With everything that is going on right now, taking on more risks and uncertainties is probably the last thing in people’s minds. The pandemic has nearly upended everyone’s definition of normal and forced everybody into new set-ups in both our home and work environments. Financial security and health safety have become everyone’s top priorities. Challenging ventures such as investing might be out of the picture for some. Still, real estate investment might be suitable for risk-averse people. Unlike the stock market or other short-term investments, real estate investment is not as volatile and will not disappear overnight. It also gives you unlimited options in terms of growing your property.
A. Different Types of Real Estate
Before jumping right into real estate investment, it is essential to know the different types of real estate properties out there. Some of these depend on your current financial position and what best suits your goals. Here are the different types of real estate use that you might come across.
Residential
This type of real estate property is used, built, and developed for residential purposes: house and lot developments, residential condos, multifamily residences, and townhouses. Camella, a leading real estate developer of master planned communities, offers multiple house and lot options for potential homeowners and investors.
Commercial
A real estate property developed for the sole purpose of commercial or business use falls under this category. Examples include apartment complexes, hotels, restaurants, parking spaces, shopping malls, and office buildings.
Industrial
A type of real estate property developed and used for industrial processes such as manufacturing or production, research, storage, and distribution. Such properties include warehouses, factories, distribution centers, power plants, and even docking bays.
Land
Any real estate property that includes underdeveloped parcels of land or just bare agricultural land qualifies under this type of real estate. Examples include farms, ranches, orchards, vacant plots, or even an island.
Special purpose
This type of real estate includes those classified as public properties. Examples are libraries, parks, schools, and government buildings.
B. Things To Consider Before Investing
Now that you have an overview of the different types of real estate properties, it is time that you consider the following factors. These are things to remember when choosing the real estate you want to invest in. Here is a list of the most important ones you need to consider before making your first real estate investment.
Location
The first thing you should look into is the location of your potential real estate. Especially if you are after a property’s profitability, location should make up the bulk of your criteria. A residential property’s neighborhood status and proximity to business centers, iconic landmarks, or even universities factor into its valuations. It must be accessible to markets and transport hubs where the hustle and bustle are concentrated for commercial properties. When looking into these locations, it is advised that investors consider the area’s long-term economic plans and how they can generate quantitative benefits in the future. This is especially true for commercial properties since a property’s value is closely tied to an area’s urban planning developments.
Purpose of Investment
This factor closely ties with the first one since the location of the property you plan to invest in will be largely dependent on the purpose of your investment. Having no clear purpose might lead to unwanted consequences down the road. No one wants to see their hard-earned money go to waste from a poorly planned investment. It might be better to establish your purpose early on, as this also helps you figure out what your investment means. Suppose you are looking for a residential house and lot for personal use. In that case, you have to assess the property according to your needs. If it is a property you are planning on leasing out, you have to consider these things.
Real Estate Valuations
The valuation of a real estate property is vital because the financing scheme you will be selecting will largely depend on it. The purchase, the property’s listing price, taxation, and even its insurance rely on its valuation. Three valuation methods are typically used in real estate investment. The first is a sales comparison approach that involves assessing the property’s value based on a similar property that has been recently sold in the market. Next, the cost approach considers the land and construction cost while subtracting its depreciation, resulting in its market value. Lastly, the income approach values a property based on its future cash inflows. This approach is commonly used when investors are looking to invest in a rental property. After figuring out which valuation method is appropriate for your real estate, you can then proceed with the investment.
Future Cash Flows and Growth
When investing in real estate, you need to pay special attention to the potential cash flows it can generate for you in the future. Cash flow is the capital you have left after shelling out money for expenses. A positive cash flow is a good sign and can indicate a positive return on investment for your property. Suppose you are planning on investing in a rental property. In that case, you can develop projections of the expected cash flow from the rental income you will be collecting. In this case, inflation will be on your side. If you are looking for a property that you plan on improving with renovations, then there will be an increase in its value. A renovation before selling a property can also raise its market value which can result in more profits.
