FINDING INVESTMENT VALUE IN REAL ESTATE

Real estate returns are generated in two ways. First, the income return comes from tenants' rent payments. The income return is a straightforward calculation because all you need to know is how much cash remains after all property expenses have been paid. The second type of return is the capital return, which is the increase or decrease in the value of the property due to changes in market demand and/or inflation. The capital return is more difficult to calculate, and requires the property to be valued or appraised.


If you want to determine the value of a real estate investment, the most accurate method is to sell the property and see how much money you get for it. Of course, the problem with this method is that you would no longer own that asset! In most cases you would want to determine the value without selling the asset, so you would approximate the value of the property based on the price that was actually achieved for other similar properties in the area of interest. 


The approximation process can be inexact and subjective. The real estate market does not have the convenience of a public market, such as that for stocks, where you can continuously value an asset. Also, it is rare for two real estate properties to be exactly the same - unlike two shares of stock in a company, which are exactly the same. A third factor contributing to the subjectivity of real estate valuation is that it doesn't trade very often, so it can be difficult to establish a market value- especially if substantial time has passed since the last comparable trade.


All of the above noted valuation issues have given rise to a group of professional consultants referred to as appraisers. The task of an appraiser is to objectively assess the market value of a property by hypothesizing the most likely price of a trade between an arms-length buyer and seller. Appraisers have appropriate education and experience to perform property valuations, and typically are certified by a professional body which sets appraisal rules that must be followed by all of its members.


Source: Ian Woychuk, Investopedia.com

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SIMPLE WAYS TO INVEST IN REAL ESTATE

Buying real estate is about more than just finding a place to call home. Investing in real estate has become increasingly popular over the last fifty years and has become a common investment vehicle. 


Although the real estate market has plenty of opportunities for making big gains, buying and owning real estate is a lot more complicated than investing in stocks and bonds.


Within these examples there are countless variations of real estate investments. As with any investment, there is much potential with real estate, but this does not mean that it is an assured gain. 


As with any investment, make careful choices and weigh out the costs and benefits of your actions before diving in. 


The following are ways in which you can invest in Real Estate;


1. Rental Properties
2. Real Estate Investment Groups
3. Real Estate Trading
4. Real Estate Investment Trusts (REITs)
5. Leverage


Source: Andrew Beattie, Investopedia.com

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UNDERSTANDING REAL ESTATE INVESTMENTS 2

The various categories of real estate investments available, include direct property ownership, mortgages, and debt or equity securities. What these real estate investments have in common is that there are one or more tangible real estate properties underlying each investment. 


That means when you make an investment, it is important to consider the characteristics of the underlying real estate because the performance of those properties will impact the performance of your investment.


When you're looking at the underlying real estate, one of the most important criteria (aside from location, location, location!) is the type of property. When considering a purchase, you need to ask yourself whether the underlying properties are, for example, residential homes, shopping malls, warehouses, office towers or a combination of any of these. 


Each type of real estate has a different set of drivers influencing its performance. You can't simply assume one type of property will perform well in a market where a different type is performing well. Likewise, you can't assume one type of property will continue to be a good investment simply because it has performed well in the past.


Source: Ian Woychuk, Investopedia.com

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GAINING FROM REAL ESTATE INVESTMENTS

Real Estate produces relatively consistent total returns that are a hybrid of income and capital growth. In that sense, real estate has a coupon-paying bond-like component in that it pays a regular, steady income stream, and it has a stock-like component in that its value has a propensity to fluctuate. And, like all securities that you have a long position in, you would prefer the value to go up more often than it goes down!


The income return from real estate is directly linked to the rent payments received from tenants, minus the costs of operating the property and outgoing mortgage/financing payments. So, you can understand how important it is to keep your property as full as possible. 


If you lose too many tenants, you won't have sufficient rents being paid by the other tenants to cover the building operating costs. Your ability to keep the building full depends on the strength of the leasing market - that is, the supply and demand for space similar to the space you are trying to lease.


In weaker markets with oversupply of vacancies or poor demand, you would have to charge less rent to keep your building full than in a strong leasing market. And unfortunately, if your rents are lower, your income returns are lower.


Capital appreciation of a property is determined by having the property appraised. If the appraiser thinks your property would sell for more than you bought it for, then you've achieved a positive capital return. 


Because the appraiser uses past transactions in judging values, capital returns are directly linked to the performance of the investment sales market. The investment sales market is affected largely by the supply and demand of investment product.


The majority of the volatility in real estate returns comes from the capital appreciation component of returns. Income returns tend to be fairly stable, and capital returns fluctuate more. The volatility of total returns falls somewhere in between.


Source: Ian Woychuk, Investopedia.com

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