4 Ways To Invest In Real Estate

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For many private investors, real estate is a more understandable and reliable investment tool than, for example, buying securities. Especially in Europe, where many buildings are steeped in centuries of history. For example, residential or business premises in Denmark (“erhvervslokaler”) are valued by investors from all over the world, you can find them here.

According to various sources, only cash savings and bank deposits are more popular than investments in real estate. The popularity of this solution is easy to understand - when buying, an investor receives a real object that is resistant to inflation, its value grows every year. 

The real estate market is inert, compared to the foreign exchange market, the relevance of which has fallen sharply. In any type of investment, there are “pitfalls”, without knowing which you should not rush to invest your money.

What profitability can bring investments in the real estate market and what are the risks? We answer these questions in our article.

Apartment at the excavation stage

One of the most popular ways to make money on real estate is to buy an apartment in a new building at the excavation stage, so that later, when the house is put into operation, resell the apartment.

Apartment at the excavation stage

However, the share of investment transactions with apartments for resale has been falling over the past few years. The problem is that the difference between the purchase price and the sale price is getting smaller. If 5 years ago the market average was 25%, now it is 8-15%.

Developers began to work on special escrow accounts, on which citizens' funds are accumulated in banks. The essence of this tool is to protect buyers of apartments.

If earlier at the stage of excavation they paid money directly to the construction company (which invested it in construction, but did not always calculate its strength, and if the developer went bankrupt, the buyers of future apartments were left with nothing), now the bank allocates money for the construction, and for its accounts accumulate funds of citizens.

Construction companies will not be able to use this money until the work is completed. With such a financing scheme, there is simply no need for developers to sell apartments at the stage of excavation cheaply.

Pros of buying an apartment in a new building

Simplicity and accessibility. To invest in the purchase of an apartment, it is not necessary to understand finances.

Cons of buying an apartment in a new building

Low yield. Suppose you are ready to invest $ 300,000 in buying an apartment, but if you resell it in three years, you will receive a return of 10-12% of the original cost.

At the same time, it is necessary to take into account the need for time and financial costs for processing transactions, searching for a buyer of real estate, participating in various meetings of residents, and additional contributions that arise when a new building is commissioned.

And, of course, profitability is guaranteed if apartment prices are either stable or rising. At the moment, apartment prices are rising, but one of the most important growth factors here has become preferential mortgages, which are subsidized by the state. Therefore, some analysts predict a possible decline in real estate prices if such a benefit is cancelled.

The risks of freezing the construction of a residential building, which buyers of apartments faced earlier, are minimal today. Usually the suspension of construction was due to lack of funding. With the introduction of escrow accounts, this risk has been reduced to almost zero. The developer is credited and controlled by the bank, which, if necessary, will provide additional financing.

Apartment for rent

Millions of apartments are rented out in large cities, plus a huge number of them are rented “in gray”, without paying taxes. Tens of thousands of apartments (no one knows the exact number) are bought every year to rent out. And this is also one of the most popular investments in the real estate market. 

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Apartment for rent

Pros of apartment rental

One of the easiest ways to make money. I bought an apartment, made repairs (if necessary), place an ad for rent and receive a monthly fee.

Cons of apartment rental

Low yield. According to the estimates of the investment platforms, the profitability of renting apartments now is about 4-5% per annum. If you put money in the bank and don't worry about your real estate, the income will be about the same.

In addition, the property in the apartment becomes unusable, it will have to be updated - this eats up part of the income, and the tenants, of course, may not pay. To file a lawsuit is quite troublesome and possible, by the way, only if the apartment is rented officially.

Real estate rental mutual funds

A more professional tool can be called a Real Estate Mutual Investment Fund. It is quite simple, but not yet familiar to everyone who somehow invests in real estate.

It is formed by a management company (MC) and, with the money of investors, acquires assets in the form of real estate, which, in the opinion of professional managers, will bring passive income from the same lease of space.

Real estate rental mutual funds

As the underlying assets of such a fund, for example, retail, office or warehouse real estate can be acquired. The income from renting commercial space for businesses is generally higher than the income from renting apartments rented to individuals.

The entry threshold for a private investor here can start at several thousand dollars. If you are interested in trying your hand as an investor in Europe, take a look at business premises (“erhvervslokaler”) in Denmark - interesting offers and favorable conditions.

Pros of real estate mutual investment fund

Passive investment. Traditionally, investors consider such investments to be low-risk, because the fund's asset is real estate.

In the event of an emergency, the facility can, for example, be rebuilt or repurposed, etc. In addition, the activities of the UK are controlled by the Central Bank of the country, which reduces the risk of defrauding investors.

The management company even takes over the payment of personal income tax, which is levied on the investment income of a private person. The profitability of such a financial instrument is higher than with a simple lease of real estate. As a rule, management companies promise a yield in the region of 9-12% per annum.

Cons of real estate mutual investment fund

Despite the small risks, the profitability of rental funds is not guaranteed. For example, in the case of a bank deposit, if the bank has problems, the losses of depositors are reimbursed from the DIA fund. The management companies of rental funds, as a rule, declare rather high rates.

We analyzed the return of a number of the largest rental mutual funds specializing in retail space for three years, and it turned out to be lower than the declared 12%, amounting to only about 8% per annum. This drop in yields was partly due to the pandemic, as retail rental rates barely rose last year.

If, for example, retail real estate loses some tenants as a result of another crisis, rental rates for them will have to be reduced and the investor's profitability will become lower.

New tools for collective investment in real estate

Management companies began to offer investors new investment tools and strategies that allow them to receive increased returns with a limited level of risk. One of these is the Redevelopment Fund.

The fund's strategy involves the purchase of inefficiently used real estate in the Central Administrative District and further reconstruction into residential buildings and apartments. As a rule, the implementation of such a project takes about four years.

Construction

During this time, a fund is formed, real estate objects are acquired, permits are obtained. Next comes the construction itself, and after that - the sale of apartments or apartments to private individuals.

The return on investments of the redevelopment fund is significantly higher than the profit from the purchase of commercial real estate or an apartment for rent and fluctuates at the level of 20-30%, second only to high-risk venture investments.

Pros of redevelopment Fund

The obvious advantage here is the high yield. The subject of investment is real estate as an understandable and stable asset. The activities of the management company are controlled by the Central Bank, which ensures the transparency of its activities for the investor.

Cons of redevelopment Fund

Here there are exclusively market risks associated with an increase in terms or a decrease in the pace of sales. These risks can be mitigated by diversifying investors' investments in the fund, that is, investments are made in several projects at once.

How to get maximum

Real estate is a reliable asset and certainly suits the more conservative category of investors. When investing in real estate, you should pay attention to the forecasts of its value, which are given by analysts. For example, now the price of apartments may already be at its peak and may subsequently decrease. In this case, simple speculation "bought and sold" will not bring significant profit.

In search of higher returns, you can pay attention to the instruments of collective investment. These now include investments in real estate mutual funds. The key role here is played by the competence of the management company team, its experience and portfolio of completed projects.

About the author 

Peter Keszegh

Most people write this part in the third person but I won't. You're at the right place if you want to start or grow your online business. When I'm not busy scaling up my own or other people' businesses, you'll find me trying out new things and discovering new places. Connect with me on Facebook, just let me know how I can help.

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