Real estate investing have historically been one of the most significant sources of wealth. Real estate accounts for 60% of total global assets.
Learn how to invest any amount of money.
What is real estate
Real estate, real property, or estates are things that cannot be transported, such as land, and things that are permanently attached to them, such as buildings. Real estate investments comprise sales, rentals, and other business models related to real estate.
Is it a good idea to invest in real estate?
Knowing if investing in real estate is a good business is one of the most frequently asked questions by those who want to venture into this field.
Let’s answer the question from several angles:
First, according to Wealth X, 7.6% of wealthy people built their fortune in real estate.
On the other hand, according to ecyY (founder of the information and research centre for Building Research and Development REDBRIC) of the total global assets, 60% corresponds to real estate.
According to a Morgan Stanley survey, 77% of millionaire investors in the United States own real estate investments.
With this data, there is no doubt that real estate investments CAN be an excellent business. That said, it is important to say that, like all businesses, it has risks and disadvantages, which we will discuss later in this article.
Robert Kiyosaki’s famous quote is perfectly applicable to real estate investments:
“Risky is not the investment but the investor.”
Real estate has some characteristics that make it an excellent investment; however, it is critical to have a solid strategy and sound knowledge when investing.
In response to the question, investing in real estate can be a profitable business if you choose the right business model for your situation, knowledge, available wealth, and market situation.
Countries where to invest in real estate
Investing in real estate is a more local investment option than stocks, mutual funds, or bonds. The success of a real estate investment is dependent on many local factors, such as market growth in a specific area, segment, and time frame. Knowledge of local regulations and codes is also required.
With this in mind, the best place to invest is often the one you know best. If you live in Madrid, you will most likely have access to more and better sources of information about the city’s used housing market than if you live in New York City or London.
On the other hand, if you require resources such as tax advisors, real estate lawyers, or even plumbers or electricians, you will be better prepared if your investment is in the area you are most familiar with.
Despite the foregoing, there are numerous ways to invest in other countries, including REITs, real estate ETFs, and other figures discussed later in the article.
According to the Fine Homes and Living portal, the best countries to invest in today are:
United Arab Emirates: This is a tax-friendly country where real estate investors can earn high returns. There is no income tax. It is possible to generate an income yield of 5.19%.
Germany is a safe bet for investors looking for opportunities in Europe. Germany is a superpower with a thriving economy and stable conditions.
France is yet another popular European real estate investment destination. France is the best option for long-term real estate investors. Mortgage interest rates are low, and it is possible to finance up to 85% of the property’s value.
The United States is widely regarded as the best country for real estate investments. Several cities, including Los Angeles, San Francisco, New York, and Washington, DC, rank high on lists of the best places to invest in real estate.
Other countries to consider are Canada, Australia, Turkey, Indonesia, Colombia, the Philippines, and Morocco.
Disadvantages of investing in real estate:
- High transactional costs: Buying or selling real estate has numerous associated costs, which vary by country and city. Taxes, fees, assessments, notary fees, agency fees, and conveyancing costs are just some of the frequent outlays.
- Low liquidity: Selling real estate is slow unless you sacrifice an important part of the property. It is faster to sell stocks, bonds, and fund shares than real estate.
- Requires management and maintenance, which entails additional costs.
- Real estate markets have significant inefficiencies. This point is both an advantage and a disadvantage, precisely because inefficiencies can work for or against them.
- Often brings with it financial and legal liabilities. If you own a property, and the pipe bursts, and floods the apartment below, you have a liability. It is essential to cover yourself with all-risk insurance.
- High cost: In most cases, real estate has a high cost, which inhibits many investors without a lot of capital from investing in it.
- In the case of rental properties, there is often a time of no income when one tenant leaves and another enters.
- The tenant(s) may stop paying. When renting a property it is advisable to take out lease insurance to maintain the rental income even if the tenant stops paying.
- The real estate market is very local. When changing city or country, taxes, costs, valuation zones, and the dynamics of the sector change.
- Events external to the property can drastically change the value of the property: Pollution, noise, new adjacent developments, and new legislation, among many others. This point may eventually also lean towards advantages.
Advantages of real estate investments
- Double income from appreciation and rent
- Good hedge against inflation
- Easy to understand the investment
- The real estate market is inefficient, allowing bargains to be found.
- Real estate assets can be easily financed because they provide collateral for the lending institution.
Why invest in real estate?
In addition to the advantages mentioned above, real estate investments have some characteristics that make them very attractive:
- In the long term, they tend to appreciate in value
- They are relatively passive investments, that is, the management of a property requires less management and time than many businesses.
- It is possible to build scalable businesses from real estate.
- Positive cash flow: by calculating and executing the financing conditions well, it is possible to have one or more properties with a positive cash flow, which allows scaling the business model.
