Real Estate Finance and Investment

Real Estate Investment Advice

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Why Invest in Real Estate?

Investing in buildings and land has many advantages. As Mark Twain said: "Buy land, they're not making it anymore." As populations continue to grow so the same basic land mass has to accommodate ever more people. It makes sense to grab a piece of the action.

Home ownership should be everyone's top financial priority. Renting for anything more than a short-term stopgap is throwing money away. Why pay someone else's mortgage when you could be paying your own?

For many, owning their own home will be the limit of their real estate portfolio. As probably their largest asset, that's fine. But property can provide excellent opportunities for further investment.

Although residential real estate has much to offer (everyone needs somewhere to live!) there are numerous alternative real estate opportunitis, eg commercial (malls. offices, factories, warehouses...), mobile homeparks, even billboards can be surprisingly lucrative.

Real Estate Investment Trusts (REITS)

The simplest way to get involved is through an indirect investment in a Real Estate Investment Trust (REIT). REITs are traded companies that own and lease residential and commercial property. They are well established in North America but relatively new to the UK following recent changes to the law. Investors buy stock in REITs and benefit from a rising stock price and regular dividends.

REITs provide a means of diversifying the risk of direct real estate investment by spreading your capital across multiple properties. They offer exposure to real estate market returns without the need to find tenants, fix bathrooms or bear the risk of unoccupied periods. REITs also provide an excellent vehicle for those saving for a deposit on their first home, since their money will keep pace with rising real estate prices.

Real Estate Investment Strategy

There are two ways to profit from direct real estate investment, ie owning actual houses and apartments:

The first method is flipping. This means buying cheap, probably making some improvements, and selling at a profit. Although it's possible to find below market price properties that can be quickly sold for a higher price, it isn't easy as your potential buyer is also searching for the same thing. More often you will have to do some renovation in order to sell on an improved product.

This route is best suited for those with an aptitude for design and a talent and passion for DIY. If you have to rely on tradesmen to carry out the work their fees will quickly eat up any profit potential.

If you MUST use tradesmen be sure to choose only those with a well-established track record, get references (the more the better), get several quotations to make sure you're not paying over the odds. Personal recommendation is also worth a lot.

The second method is by buying one or more properties to rent out. Returns come from two sources - rental income and capital appreciation. This is a long-term strategy, but can be extremely lucrative over the years. In this case buying below market price is less important (though great if you can) than rental market knowledge. What areas attract most renters? What kind of properties are they looking for? What are the rental yields (ie the annual rent divided by the property value)?

If you're looking to make money by renting, avoid buying anything that needs a lot of work, because time spent up a ladder is time without rental income.

If you rent property out you are responsible for carrying out any necessary maintenance / repairs. Being able to do as much as possible yourself will save money. (Consider a DIY course at your local college). For those things you can't do it's good to have the names of suitable repairpersons to hand. The advice given above on choosing tradesmen applies equally here. Taking out maintenance insurance for plumbing, heating etc can help balance the budget by replacing unexpected big bills with a regular monthly outlay. Such insurance may be avilable as an add-on to your building insurance, but as always - shop around!

Financing Real Estate Investment

Real estate investment is generally financed with borrowed money, ie mortgages. This means

  • it isn't necessary to own the entire capital necessary to purchase your next property - only a relatively small percentage, and
  • you get to benefit from leverage - a magnification of any gains (or losses) due to using borrowed money. Eg, you buy a $200,000 house but put down only $20,000. The price rises to $220,000 - a modest increase of 10% - but your interest, or equity, has doubled from $20,000 to $40,000. Your debt remains at $180,000.

Although any investment can be financed with debt lenders are particularly happy to advance funds on loans secured with property, safe in the knowledge the asset becomes theirs in the event of default. As your share of your existing property/ies increases, so you can use the equity to obtain further mortgages. This is how it's possible for relatively small investors to build a portfolio of properties.

Home Mortgage Guide - Find the Best Mortgage Deal

Like all markets property / real estate prices can fall as well as rise. But unlike other investment types property / real estate is REAL. Whatever happens to the market you still have that same physical asset (stocks can go bust, cash can be eaten by inflation... but a house is always a house).

The sub-prime mortgage crisis in the US has seen some housing prices fall. UK housing prices have more than trebled in the decade to 2007, but is this sustainable? Trying to predict the future direction of the housing market has become a national pastime, but the only predictable thing is the unpredictability of short-term movements. However, in the long term real estate prices have risen steadily and there is no reason to believe they will not continue to do so.

More on Real Estate Investing from our Free Personal Finance Articles Library

This growing collection of articles aims to bring you the very best in real estate investing advice.

10 Tips for Successful Real Estate Property Investment
Best Investment Real Estate Locations
Buy To Let: Which Mortgage Is Right?
Categories of Real Estate Investment
Descriptive Terms in Real Estate Ads – More Definitions
Finance Your Real Estate Investment Properties
Five Top Tips When Buying Property At Auction
A Guide to Buying a New Home
House Flipping – How to be More successful?
Important Things to Know and Do When Selling Real Estate
Purchasing Your First Home
Real Estate Investing: No Lawyers, No Debt, No Plungers
Real Estate Investors – Where's the Best Deal
A Simple Real Estate Investment Plan To Make A Million Dollars or More!
Six Questions Buyers Should Ask Before Making An Offer
Who Else Wants To Buy Rental Property With Zero Down?
The Worst Real Estate Investment Strategy Ever!
Zero Down

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