Real Estate Investment Strategies for Beginners

Investing in Real Estate

In recent decades capital has increasingly been invested in real estate. Investing in real estate offers profound ways to make money. But on the con site the acquisition and possession of multi-family apartments, tenements and land is much more labour-intensive than investing in Stocks and Bonds.

The issue of real estate buying can be very emotionally occupied. Some real estate buyers dream of own house and want to pay off as quickly as possible. In particular, if a construction project with little equity and much sweat was built in own work one would not want to hear anything negative about his house construction.

This may be the case with real estate investors who are already financing a multi-family home, have commercial real estate or see real estate more than one investment. The prerequisites to earn money with real estate have probably never been as good as today.

In Switzerland, bonds with all maturities have negative interest rates at the beginning of 2017. In Germany, you will certainly lose money (even without inflation) for all government bonds with a maturity of less than 8 years.

Because of the low interest rates may seem tempting to invest in real estate, even if the yield calculation yields only a 2% or 3% return on equity.

Real estate investment is regarded as an inflation-proof investment and an additional value can be generated by letting the property increase in price. 

But we have to ask ourself if these rules are still valid after years of money creation, declining population and massive real estate construction. Many investors simply do not remember the times of 8% or even 14% interest.

Even if you have finance your real estate project for the next 20 years think about if you will find a buyer for a 2 Mio. CHF family flat in Zürich if the interest rate is at 8% in 20 years again. The buyer would have to pay 160 000 CHF in interest alone a year (assuming 8% interest) in addition to other costs associated with a flat in Zürich. 

Probably it will not be enough for future yield calculations simply to calculate the returns with a real estate yield calculator and thus obtain a meaningful number.

Real estate is built in Switzerland and Germany as well as in other Central European cities made of stone or durable materials. In cities such as Basel and Zurich or Vienna you can still admire the buildings from the 15th and 16th centuries.

In cities such as Frankfurt, Duesseldorf, Cologne or Berlin, it is rather the 70s buildings that partially shape the cityscape but are still in the best condition. The longevity of European buildings can be a significant problem for real estate investment, which we will discuss later.

In contrast to the construction in Central Europe, paper, cardboard and wood are often made in combination with insulation wool in the USA. The problems of a real estate bubble thus disappear much faster than in Europe.

For example, if you travel approximately 300 miles from Detroit to Chicago, you will see thousands of ruined houses from the 2008/2009 real estate crisis. Unlike in Europe, where stone houses may be 100 years old (and the tax-depreciation or tax-deduction of residential real estate in many European countries is over 100 years or 1% per year; while the US tax-depreciation is only over 40 years), the houses in the real estate bubble are already decayed and uninhabitable after a few years and can be rebuilt.

Similar architectural styles as in the USA have also prevailed in the UK, where you can see many decayed wooden houses when you leave London in the direction of Leicester, Nottingham, Sheffield and Leeds.

What is Rental Investment?

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A man purchases a property, rents it and charges a predicated amount for a regular time interval. It can be defined as a property in which the landlord gets rent from the renter on a monthly basis. Property could be located in commercial or residential area.

The proprietor, the landowner, is in charge of paying the home loan, maintenance, cost of sustentation, taxes and everything related to his home. In the real world, the proprietor charges enough amounts which cover all his expenses.

Why do people invest their money in rental properties?

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Nowadays the trend of investing in some rental property is becoming very popular. Investment in the rental property is substantially emancipating and quite visceral. One can find many financing strategies related to real estate investment.

People prefer to spend their money in some sort of rental investment work because they think it can save their time and efforts. In order to shield themselves from the heavy taxes, people consider it an excellent approach to invest their money in some real estate property.

If you are new to the investment market and do not have much information on hand then you might not know why people prefer to invest in real estate. To break things down for you, following are few reasons people choose real estate investment:

Good Cash Flow:

There is no single investor who is not fond of good cash flow, which is why investing in real estate is their safest bet. Once you have bought residential house or a commercial property, the next thing that you need to do is rent it out.

