19 Sep The art of real estate investing: industry secrets to profitability
Investing in real estate has been around for hundreds of years and is still one of the most popular investment vehicles. There are many benefits associated with real estate investments but today, we will focus on investing in real estate the right way.
Going by historical return figures, there’s no doubt that every investor with a long enough investment time horizon should add some real estate investments into their portfolios. While that is an easy decision to make, the real question is how to go about investing in real estate the right way.
In this guide, we will discuss a few things that successful real estate investors do on a consistent basis and these little things have certainly helped them become the successful real estate investors they are today. From this perspective, we can consider these as industry secrets.
A thorough education is the best starting point
This is an open secret but it’s a secret because many novice investors simply do not take time to understand the importance of thoroughly educating themselves on the concepts related to real estate investing before jumping right into investing their hard-earned money.
Unfortunately, many such investors learn these investing lessons the hard way. Even if an investor has extensive experience in trading and investing equities or bonds, real estate investing is intrinsically different from that of investing in stocks or bonds, so it’s important to allocate time to educate himself on real estate investing and the underlying principles related to real estate investing.
Understanding that real estate investments are long-term oriented
A common mistake committed by novice real estate investors is expecting investment returns within a short period of time. However, the inherent nature of how real estate investments work require investors to remain patient for an extensive time period to generate attractive returns. The importance of understanding the long-term nature of real estate investments cannot be emphasized enough.
Over a long period of time, carefully executed real estate investments will provide a very attractive risk-adjusted return, as evident from the below chart.
(Source – Seeking Alpha/Thompson Reuters)
The key here is to note how real estate investments have been able to provide unmatched returns over a 20-year period while exposing investors to a considerably lower risk than many other asset classes.
However, in the short-term, real estate investments will most likely provide negative returns as it takes time for property prices to appreciate and there’s a considerable amount of taxes involved when buying and selling properties.
A short-term oriented investor should not consider investing in real estate and this is one of the top secrets to becoming a successful real estate investor. An investor should be willing to hold on to his or her real estate properties for many years to get the most out of the investment.
Understanding the fact that real estate investing is a long-term process will do wonders to an investor’s portfolio.
A thorough understanding of macro-economic developments
Not paying close attention to macro-economic developments is a mistake committed by many real estate investors. It’s surprising to see the number of real estate investors who conduct deep analyses on the attractiveness of a particular property without considering the prevailing macro-economic condition at all. This is a costly mistake.
The value of real estate properties is closely linked to the underlying macro-economic condition of a country or a region.
First, interest rates will have a significant impact on the value of a property. When interest rates are low, many individuals and corporates tend to buy properties as it’s cost-effective to use leverage to buy residential or commercial properties. On the other hand, when interest rates are rising, real estate transactions tend to decline considerably. A clear understanding of whether interest rates are poised to move higher or lower can determine the ability of an investor to make correct real estate investment decision. Failure to gauge a measure of what interest rates would be in a couple of years could lead to undesirable outcomes for an investor.
Next, it’s important to distinguish between the various macro-economic factors that affect property prices in various real-estate categories. Below table provides good guidance as to various such factors that determine the value of a real estate property.
As we can observe from the above table, there are different factors that determine the price of properties in different property types. A thorough understanding of the factors that drive property values is essential to be a successful real estate investor in the long run.
However, many real estate investors simply do not pay attention to these macro-economic variables and end up on the wrong side of the bargain. While the level of interest rates will have an impact on any type of property, factors listed in the above table are unique to each property type.
Finally, a real estate investor should pay close attention to the industries and sectors that are evolving. An understanding of this could unveil potential investment opportunities. For example, if the healthcare sector is expected to grow at a stellar rate in the future, properties that have an appeal to healthcare sector companies could skyrocket in value. To uncover these types of investment opportunities, it’s vital to have an understanding of macro-economic developments.
Develop a niche
The final secret is selecting a real estate property niche to invest in. Even though there are real estate investors who consistently generate positive returns by investing in a wide array of real estate properties, majority of highly successful real estate investors discover the real estate property type or the niche that best fits their investment objectives and personal traits.
As with many other things, specializing in a single type of real estate properties makes it easy for an investor to focus on macro and microeconomic factors that affect the selected property type, and this provides a clear advantage when it comes to investment decision making. Focusing on too many property types at the same time might become an obstacle in identifying important trends that could have a significant impact on property prices.
For an inexperienced investor, selecting a property niche might sound a daunting task. The first step is to create an investment policy statement to identify his or her investment objectives, risk tolerance, and the investment time horizon. Next, a thorough understanding of the intrinsic characteristics of different real estate property types should be attained to distinguish between each of these property types. Finally, a decision should be made as to which niche falls best in line with the objectives stated in the investment policy statement.
Investing in real estate assets is lucrative and can lead to unbeatable returns in comparison to other asset classes. Historical evidence supports this. However, to remain a successful real estate investor over a long-time horizon, it requires an investor to develop certain skills. In this guide, we introduced some of the most common practices of successful real estate investors and we believe that harnessing these skills could make a meaningful impact to the performance of a real estate investor’s portfolio.