Real estate investments involves the purchase, ownership, management, rental, and/or sale of real estate for profit. Increased realty properties as part of a real estate investment strategy are generally considered to be a sub-specialty of real estate investing called real estate development. Real estate is a form of assets with limited liquidity relative to other investments, also capital-intensive (although capital can be obtained through mortgage leverage) and is heavily dependent on cash flow. If these factors are not understood and managed by investors, real estate becomes a risky investment. The main cause of failure of investments for real estate is that investors go into negative cash flows for unsustainable term, often forcing them to resell property with a loss or enter into bankruptcy. A similar practice known as flipping is another reason for failure because the nature of investment is often associated with short-term profits with little effort.
Video Real estate investing
Sources and acquired investment properties
The real estate market in most countries is not as organized or as efficient as the market for other, more liquid instruments of investment. Individual properties are unique to themselves and not directly exchangeable, which presents a major challenge for investors who want to evaluate the price and investment opportunities. For this reason, finding a property in which to invest can involve employment and a great competition among investors to purchase individual property may vary greatly depending on knowledge of availability. Information asymmetry is common in the real estate market. This increases transactional risk, but also provides many opportunities for investors to acquire property at low prices. Real estate entrepreneurs typically use various assessment techniques to determine property values ​​before buying.
The typical sources of investment property include:
- List of markets (through Multiple Listing Service or Commercial Information Exchange)
- Real estate agents and real estate brokers
- Bank (like a bank owned real estate department for REO sales and short)
- Government entities (such as Fannie Mae, Freddie Mac, and other government agencies)
- Common auctions (foreclosure sales, property sales, etc.)
- Private sales (transactions sold by owner sold by owner)
- Real estate traders and investors (flipping)
Once the investment property has been placed, and initial due diligence (investigation and verification of condition and property status) is completed, the investor must negotiate the selling price and terms of sale with the seller, then execute the contract for sale. Most investors use real estate agents and real estate attorneys to help with the acquisition process, because very complicated and inappropriate transactions can be very expensive. During the acquisition of the property, the investor will usually make an official bid to buy including a "earnest payment" payment to the seller at the beginning of the negotiation to reserve the investor's right to complete the transaction if the price and terms can be satisfactorily negotiated. This money may or may not be refundable, and is considered a signal of seriousness of investor intent to buy. The terms of the offer will also usually include a number of possibilities that allow the investor time to complete due diligence, inspect the property and obtain financing among other terms before the final purchase. In a contingency period, investors usually have the right to cancel the offer without penalty and get a serious deposit refund. After the contingency ends, canceling the offer will usually require the forfeiture of a serious money deposit and may involve other penalties as well.
Real estate assets are usually very expensive compared to other widely available investment instruments (such as stocks or bonds). Only rare real estate investors who pay the entire amount of property purchase price in cash. Typically, most of the purchase price will be financed using some sort of financial instrument or debt, such as a mortgage loan secured by the property itself. The total purchase price financed by debt is called leverage. The amount financed by the investor's own capital, through cash or other asset transfers, is called equity. The ratio of leverage to the total assessed value (often referred to as "LTV", or lending to the value of a conventional mortgage) is one of the mathematical measures of risk taken by investors using leverage to finance property purchases. Investors typically seek to reduce their equity requirements and increase their leverage, so their return on investment (ROI) is maximized. Lenders and other financial institutions typically have minimum equity requirements for real estate investments that are required to be funded, usually on the order of 20% of the assessed value. Investors looking for low-equity requirements can explore alternative financing arrangements as part of property purchases (for example, seller financing, vendor subordination, private equity sources etc.)
If the property requires substantial improvements, traditional lenders such as banks often will not lend property and investors may be required to borrow from private lenders utilizing short-term bridge loans such as hard money loans from hard money lenders. A real money loan is usually a short-term loan in which the lender imposes much higher interest due to the higher nature of the loan risk. Real money loans usually have a much lower Loan-to-value ratio than a conventional mortgage.
