate is partnering, which uses your network of acquaintances and friends to help you find a property to buy and raise the capital for investment. Leasing or Rental is purchasing an apartment or house that you intend on leasing out to tenants who will pay rent over a specified period. Another method of investing is through Land Trusts. It is purchasing land in an LLC or corporation that exists for a set period and then dissolves into its original owners when the trust expires.
What are the Internal Revenue Service Tax Implications for Property Investment?
The Internal Revenue Service (IRS) tax implications of property investment are that individuals who invest in rental properties cannot deduct the total amount of their mortgage interest or real estate taxes. However, they can remove the portion of their expenses that typically represent monthly maintenance and insurance costs.
What is the Investment Mentality for Properties?
Investment reasons for people who invest in properties vary from person to person. One is they invest because it gives them a lot of flexibility and freedom to do what they want with their money. Another reason is that they have an insatiable desire to say, “I told you so,” when properties increase in value from year to year. A third reason is people can use their properties as a tax shelter. They can write off the current and expected future value of their property against other income.
Some of the most popular reasons for investing in properties include:
- Short-term investments: Making quick money is one of the most common reasons why people invest in properties. Some properties are considered suitable short-term investments since they tend to appreciate their value when the market is booming. However, when the market turns sour, or you have a dry spell when it comes to tenants, you may not get a good return on your investment.
- Long-term investments: Properties are considered long-term investments because they bring stable returns and value appreciation over a long period. If you own a rental property, then you know that your tenants will pay your mortgage for you every month.
What are the Flipping Houses?
Flipping houses is buying a run-down home, renovating it, and selling it for a profit. Its methodology is usually to choose a place with low value, research the housing market and sellers’ psychology, and sell quickly after repairs and renovations.
The market cap of flipping houses in the U.S. is around $5 to $6 million homes sold per year. Its advantage of hold and resell is that you don’t have to deal with tenants. While its disadvantage from hold and resell is the relatively low capital gain after renovation cost.
What are the Hold and Resell?
Hold and Resell involves purchasing a property and retaining it for the long term. The general concept of hold and resell is buying, fixing up, holding, and waiting for capital gain. The methodology of hold and resell is to identify a property that you want to buy. Find out whether it is undervalued or overvalued. Then negotiate with the seller and determine a realistic price.
The market cap of hold and resell is around $4 million. The advantage of hold and resell is that you can buy properties at a lower price, fix them up for a higher price, and then sell the property at the increased market value. While its disadvantage is that it takes time before you can get your investment back plus profits.
What is the Relation of REIT to Real Estate Investment?
A REIT, or Real Estate Investment Trust, is a business that owns properties and charges rent to the occupants. Over 90% of U.S. commercial real estate is owned by REITs, according to The Balance.
REIT’s connection to Real Estate Investment is the most common type of investment related to real estate. REITs are listed on the stock market so that investors can buy shares in any one of these several thousand companies. While you can purchase properties directly from private sellers, institutional investors purchase property through REITs.
How to Check the Property Prices for Investing
The property Price checking methodology is done by reflecting the market price of an individual’s investment capital, savings, and financial situation.
The things you need to consider in property price checking are:
- The amount of money that you have to invest,
- The amount of time that is available for you to hold the property, and
- The income you can generate from the property.
The things you should expect are:
- The amount of money that you have to invest in property,
- The time you can put into managing your investment, and
- Rental yields for your properties.
The property price calculation formula can be seen below.Property price = (Rental yield x Investment capital) / Time holding period
For example, for a property that has a rental yield of 8% and you have $100,000 to invest, the mathematical calculation will be as follows:
Property price = (8% x $100,000) / 1 Year
The property price will be $8,000.
What are the Related Terms to Property Investment?
There are several terms related to the property investment you should know.
- Income Property: A property that produces income through rent.
- Vacation Home: A property not intended for income generation through rent but is mainly used for vacationing.
- Landlord: The owner of a property or house who rents it out to tenants.
- IRS Publication 527: The IRS states that a vacation home is treated as a rental property.
- Absentee Landlord: Investors who rent out their properties without personally visiting the site.
- Income Property Mortgage: A type of loan for purchasing income property.
What are the Laws for Real Estate Investment?
Real estate laws are specified in the Constitution, as a set of rules regulating how people interact. Here are some of the most well-known Laws in the U.S. related to real estate investment.
- The Federal Reserve Act: This law was signed in 1913, which authorized the Federal Reserve to regulate state-chartered banks and other financial institutions.
- The Federal Deposit Insurance Act: Created in 1933, this law established the Federal Deposit Insurance Corporation, which guarantees bank deposits up to $250,000.
- The Truth in Lending Act: This law was implemented in 1968. It is to establish the rights of borrowers to know about the terms, types, and rates of interest on all loans.
- The Jobs Act: Part of the American Recovery and Reinvestment Act in 2010, this law is designed to encourage small business lending.
These are also some of the most well-known real estate laws in Australia:
- The National Consumer Credit Protection Act 2009: This law covers consumers’ credit, cash, and debt requirements.
- Prudential Supervision Guidelines for Registered Managers: This law applies to all registered managers, including real estate agents.
- The Property Occupations Act 2002: On an ongoing basis, anyone who provides sales and management services for real estate must be licensed.
- Temporary License Exemption: Under this law, a person can provide real estate management services for up to six months without the need to obtain a license.
How is the Real Estate Investment Situation in Australia?
In Australia, many people invest in real estate as a haven to accumulate wealth. There are approximately 3.8 million properties valued at $9 trillion located across the country.
These are the total value of real estate properties in each large city in Australia:
- Sydney Property Investment: The real estate market situation in Sydney is quite similar to the market in Canada. It has moved out of the red-hot market, but there are still vital signs of recovery. As of 2021, its market value increased to $2.53 trillion.
- Melbourne Property Investment: As of 2021, Melbourne is the fastest-growing property market in Australia. It has an estimated market value of $1.92 trillion.
- Brisbane Property Investment: This city has a significant amount of affordable housing, which contributes to its growth. There is $626.7 billion worth of real estate market value as of 2021.
- Perth Property Investment: Perth real estate has a lot of potential. It currently has $528.8 billion worth of property and is still growing at 10% per year.
- Adelaide Property Investment: Like Perth, Adelaide has a lot of potential in the real estate industry. It’s expected to grow at an annual rate of 9%. As of 2021, there is a total real estate market value of $307.5 billion.
- Canberra Property Investment: Canberra is the capital city of Australia. The real estate market in this location has a total worth of $143 billion and is forecasted to grow at 3-4% annually.
- Hobart Property Investment: In 2017, the property prices in Hobart went down by 2.9%. This number will increase to an average growth rate of 5% each year from 2018 to 2021. The current total real estate market value of this city is $62.3 billion.
- Darwin Property Investment: This is the capital city of the Northern Territory. The growth rate for this location will be around 5% each year from 2018 to 2021. Currently, it has a total estimated market value of $25.9 billion in real estate.