The housing problem has always been acute. Therefore, the acquisition of their own separate property was perceived as the main goal and one of the best ways to invest money. After all, the apartment is safe. But is it really so?
The issue with the rental of real estate is somewhat different. You can read about this, for example, in an article about the benefits of office communities. But in any case, the issue of investment is always important and relevant: what to invest in, how, etc.
Let’s try to figure out what types and methods of investing in real estate are, how profitable it is, and where to start for a novice investor.
Types of Real Estate
Real estate is literally the most valuable asset on the planet. According to the international real estate agency Savills, the total value of properties in all countries of the world exceeds $300 trillion. For comparison: the global GDP is estimated at $85 trillion, the entire stock market is worth about $110 trillion, bonds – $120 trillion.
Buying a home is the most obvious way to invest in real estate. 80% of all objects in the world are residential premises: country houses, apartments, and apartments. The remaining 20% is divided between commercial real estate and land.
Accordingly, the investor has a choice of three areas for purchase: residential, non-residential premises, and plots. All of them historically rise in price following inflation. At the same time, the fall in prices during periods of crisis rarely reaches 20%, which makes real estate investment relatively safe.
Methods of Real Estate Investment
There are two main ways to invest in real estate:
- Renting out. Long-term strategy with income: 5% (long term), 7-30% (daily). Plus: low risk. Cons: high involvement of the investor (waste of time), repair and decoration costs, utilities, payment of income tax.
- Resale. Medium-term strategy with income up to 40% in 1-3 years. Plus: low investor involvement. Cons: high risk, the need to pay tax upon sale (if the object is owned for less than 5, and in some cases 3 years).
Each of these methods has several types of attachments, each of which needs a separate representation.
Investors are offered three profitable ways to invest:
- Long-term rental. The method attracts with its simplicity – there will always be those who want to rent an apartment. The task of the investor is to find conscientious solvent tenants, conclude a standard agreement with them and receive a well-deserved profit every month. But you need to remember that finding good tenants is not so easy. In addition, with a long-term lease, buying an apartment pays off very slowly: it is completely pointless to purchase housing for this purpose on credit.
- Daily rent. The main “for” is a quick way to recoup the purchase of an apartment: the yield can be up to 30-40%. But such an investment is not passive income but real work: you will have to move in new tenants almost every day and put the premises in order. The risk of damage to furniture and furnishings is higher than with long-term rentals.
- Rent a bungalow, cottage, or country house. The option captivates a huge demand for the New Year and summer holidays. But all other times, it will be quiet. As an alternative, they often buy a large private house and divide it into two halves: they live in one and rent the other to vacationers.
Renting out a garage or a parking space is worth a special mention. It’s a 50-50 way: investing doesn’t require a lot of investment, but to get a really good income, you need to rent out several garages or parking spaces at the same time.
An excellent option can also be called rent office comunities (“kontorfællesskaber”). After the pandemic, many people have returned to their offices with great joy and still prefer to work away from home for obvious reasons.
There are three main strategies:
- Buying an apartment at the excavation stage. Your profit can be up to 30% of the average market value of housing. But you need to wait a long time for the completion of construction to be wary of its freezing.
- Resale of land. The scheme is simple: a plot is bought at a bargain price, they wait for the price to rise, and they sell it for good money. The disadvantage of the method is one and significant – sometimes you have to wait for years to increase the value of the allotment.
- Buying a home in a deplorable state. An investor buys a “grandmother’s apartment” at a low price and invests in repairs, after which he resells the prettier room for twice as much. This method has its drawbacks – the search for cheap real estate and its repair requires both time and appropriate skills.
The main real estate resale scheme looks simple: “Buy at a low price – have time to sell at a high one.”
How To & How Much
The real estate investment strategy can be represented by a step-by-step algorithm:
- Determine the degree of your financial ability: the exact amount you are willing to invest.
- Specify (based on available savings) what type of real estate you want to invest in.
- Conduct an analysis of the real estate market – this will immediately give an idea of lucrative offers, the size of the future transaction, and the return on investment.
- Select a specific object: type, location, purpose, infrastructure, and attractiveness for tenants and buyers.
- Buy a property. Novice investors at this stage would like the help of a professional lawyer or realtor who can guarantee the security of the transaction.
- Make a profit: Renting and reselling are among the most common ways. Remember that with the latter method, you will have to pay personal income tax.
How much can you earn on investing in real estate, and for how long?
- Resale of an apartment purchased at the construction stage: profitability – 8-25% (average indicators – 10-12%), terms – 1-3 years (depending on the developer).
- Long-term lease: yield – 4-5%, terms – 5-10 years.
- Rent daily: profitability – 7-30%, terms – 3-5 years.
- Rental real estate mutual funds: 8-12% per annum.
- Remember that a good repair increases the value of real estate by at least 15-20%.
Real estate is an acquisition that will not be superfluous. The purchased house, apartment, or office space can always be used for personal purposes.