Investing money in real estate – owned or leased properties maintained to increase equity rather than for providing services or producing goods – is one of the main ways of making good money. All because of the reliability of this option. But to successfully invest in real estate, you need to make a plan, familiarize yourself with the pros and cons of the process, and consider the payback period.
Real estate investment goals, pros and cons
If you are interested in buying real estate to generate further income, it is worth reflecting on what exactly your goal is. This will determine the choice of investment object, strategy, profitability and payback of the project, and risks.
You should make sure that:
- you have sufficient time to achieve the desired objective;
- you understand what resources you will need;
- you understand what obstacles you may encounter and how to deal with them;
- you understand exactly what resources you will need to achieve the goal.
Before investing in real estate, you need to understand the advantages and disadvantages of such a path. Among the advantages are:
- the impossibility of losing real estate property like some car key, and it can also not be stolen that easily;
- the risk of falling prices for such property is much lower than when buying securities;
- inflation will not devalue the invested capital;
- rental income is higher than interest on a bank deposit;
- you can start investing in real estate without any special knowledge.
The main disadvantage is the low liquidity of real estate: it will take a long time to sell such property. Also, the property requires periodic maintenance, such as repairs or utility bills.
Payback period for real estate investments
Real estate has a longer payback period when compared to regular business investments. The average payback period is 4-10 years, with 4-5 years being a very lucky outcome, but this figure is not constant, because it is affected by many factors. Payback period can be reduced if you invest in a new building for resale. An investor can buy an object at the construction stage, and then resell it when it’s in good condition. This strategy reduces the expected payback period to 1-5 years, capital growth in this case can reach 20-40%.
There are many options for profitable investments in real estate: you can invest in construction at an early stage for resale or buy an apartment to rent out. Let’s consider the advantages and disadvantages of interesting options for investing in real estate.
Investments in real estate for rent
This option is suitable if you are not chasing a quick profit and are not interested in investing in the construction of housing at the very early stage of construction. Such an option, as renting out some apartment you own, allows you to get a long-term passive income. Among other advantages is the possibility of further profitable sale of such property.
There are disadvantages too, of course, as you will have to make repairs in the new apartment. And that means there can be unpredictable costs in terms of money and time.
It is very profitable to invest in an apartment located in well-developed areas (near subway stations, parks, schools, new or famous office buildings – depending on the country and area you live in. Such real estate will be in demand, so the rental income will be higher. Acquisition of an apartment in a promising area that’s being developed now will cost less compared to property in some well-established part of the city, but the rental income will be lower. The payback period of such an investment is going to close on or even surpass 10 years in most countries.
If you are considering the purchase of an apartment of dilapidated housing stock, you need to understand that over time, such housing will lose in price. But this option is devoid of many of the risks of new construction, the main thing is to choose the right apartment. Take into account the location of the building, infrastructure, the general condition of both the house and the surrounding area. It will be important to check the condition of the apartment itself, since investing a lot of money in renovation is unprofitable.
The most popular variants of the old housing stock for rent will be one- or two-bedroom apartments of 300-600 square feet, located in safe areas of city centers or near developed transportation infrastructure. Such real estate will pay off in 9-10 years or so (depending on the market conditions and your country’s economy), but during this time it may lose up to 1/3 of its original value.
Investing in new buildings
Buying an apartment in a new building, for a fairly short period of time you can get a good income – provided the investment in residential real estate at the initial stage. The payback period is about 2-3 years across the developed countries (sometimes even shorter), during this time the price of the apartment grows by 20-30%. Such investment promises you an income both passive and quite solid.
Yet you will have to put up with not only the costs of buying a new building, but also with the risks. There is a probability that the developer will not complete the construction due to lack of financing and will not return the money invested.
If you are interested in new buildings, you should choose the developer carefully – check all the available information, find out whether there are any unfinished projects, as well as the total number of projects. You should research publications in the media regarding the chosen construction company.
The following should be requested from the developer:
- company’s constituent documents;
- financial statements;
- state license;
- construction permit;
- proof of land ownership;
- project documentation (if possible).
If you want to reduce risks, you can buy an apartment in a new building at the final stage of construction, but the cost of such real estate will be higher.
It is also important to choose the right project, because its liquidity will depend on how well it meets the requirements of buyers and market trends. There is no need to save on the quality of work and materials, it is better to choose a cheaper apartment of a smaller size.
Now there is a demand for small apartments – studios and one-bedroom options are targeted by many. It is better to choose new buildings located in areas with well-developed infrastructure.
Buying commercial real estate
If commercial real estate in Toronto is chosen for investment, it should be understood that the investment is likely to be voluminous.
The cheapest option is a retail or office property of small size, it will cost the same as housing in a new building, but the rent for commercial property will be higher. You also need to invest additional money in renovation and household appliances. One could earn a high passive income from such operations. The risk of this business is low, but tenants will often change, so you need to spend a lot of time looking for new ones. The payback period is up to 10 years, but may be significantly shorter depending on your area.
As for investments in warehouse real estate, the larger such property is, the higher its value. The income will be good and stable, but as an investor you’ll need to be involved in all processes concerning a large facility. The return on investment in this type of real estate is about 6-12 years, assuming constant occupancy.
Profitability of investing in real estate for renovation
Investing in real estate under repair is a popular thing as well. On the secondary market there are many interesting choices – they are often located in good areas, only needing some renovation to become a source of a good income.
For this type of purchase to be a gainful investment, it is necessary to be able to assess not only the general condition of the building, but also the cost of renovation and the price per square foot after renovation. An experienced investor can earn 10-15% of the invested sum on such a project.
They try to start renovation as early as possible. Next, the prepared real estate is resold. In this case, you can earn both on the growth of the price per square foot, and on renovations. This strategy pays off quickly, but carries certain risks (too slow construction or termination of it).
If you do not want to take risks, it is better to focus on the secondary market and choose such strategies as renting out a renovated apartment or selling the property after renovation. If you are willing to take risks for the sake of more income, you can choose to invest in new buildings.
Conclusion
For your real estate investments to live up to expectations, it is necessary to set a clear goal and choose an object taking into account all its features. With this approach, almost any investment will yield some return.