Newly Constructed or Old Property
Investing in a soon-to-be or newly constructed property will give your higher value and allows you to be flexible with improvements you might have in mind. However, this also comes with higher costs and construction delays. Existing properties erase the hassle of cashing out a considerable amount of money right from the get-go. There are existing improvements such as permanent fixtures and installments, which lessens your costs makes it more convenient for you as an investor. Suppose you are planning on investing in new construction. In that case, it is advised that you review the contractor’s portfolio and check their reputation. Suppose you decide to go for an existing property. In that case, you must review the property’s appraisal reports and other documented costs. A key to a successful investment is doing your due diligence to make sure you make the right decision.
Credit Score Status
You might not want to shell out a considerable amount of cash for your investment. This is when loans and mortgages come into play. But before you get to avail these, you should first check if your credit score is good enough. A high credit score allows you to qualify for a mortgage and has more favorable options for your loan. It also affords you the ability to have more flexible terms for your financing and can save you a lot of money in the long run. Make sure to improve your credit score and review your credit reports to get the best terms possible.
Status of the Real Estate Market
Like the stock market, it is best to be updated with the real estate market’s current state. You will want to buy properties when the prices are low. Conversely, it is best to sell properties when prices are high. Being updated with the current market trends allows you to plan ahead and get your properties’ best rates. The goal is to get the best mortgage rates for your investment, and mortgage rates are affected by inflation and economic growth. While the real estate market fluctuates as well, it is not as volatile as the stock market.
C. Start Investing in Real Estate
After doing all the necessary research, you can then jump right into investing. Listed below are the common ways of directly investing in real estate.
Direct
The first one is through homeownership, like purchasing a house and lot for your family. Another one is investing in rental properties to gain passive income from tenants collecting rent or lease payments. Finally, you can opt for house flipping, which is the process of renovating and improving an existing house and lot and then selling it for a profit. If you have a knack for home renovation or interior design, then this might be up your alley. All these direct investment options rely heavily on the property’s location and other factors like convenience and proximity to schools and transport hubs.
Indirectly
You can also choose to invest indirectly. This is through real estate investment trust companies that allow you to choose from their portfolio of profit-generating real estate properties. It is modeled after mutual funds and lets investors earn dividends without buying and managing physical property. REITs are very liquid since they are traded similarly to how stocks and other securities are traded on an exchange market. You can enjoy passive income through purchased shares that have appreciated and dividend payments that you receive periodically. Unlike direct real estate investment, REITs are subjected to market risk. You also cannot avail of tax advantages. It all depends on what type of real estate investment suits your needs and purpose.
Mortgage-Related Securities
Also known as a mortgage-backed security, this type of asset-backed security is an investment where investors receive payments periodically, much like bond coupon payments. Essentially, banks act as the middleman between home buyers and investors. In this case, an investor who purchases mortgage-backed security is the one lending money to home buyers. This type of investment has received a lot of bad press for its role during the global financial crisis of 2007-2008. Due to the uncontrolled rise of subprime lending, it was all due to the said meltdown that cost trillions of dollars in wealth. This crisis showed how mortgage-backed securities are only as good as the mortgages’ quality that back them. Now, stricter regulations have been imposed to avoid the same scenario from happening in the future.
Why You Should Invest in Real Estate
Investing in real estate is a secure way of starting your investing venture. While not wholly void of risks, they are significantly lesser than when dabbling in the stock market for your investment. Benefits of investing in real estate include the following: stable cash flow, passive income from rent and lease payments, appreciation of the property, diversification of your assets, and tax advantages.
A steady source of cash flow and passive income allows you to pay off your mortgage while building up your equity. As you build up your equity, this adds up to your net worth, which helps you gain better leverage when you want to buy another property in the future. Investors also earn profits from investing in commercial real estate property. Investors especially love tax deductions and break since it allows them to lessen their money to pay taxes. Costs of owning, managing, and maintaining a property can be deductible and can lower your taxed income.
For homebuyers who want to purchase a house and lot for personal use, finding the perfect unit is a matter of great importance. You will want a secured community, a wonderful neighborhood suitable for raising your family, and the ideal home for you and your loved ones. With over 40 years of building the perfect homes for every Filipino, Camella aims to provide the best possible property for your first real estate investment. An industry leader when it comes to developing master planned communities, Camella promotes green communities and smart home living through their top-of-the-line house and lot units. To know more about Camella’s latest offerings, you can visit its house and lot catalogue page or their official Facebook page for a complete list of available units.