You can either use your social circle to find a Tenant or take help from a real estate dealer. Once you have found a suitable Tenant, you can enjoy the income generated in the form of rent every month. You do not have to worry about the prices of commodities going up or down since, it is not going to change your flow of cash.

Inflation and Real Estate:

Currently Real Estate is still labour intensive, if labour cost increase the price of Real Estate goes up. This is the reason why during inflation, the prices of the property keeps on going up, even if the market gets slow.

Negative interest rates and money printed out of nothing like ever seen before in human history has trigger massive real estate development activities around the world. In many industrial countries the population is decreasing.

An oversupply of Real Estate combined with decreasing population could be a disaster for Real Estate price on the one hand - but on the other hand inflation, increasing labor cost and low interest can keep Real Estate market prices increase. 

Rate of Inflation Real Estate Prices today 5 years later 10 years later 20 years later 30 years later
3% $100,000 $115,927 $134,392 $180,611 $242,726
2% $100,000 $110,408 $121,899 $148,595 $181,139
1% $100,000 $105,101 $110,426 $122,019 $134,785
0% $100,000 100,000 $100,000 100,000 100,000

Presence of Hard Asset:

When it comes to presence of hard asset, real estate investment is one of the few things that qualify in this category.Buying a piece of property is the physical asset that an investor holds. He knows the value of the house, how much money he can make from it and even live in it. The presence of a hard asset is a great charm in itself for real estate investor.

Estimating Returns on Investment:

Calculating the Returns on Investment also known as ROI, might seem to be an easy thing to do for the financial advisor since they are the professional of this field. However, when it comes to a layman, this particular calculation can be confusing.

Let us see how to calculate Return On Investment (ROI) for Real Estate:

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If a property was bought for $20,000 and after 3 years it was sold for $25,000 then the profit made from the investment would be $5000

Gain from Investment-Cost of Investment = $25,000-$20,000

The ROI would be 25%

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Equity ≠ Cash:

Before you calculate the ROI using the above mentioned formula, you need to make sure that you have already sold your property. There are a lot of chances that your property might not sell at the market value you anticipated. Moreover, there are different types of costs that are linked with the selling of the property which includes repairing, money spent on advertisement and commission money that you pay to your broker. You can negotiate the cost of advertising as well as broker; however, they are still going to leave a huge impact on your expenses.

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Refinanced property:

One of the major complications that arise during the calculations of the ROI is due to the refinanced property or there is second mortgage taken out. The interest can be increased on the refinanced or second mortgage and you might be charged with the loan fees. These both things can end up decreasing the ROI.

Property Maintenance:

If you are owner of a commercial or residential property, you are obliged to pay the tax even if you have rented it out. Yes, the renter is responsible for paying all the taxes of the property he own. The huge percentage of money that goes in the name of tax also leaves a huge impact on the ROI.

What You Should Consider While Investing In Real Estate:

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Investment in real estate is not as easy and simple as it sounds. You cannot simply choose a piece of property randomly and go for it. There are a lot of things that you need to bring in consideration while buying anything.

Location of the property:

The first thing people check while buying a house for their family to live in is the location, goes with the buying it for the sake of investment. The main purpose of buying any property is to earn profit for it.

For that purpose, you need to make sure that you are investing in the perfect location. If you are buying a residential house then you need to check if it is in some peaceful conforming place, there is a nice neighbourhood and you get all the major necessities of life nearby.

However, if you are going for some commercial place, you need to check the value and resale value of the place along with presence of transport hubs, warehouses and freeways.

One of the biggest problems while choosing the location is that you might not get everything you want. You will have to compromise on a thing or two which can be a setback when it comes to resale of that property.

State of the property:

Finding a decent location is not the end of hassle, the state of the property is of equal importance. You will come across a lot of houses or buildings that look just fine but have serious issues in them.