- It is possible to improve the assets, increasing valuation and rent.
- The same property can produce rents for life.
How to invest in real estate with little money
Fortunately, there are business models, which we will see in more detail below, through which it is possible to invest in real estate without a lot of money. Some of them are:
- Securitization
- Real Estate Crowdfunding
- ETFs
- REITs
Real Estate Investments: 12 business models
Today there are numerous business models for investing in real estate of all types, for all budgets and levels of experience and expertise.
Below, we will list some of these models, so that you can choose the ones that best suit your current situation:
Buy and sell (flipping houses).
It is one of the simplest models that exist, however, there are techniques to make this modality a scalable and sustainable business over time.
The essence consists of buying a property and reselling it at a higher price, in such a way that a profit is obtained from the operation, after subtracting all the implicit expenses. The people who engage in this business specialize in obtaining information on donations in payment or auctions so that they manage to buy real estate at lower prices than the market average.
Buying, remodelling, and selling
A very frequent variant consists of remodelling, renovating, or improving the property being purchased. As the properties purchased by these investors are often in poor condition, improving their standing significantly increases the expected sale price.
Buying, remodelling, and selling require knowledge, dedication, and a team of specialists so that the operation produces profitability.
By “team of specialists” I usually mean a real estate agent, a construction contractor, a real estate agent to help find the right properties for purchase, a real estate attorney who is proficient in title searches and the process of buying and transferring the property.
Buy and rent
This is another type of figure, in fact, it is the one I have used the most for years. Unlike buy and sell, this operation seeks to keep the property for a much longer period, which makes it a much more passive type of business.
Buy and rent is a real estate business model applicable to various real estate types: residential, commercial, industrial, and office.
Buy-to-let furnished
This variation of buy and rent is very common in some cities, and in some sectors where the lease term is short, say months or even a year. Furniture impacts the lease fee upwards so that the purchase value is amortized.
Buy, remodel and rent
This is a variation of the buy and rent model, according to which the rental value is sought to be increased by improving the property. As always, it is necessary to calculate whether the value of the remodelling is recovered through the increased value of the rental fee.
REITs
If you remember, the chapter on “How to invest in real estate with little money” includes REITs and ETFs among others, so if you are looking for how to invest without a lot of capital, this could be the alternative.
REITs are an abbreviation for Real Estate Investment Trusts. A REIT is a publicly traded real estate investment trust (usually owns and manages real estate that produces rental income).
In the same way that a company can issue publicly traded shares and investors can buy them to become co-owners and get dividends, a person can be a co-owner of big residential or commercial real estate properties and obtain part of its profits through a REIT.
REITs derive their income from leasing fees charged to tenants of the properties and/or interest on mortgages and transfer most of the income to investors, via dividends.
On the other hand, REITs and their investors profit from the gradual depreciation of the real estate they own.
There are currently 3 types of REITs:
Equity REITs:
They own large residential real estate (buildings, apartment complexes, or housing developments) or commercial real estate (hotels, offices, shopping centers, data centers, medical centers, cellular antennas, and industrial parks among others) and derive their profits mainly from the rents paid by the tenants of the properties
Mortgage REITs
They own mortgages backed by real estate and derive their income mainly from the interest paid by the borrowers of the loans.
Mixed REITs
These are companies that own both real estate and mortgages and derive their income from rents on the real estate and interest on the mortgages.
To give you an idea of the popularity of these instruments, according to a Morgan Stanley report, 35% of millionaire investors in the United States own REITs.
ETFs
ETFs stands for Exchange Traded Funds or Exchange Traded Funds. For a more detailed explanation, we invite you to read the article on ETFs and index funds.
In short, a REIT ETF is a collection of REITs that are traded as a complete package. For example, the Vanguard Real Estate ETF is an exchange-traded fund with the symbol VNQ and is composed of REITs in various real estate sectors:
- Healthcare Real Estate: 8.6%.
- Hotels and Resorts: 2.5% Industrial Real Estate: 11.5% Industrial Real Estate: 11.5% Real Estate
- Industrial real estate: 11.5%.
- Residential real estate: 13.2% Residential real estate: 13.2% Residential real estate: 13.2% Specialty REITs: 42
- Specialty REITs: 42% Specialty REITs: 42
- Shopping centers and warehouses (retail): 8,1%.
- Offices: 7.4%, among others.
among others.
By investing in ETFs containing REITs we can increase diversification by property type (residential, commercial, and industrial) and by geographic region since the properties are located in different countries and continents.
If at first glance it seems a bit complex, don’t let it scare you. Both REITs and ETFs are widely used instruments that you can access through an investment account. In the article on ETFs and Index Funds, we give you some suggestions.
However, you must read the prospectuses, know the historical performance and be aware of the risks and mitigate them before investing.
