INVESTING IN THE REAL ESTATES MARKET
The Real Estate sector is currently an essential element in any national economy. International statistics have indicated that real estate market has been quite profitable especially in the last two decades. The sector offers an attractive business opportunity for potential investors since it has what is viewed as ‘a stone that is a safety net’ unlike securities in the stock exchange where an investor might lose an entire initial investment if the capital market is crashed since it had a virtual value. The value of real estate assets moves proportionally with the economy status at any particular time, making the sector very significant. It is the barometer upon which the well-being of any economy is evaluated.
Real estate market possesses some qualities that make it easily identifiable by many investors as a preferred investment vehicle. The investors in this sector have the ability to control their investments that may not be the case with other asset classes like the securities. In addition, the vendors and vendees in this market usually have direct dealings with each other. However, the decision on whether to invest in real estate has to be very much informed having considered all relevant factors such as the location of property, statutory requirements, neighborhood characteristics, construction details as well as title particulars.
The nature of real estate market is very complex; this requires prudence on the part of the investor. The venture is quite expensive and hence requires huge capital investment. Information regarding any similar transactions is not easily available giving it an imperfect characteristic. Real estate properties tend to have reduced liquidity because of the intricate procedures involved in the transfer of money and property rights. In addition to that, the market is greatly affected by fluctuations of prices that are sensitive to levels of income, the unemployment rate and changes in exchange rate. Active management is a key requirement because every stage of the investment demands for timely management decisions.
Decisions on real estate investments are based on the key drivers that determine the attractiveness of such kind of an investment. The most important factor is real estate investment opportunity. The existence of these opportunities is majorly created by the accelerating urbanization and the demographics of urban areas that affect the degree of occupation. The sophistication and depth of capital markets are also a great contributor. Stable financial and banking systems and well established liquid capital markets spur investment activity in real estates. There also exist regulatory limitations and the ease with which real estate business can be conducted. Investors are confident to invest where there is transparency in investor rights and there exist protective property rights. Countries without barriers to market entrants are likely to have an increased activity in the real estate sector. Political environments in host countries have a great role to play in making investment choices. Political stability, corruption and crime levels in a country strongly impact investment activities.
The most important consideration in valuing property in the real estate market is the Capitalization rate. This is the base on which net income is converted to value of a property. A new investor interested in purchasing a real estate property needs to know the rate at which other investors have acquired their property so as to determine value. This rate is determined by the capitalization rate of the prior year and majorly the current market state that is represented by the current vacancy rate and a forecasted decline in the capitalization rate. Moreover, the return on investment, investment risk involved and liquidity of the investment are also important features that affect property value.
The current major trend in developed countries in regards to real estate investments is investing in Real Estate Investment Trusts, REITs. Being a simple landlord is associated with having loads of work with uncertainty in the payoffs, but REITs are viewed to be more rewarding. REITs work in the same way as financial stocks; the holding company uses funds that have been invested by shareholders to hold real estate property. The income from the property is shelled out to the shareholders at an agreed percentage rate. Since the real estate sector is on a growing trend, yields from REIT stocks are expected to climb in comparison with the yield on bonds and fixed-income investments.
A new investor needs to be well equipped with information regarding the variety of taxes charged on property. Such information is available in consultation with various professionals. A real estate broker, financial planner, an attorney, and a tax preparer all have information about taxes with respect to their disciplines. This information is vital when looking at the expected cash flows from an investment. The cash flows from real estate are a blend of variable and fixed income. Fixed income is composed of the current expected rent payable by the property occupants that has been fixed by an initial and assented lease contract. Variable income, on the other hand, is adjusted rental payments as a result of rent reviews and expiry of lease contracts. The residential sector of the real estate market is the most significant in income generation from the market.
Investing in real estate market generally is not all rosy, some hurdles may accompany it. Although an investors’ property may be rented out, the cash may be insufficient to carry out routine maintenance, repairs and still pay monthly loan installments. Conflicts may arise between the landlord and tenants in case of non-payments that may end up being solved in a court of law leading to time and financial loses. Financial problems may also arise if there is a reduction in period for the credit given or introduction of tight guidelines on the criteria for giving loans. Such risks should be viewed as warnings for careful handling of property rather than being perceived as obstacles to making investment choices in the real estate sector. Investors should also note that benefits of such investments are generated after a long period.