Some real estate investment organizations, such as real estate investment trusts (REITs) and some Hedge pensions and funds, have substantial capital reserves and investment strategies to enable 100% equity in the properties they buy. This minimizes the risk of leverage, but also limits the potential ROI.
By leveraging the purchase of investment property, the periodic payments needed to serve debt create a sustained (and sometimes great) negative cash flow from the moment of purchase. This is sometimes referred to as carry or carry fees of investments. To be successful, real estate investors must manage their cash flow to create enough positive income from the property at least to offset freight costs.
With the signing of the JOBS Act in April 2012 by President Obama there has been a relaxation on investment applications. A new method of increasing equity in smaller amounts is through crowdfunding real estate that may accumulate accredited and/or non-accredited investors in a special purpose vehicle for all or part of the equity capital required for acquisition. Fundrise is the first company to do crowdfund real estate investments in the United States.
Maps Real estate investing
Resources and management of cash flow
Typical investment properties generate cash flow to investors in four common ways:
- net operating income (NOI)
- tax shelter offsets
- the formation of equity
- capital rewards
Net operating income , or NOI, is the sum of all positive cash flows from rent and other ordinary income sources generated by the property, less the amount of ongoing costs, such as maintenance, utilities, fees, taxes and goods - other goods of that nature (debt services are not taken into account in NOI). The ratio of NOI to asset purchase prices, expressed as a percentage, is called a capitalization rate, or a CAP level, and is a common measure of the performance of an investment property.
Tax shelter offsets occur in one of three ways: depreciation (which can sometimes be accelerated), tax credits, and losses due to accumulated losses that reduce tax liabilities imposed on revenues from other sources for a period of time 27.5 years. Some of the benefits of tax protection may be transferable, subject to the laws governing tax obligations in the jurisdiction in which the property is situated. These can be sold to others for refunds or other benefits.
The formation of equity is an increase in the equity ratio of investors as part of repayment of debt services that are devoted to principal increases over time. Increased equity is calculated as a positive cash flow from assets where debt service payments come from income from property, not from independent sources of income.
Capital appreciation is an increase in asset market value over time, which is realized as cash flows when property is sold. Capital appreciation can be very unpredictable unless it is part of a development and upgrading strategy. Property purchases where most of the projected cash flows are expected from capital appreciation (rising prices) rather than other sources are considered speculative rather than investment.
Risk management
Risk management and evaluation is a major part of a successful real estate investment strategy. Risks occur in various ways at each stage of the investment process. Below is a tabulation of some common risks and typical risk mitigation strategies used by real estate investors.
Investment foreclosure
Some individuals and companies are involved in the property purchase business that is in Foreclosure. Property is considered in foreclosure when homeowners have not made a mortgage payment for at least 90 days. This property can be purchased before a foreclosure auction (pre-foreclosure) or at a foreclosure auction that is a public sale. If no one buys the property at a foreclosure auction then the property will be returned to the lender who owns the mortgage on the property.
Once the property is sold at a foreclosure auction and the foreclosure process is complete, the lender can save the proceeds to meet their mortgage and legal fees they incur. The confiscating bank has the right to continue to honor the tenant lease (if there are tenants in the property), but usually as a rule the bank wants an empty property, to sell it easier. Thus, distressed assets (such as foreclosed properties or equipment) are considered by some to be valuable investments because banks or mortgage companies are not motivated to sell more property than promised to oppose it.
Foreclosure statistics
US foreclosure activity fell to a 74-month low in April 2013, with 144,790 properties with foreclosure foreclosures. Though still about twice as high as the 75,000 a month average in 2005, it was 60 percent below the monthly peak of more than 367,000 in March 2010., with about one in every 100 US households at some stage of the foreclosure process, according to the latest figures from RealtyTrac data collectors.
See also
- Cash on cash return
- Creative Real Estate Investment
- Internal rate of return
- Investment Rating for Real Estate
- Real estate appraisal
- Real-estate developers
- Real estate investor
- Off plan property
- Wholesale
- Shrinkage Record
References
Source of the article : Wikipedia
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