Most of the time, a layman cannot point out the problems in the state of the property which is why it is wise to take an expert with you. An expert of this field can point out all the hidden defects in the property which will make it easy for you know if it is worth buying. Going in blind can cause you a huge amount of money.

Condition:

Now people might get tangled up trying to figure out what is the difference between the state of the property and its condition. The state of the property is basically its structure and the material used for it, while on the other hand, the condition means that if the property can be used or not.

For example, if you are buying a house solely for the purpose of renting it out then you needs to make sure that the house is in good condition. It is in perfect condition for the people to live in. moreover, it should also have basic water, electricity and gas supply. It is near to impossible to rent out a house that has broken ceiling or floors.

The ugly side of real estate investment:

If you are thinking to invest in real estate then chances are that you are lured into this idea by telling all the positives of it. How about you take a step back and look at all the big ugly setbacks that come with investing in real estate? Yes, your idea of the real estate investment might turn around by looking at everything that comes with it.

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Hidden costs:

Made the decision to invest in real estate, found the right house to buy, paid for it and you are done, do you really think that it is that easy? Well, sorry to break your happy bubble but investing in real estate is much more than this.

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The first thing that comes as a shock for you is the hidden costs that you to buy when you invest in real estate. Following are the few hidden costs that tag along while investing in real estate.

    Property dealer’s commission:

    • It is a whole other story weather you end up buying a house or eventually change your mind, in either case you need to hire a property dealer for his professional advice. Well, you think paying property dealer is a one-time thing ?
    • Think again! Yes, you basically pay your property dealer twice. First when you hire him to find you your desired piece of property for the sake of investment and then you pay a percentage of the buying amount to the property dealer while closing a deal.
    • In order to determine the commission of the property dealer, you can use the formula given below:

      Commission Rate (%) X Property Price = Payable Property Commission.

    • The commission rate is usually predefined between the investor and property dealer.

    Closing cost:

    • You cannot seal a deal without paying the closing cost. Some people usually mix closing cost with the down payment when in fact these two are different terms.
    • The closing cost is to be paid to everyone that was involved in the sale of the property which includes company who is handling all the legal paperwork for you, government offices that are recording deeds, etc.
    • It’s driven by:

      Closing Cost = 2%-5% x Purchasing price of the property.

    • The closing cost is the true example of hidden costs that comes as a shock to the real estate investor.

    Renovation:

    • It is a very rare case that the real estate investor ends up getting each and everything he ever wanted in the property he bought. In most cases, he has to make renovation to give it his desired face.
    • After buying the house, the first thing you need to do is check how much renovation it needs. Yes, there are a lot of chances that you will not find the property you bought in absolutely perfect condition.
    • You will have to spend further money in order to get it fix so that you can finally rent it out. The renovation sometimes takes a huge chunk of money out of your pocket while you still haven’t enjoyed one single benefit by investing in real estate.
    • The renovation cost can be frustrating and can turn down the entire excitement of investing in real estate.

    Maintenance:

    • Once you have bought a house or a building, Moreover, the first maintenance is not the only time you are going to pay.
    • Since you are the owner of the house, every time the house or building needs any sort of repairing, you will be the one paying for it. Yes, it doesn't matter if you have rented it out; the maintenance of the house is always on the owner.
    • Sometimes Maintenance of more than one house makes everything a lot of hassle and you instead of lying back while enjoying rent money end up going back and forth for the maintenance issues.

    Home insurance:

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    • Just when you thought that you are done with paying all the hidden costs, the home insurance snaps it.
    • You spent an investment that is worth a fortune in real estate so it is natural that you want it to stay forever with you.
    • For this purpose, you need to get your house or the property you bought insured, in order to get through natural disaster or criminal acts.
    • There are different charges for the home insurance; however, on a national level it usually costs $1000 per year.
    • Even if your real estate investment isn't bringing you any good, you have to pay home insurance every year.

    This article is further continued with our next blog post on:"Things that Nobody told you about Investing in Real Estate". Which also includes "What should be preferred over Real Estate Investments & Why"

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