Real Estate Crowdfunding
Crowdfunding is another figure that allows you to access real estate investments, even if you don’t have much money. In our article on Crowdfunding and Crowdlending, you can learn more about this interesting concept.
Real estate crowdfunding is a model that seeks, through a technological platform, to unite investors and developers of a real estate project so that it can be carried out.
For example, if I want to build an apartment building in a particular specific location, but I do not have enough money to finance the work, I can present the project to a specialized platform, so that potential investors get to know it, review it and compare the profitability and risks against other projects.
Securitization
This scheme is similar to REITs, although there are some differences in method:
A securitization company sells the securities to investors like you, and in consideration, you receive a right to operate it.
Important: You are not a co-owner of the property. You own the usufructuary rights to the asset.
Dividing real estate
Splitting a house into two or more apartments or one large apartment into two smaller ones is sometimes possible and very profitable and sometimes totally impossible.
The demographic profile of families in most countries has changed dramatically. Fifty years ago it was not uncommon to find families of 6, 7, and even 10 people.
In the following graph with data from the U.S. Census Bureau, we can confirm this trend.
Today most families (in my country 67% of families have 1 to 3 people) are small.
This change makes large houses and apartments oversized for the needs of the average family. In addition, the high prices for buying and renting real estate make us look for smaller apartments.
Given these prospects, the division of real estate makes a lot of sense.
HOWEVER…
Carrying out a work of these characteristics may require the permission of the co-ownership and of the respective governmental entity: the city council or the mayor’s office.
To request the permits you must make a complete project, which has architectural, structural, legal, and financial implications among others.
Building and developing real estate projects
In the development of real estate projects, there is usually the greatest potential for operating profits while owning the property and greater capital gains at the time of sale.
It is a risky process but satisfactorily executed successfully.
The process of developing real estate projects requires a lot of knowledge in different areas, such as finance, engineering, legal, urban planning, commercial and project management among many others, as well as a team of professionals, each one an expert in his or her area.
What is meant by real estate development:
According to Ben Bulloch & John Sullivan, real estate development is the process of creating value by making tangible improvements to a real estate property.
Real estate development is accomplished by either building structures, modifying existing systems, or generally improving a real estate property in a way that increases its value. Real estate includes land and permanent or temporary structures that occupy this land.
- Pre-development: understanding the market; finding the property, analysis, and study of the property; the area, local regulations; design; negotiation with tenants; cost analysis and redesign and negotiation with the community.
- Construction
- Post development: Generally there are two options. Maintain and operate it or sell it.
Tourism rentals through the collaborative economy (AbnB model).
Through this model, you can rent your apartment, your house, or even a room in the apartment you live in. It allows you to obtain additional income from a property you own, even if you live in it.
We include this modality in the list of ways to invest in real estate with little money since you don’t even have to own the property.
On the other hand, you can receive more money through Airbnb or Booking tourist housing than through a conventional long-term rental.
Airbnb: The other side of the coin
So far there are many advantages, however, it is necessary to take into account:
- Tourist rentals through collaborative economy platforms are not a passive business model.
- Many cities, mainly those that are tourist destinations, have modified local legislation so that housing for tourist use has identical conditions to those of hotels in fiscal and tax terms. In other words: if they allow it, you have to pay taxes like a hotel.
- In many cases, the owner of the property must request authorization from the co-ownership to make tourist use of the property.
The administration of tourist properties is costly: admitting visitors, receiving the property to the visitors that leave, repairing, provisioning, repairing damages, etc. This implies more time and additional costs. - There are wonderful guests and not-so-wonderful guests: it is necessary to be very selective when accepting reservations.
Real Estate Investments as Joint Ownership or Community Property
It is possible to buy a property between several people.
If you and your friends want to buy a tourist apartment in Barcelona but don’t want to spend all your money, you can buy it together.
The costs associated with maintenance and improvements must be borne by all co-owners pro rata to each one’s share.
Conclusion on real estate investments
Real estate investments have been a tool for wealth generation for centuries.
It is possible to invest in real estate through numerous modalities, including some that require virtually no capital. We have mentioned the following:
1 Buy and sell
2 Buy, remodel and sell
3 Buy and sell
4 Buy, remodel, refinance, and rent
5 REITs
6 ETFs
7 Real estate crowdfunding
8 Securitization
9 Dividing real estate
10 Building or developing real estate projects
11 Tourist rentals through collaborative economy
12 Joint ownership or community property
All real estate investment models have advantages and disadvantages, as well as implicit risks that the investor must know.
The investor must mitigate it with help from experts in real estate law, finance, construction, and accounting.
Some options are much more difficult and risky than others.
As your knowledge and experience grow, study and prepare yourself to venture into other increasingly profitable business models.