Real Estate Investment: How to Build a Solid Property Portfolio
A real estate portfolio is a collection of properties that you hold, for the purpose of growing your money. This is accomplished by collecting rental income, through the property appreciating in value, or a combination of the two.
Note that real estate investment does not require you to have full ownership of a property. The advent of newer models of investing has made it possible to start investing in real estate simply by buying a stake in a property, or by owning shares in an investment fund.
Real estate portfolios may be constructed in several ways, ranging from residential real estate, to commercial properties and mixed-use developments. Some real estate portfolios are categorised according to different parameters, such as geographic location, property type, or market value.
Pros and Cons of Investing in Real Estate
|Generates passive income||High capital may be required|
|Offers capital appreciation||May incur maintenance costs and other upkeep fees|
|Hedge against inflation||Requires long investing timeline|
|Suitable for wide range of investors||Illiquidity, not easily converted into cash|
Pros of Investing in Real Estate
As real estate enjoys perennial demand (people will need a place to live, work or play after all), real estate investments can generate steady cashflow, furnishing investors with passive income. This is perhaps the biggest draw of investing in real estate.
Secondly, real estate investing allows investors to enjoy capital appreciation. This is because property tends to appreciate in value over time, mainly when demand outstrips supply. Future improvement works may also heighten the value of the property.
Furthermore, real estate value may also grow at a faster rate than inflation, which brings us to the third advantage of investing in real estate. Investing in property can offer a way to hedge against inflation.
Finally, real estate investing has evolved such that even beginners with little to know knowledge can take part, while still offering enough complexity and depth for those who prefer a hands-on approach.
Cons of Investing in Real Estate
While real estate investing holds many advantages, there are also pitfalls to watch out for.
If you’re pursuing the traditional route — i.e., purchasing a property and renting it out for income — you will require a large capital before you can do so. At the very least, you’ll need to come up with the down payment, as well as pay for renovations and furnishings required to attract the kind of tenants you want.
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Also, as the landlord or owner, you will need to ensure the property remains in good condition. This means regular maintenance, as well as bearing the cost of any repairs or breakdowns. Periodic improvements or refurbishments will also be necessary to maintain the value of your property.
Investing in real estate often requires a long time horizon, as property values take time to go up, and rental income is accrued month-by-month. Those who are unable to wait are unlikely to see solid returns on their investments.
This is also related to the fact that real estate is a highly illiquid asset class. You will have to wait for the right time to sell your property at a good price in order to realise your gains.
Many of these potential pitfalls disappear if you choose to invest in real estate using newer, non-traditional means. See the next section for a detailed explanation.
3 Ways You Can Invest in Real Estate
Buying and Holding Properties
The first (and original) method of investing in real estate revolves around buying additional properties to rent out for income.
The difference between the rental income and the property’s mortgage, cost of maintenance and other fees is where your return on investment is found (this is known as rental yield).
The higher the rental yield, the more lucrative your returns.
As noted above, this method of real estate investing requires a high level of skill and knowledge, as achieving a good rental yield hinges on keeping your overall costs low.
Landlords will need to strike a keen balance between maintaining the property’s attractiveness without going overboard on fancy renovations, expensive appliances, etc.
Real estate investment trusts (REITs) are a popular type of investment fund that allow investors to invest in property without having to raise a large capital sum or worry about property maintenance and other issues.
All you need to do is to buy shares of a REIT (through a bank or an online brokerage) that owns the properties you want to invest in. You can buy as many shares as your budget allows, and do so at your preferred pace. You can choose to make small investments regularly, or invest a lump sum all at once.
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In return, the rental income collected from the properties held in the REIT will be distributed back to investors; you will receive a dividend proportionate to the number of shares you hold.
Note that management fees, property maintenance fees and other charges are deducted from the income collected before distribution to investors.
The dividends you receive can be used to buy up more REIT shares, or withdrawn to your bank account in cash. You can also sell your REIT shares at any time to cash out your investment.
Using a Co-Investment Platform
A variation on REITs, real estate co-investment platforms offer many of the same advantages and none of the hassle of traditional property investing.
Co-investment platforms work largely the same way as REITs, pooling together investor funds to buy and manage real estate on their behalf. Income from the properties is collected and re-distributed to investors in a similar manner as well.
Real estate co-investment platforms may work slightly differently than REITS. Instead of a collection of properties, co-investment platforms may offer individual properties for investment.
Tips For Spotting a Good Real Estate Investment
Pay Attention to Location
The location of a property is one of the foremost factors determining its value. Even the most well-designed property will struggle to attract tenants if it is situated in an undesirable location.
Check Future Development Plans
Real estate can be positively or negatively affected by the area’s future development plans, so it’s worth taking the effort to find out as much information as you can. For instance, a holiday bungalow famed for its views will quickly see its value plummet once a high-rise has been announced to be built in front of it. Watch For a Good Entry Price Properties that are selling below market value are worth checking out, as they automatically provide a positive investment margin.
However, be wary of rushing blindly into a purchase based on this factor alone; property prices in the area may be entering a contraction, and there’s no guarantee that you will be able to make a good return on your investment.
Attend Property Auctions
Property auctions are ideal opportunities to pick up distressed properties at a good price, kicking off your real estate investment on the right foot.
Furthermore, if the reserve price fails to be reached during the auction, you can then approach the sellers to strike a private deal.
Check Past Performance
For REITs and co-investment platforms, you will want to pay attention to their historical performance.
A REIT with an established history of steady returns will likely continue to do well in the future, while a pattern of dropping dividends may indicate competition from newer properties or issues with maintenance.
Meanwhile, co-investment platforms with consistent returns may prove to be a better choice compared to those with a history of wildly swinging returns.