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Investment Viability in Real Estate

Real estate investment is the commitment of finances to the property with the objective of generating income through lease or rental with an aim of capital appreciation in the long run. Real estate is basically land and any developments made to land and the sets of rights acquired with it, which include possession and transfer rights. Real estate investment involves a substantial amount of finances, is a long-term investment, and can be very unpredictable. This calls for a real estate investor to evaluate his/her risk appetite and investment capacity before participating in real estate investment, particularly when moving from buying a home to speculating in raw land or involving yourself in commercial and industrial ventures (Economy Watch para 1).

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The real estate is divided into residential real estate and commercial real estate. Residential real estate is concerned with all types of housing; apartments and family homes. Commercial real estate includes among others office buildings, shopping centers, retail property, and factories. Commercial real estate properties are valued much higher than residential transactions, much more profits are realized (Vaughan para 2).

Land, on which real estate is based, is a limited commodity. Land cannot be increased in supply; the only thing that can be done is to develop what is already there. This implies that those dealing in real estate, they are dealing with a commodity which limited in supply. This is what is appealing when it comes to real estate investment. This has the implications that as the population is increasing more houses have to be constructed to meet the demand, thus demand for more residential space increases land prices. Although investment in real estate ties up capital in the property thus cannot be retrieved easily in case of emergencies, real estate investments have a tendency to go up in value over time provided the investor is careful in the selection, improvement, and maintenance of the property.

Real estate investment, despite the challenges that come with it, is a good means of wealth creation and can prove to be a viable investment as it ensures a consistent stream of cash flow. Although some of the income may go to the maintenance of the property, the good news is that it is possible to keep an eye on your investment from time to time ensuring that the tenants are taking good care of your property and thus you can hold the property at very little costs.

Like any other investment, real estate has its varying characteristics of risks and opportunities. These calls for any would-be investors to consider if real estate is the right investment for them by taking these risks and opportunities as a package and weighing them against their risk appetite. The basis of real estate investment lies in the shelter being a basic necessity and thus with increasing populations and scarcity of land, the boom in real estate is here to stay and cannot go away soon. This makes real estate investment a very good venture when considering a foundation for in future.

The economy is becoming weaker by the day; most investments are witnessing a fall in their demand, real estate among them. Housing prices are falling but patterns indicate that recessions are predecessors of increased investment returns, thus real estate investment should be on every investor’s mind right now. Though it cannot be precisely established when the market will stabilize, real estate investors, anticipate extensive future price appreciation (Renaissance Capital Para 1).

The idea behind which any investment is upon is buying low and selling high so as to make significant financial profits. Investors should have a basis for establishing potential investments. This is important in making consistent and viable real estate investment decisions. The greatest question behind any amateur real estate investor is, “what characterizes a profitable real estate investing business?” (Renaissance Capital para 2). The best way to establish a potential real estate venture is to utilize the right techniques so as to make attractive investments with huge profit potential and minimize downside risks. Valuation of particular real estate property involves focusing on residential real estate. The willingness of local residents to pay so as to live in that particular property is used to establish the value of that property. The willingness of the local residents to pay for a real estate property is affected by a number of factors ranging from income to the availability of alternative housing. The most commonly used valuation techniques that factor in both income and availability of alternative housing are: “sales comparison approach” which considers recent sale value of the comparable property and the “rental income approach” which considers current market rates of rent for comparable property (Renaissance Capital para 3). When the real estate market is stable these techniques should give relatively the same value, though the rental income approach is strongly recommended as the stronghold of any good valuation analysis. The sales comparison approach gives a picture of the value of similar properties now but cannot indicate what can be expected tomorrow. The rental income approach tends to give a picture of the long-term analysis (Renaissance Capital para 4-5).

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The most widely used method of establishing the viability of an investment is to compare it with other investments that are doing fairly well. One of the greatest challenges when it comes to comparing two investments is that they usually have varying degrees of risks even if they have the same returns, thus these comparisons are usually not valid unless a qualified comparison approach is assumed where opportunities and risks are weighed in relative terms. Comparison in investment is also hindered by varying amounts of capital required. Real estate investment requires a substantial amount of capital to get started; this makes comparison with other investments difficult (Thomsett 20).

Real estate investment requires a lot more commitment than when compared for example with shares, and commitment is a form of risk in that as the landlord you need to know who your tenants are and make sure rent is paid on time. Knowledge of risk is always a vital starting tool in making an investment. The commitment is a risk because you are taking a gamble on the tenants, what if the rent is not paid? There is also the risk of not finding any tenants hence cutting the stream of income. Real estate investment is a long-term investment and one that cannot be rushed into because once you have acquired property you cannot do away with the property easily without incurring any losses (Thomsett 20).

Real estate investing has risks and opportunities like any other investment and is a viable investment as it ensures a continuous stream of income. It acts as the base to an investing future, but once you have made up your mind about real estate investing you need to be extra careful and follow guidelines available on how to determine whether a particular property possesses the potential to appreciate in the long term. Among the fundamentals to watch out for when anticipating to acquire real estate property include: location of the property which is crucial as neighborhood condition will have a great influence on the value of the property, the condition and age of the property, how the property conforms with the other property in the same neighborhood, and price for which the property is going at.

Real estate participants vary, each with different reasons for participating in this venture. These participants include those who opt to own real estate property with the objective of renting it out as landlords. These participants run the risk of not finding tenants and have to spa re significant amount of time and effort on the property. Real estate investment groups are other participants in this market and are professionally managed companies similar to mutual funds. They buy, build, and maintain the property for a ratio of the monthly income. Real estate traders hold the property for only a short period of time with the objective of selling when the prices are fair so as to make profits (Vaughan para 4-6).

Real estate investment trusts (REITs) are corporations that trade in large exchanges using investor’s money to buy and control property, REITs have advantages because they provide regular income, are highly liqand enable investors to gain access to commercial real estate property and distribute 90% of their income as dividends to shareholders. Participation of REITs in real estate reduces risks associated with real estate and makes real estate investment attractive and feasible. Investment in real estate is viable.

References

Economy Watch. Real estate investment, real estate investing. 2009, Web.

Renaissance Capital. Why now is the perfect time to invest in real estate. n. d. Web. 2011.

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Thomsett, Michael C. J.K. Lasser’s real estate investing. New York, NY: John Wiley and Sons, Inc., 2001. Print.

Vaughan, Jeanne P. Commercial real estate investing. CRE Obline. n. d. Web. 2011.

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