Real Estate Investment

Updated on April 4, 2024
Article byRutan Bhattacharyya
Edited byRutan Bhattacharyya
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Real Estate Investment?

Real estate investment involves individuals purchasing real estate properties as investments to make financial gains instead of utilizing them as their primary residence. It enables one to generate passive income and benefit from tax advantages. Moreover, such an investment allows individuals to diversify their portfolio.

Real Estate Investment

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This avenue can help individuals mitigate portfolio risk by lowering volatility via diversification, irrespective of the type of real estate investment option they choose. There are different kinds of real estate investments. Some are real estate investment trusts or REITs, real estate mutual funds, crowdfunding platforms, and commercial real estate.

Key Takeaways

  • Real estate investment meaning refers to an investment technique that involves buying, selling, and/or holding real estate properties with an aim to earn income to fulfill financial objectives.  
  • This investment strategy offers various benefits. For example, it allows investors to claim tax benefits and provides a stable income. Individuals can also mitigate the impact of inflation by including real estate properties in their investment portfolio.
  • Commercial real estate, REITs, and real estate mutual funds are some of the different kinds of investments in real estate.
  • Fixing and flipping and house hack are two popular real estate investment strategies.

How Does Real Estate Investment Work?

Real estate investment meaning refers to the allocation of funds to estate properties, like houses, office buildings, commercial plots, agricultural buildings, etc., to generate earnings. It can provide investors with cash flow stability and tax advantages. Moreover, it can safeguard individuals from the impact of inflation.

Some key features of this investment are as follows:

  • It involves investing in tangible assets. In other words, one can touch or see residential or commercial real estate properties.
  • Investments in real estate are immune to inflation. As a result, real estate property prices increase when the market is inflationary.
  • Unlike bonds and fixed deposits, investments in real estate properties have no fixed maturity period. Instead, property owners decide whether to sell or hold the asset.
  • Such investments can generate profits even during a recession.  
  • A key feature of an investment in real estate properties is that it can provide investors with a dual benefit through rent and value appreciation.

One can understand the importance of this type of investment through these points:

  • The Rent Can Pay The Mortgage: The rent earned from commercial and residential properties can help property owners make their mortgage payments.
  • Stable Income:  The rent earned on a property can be a source of stable earnings for individuals.
  • Financial Security: In the case of such an investment, investors possess the asset, which offers financial security to them.
  • Tax Benefits: Individuals can reduce their taxable income by investing in real estate.

That said, such investments come with a few drawbacks. Let us look at two noteworthy ones.

  • Sometimes, investors allocate their funds to a project that does not turn out to be profitable.
  • Unlike certain investment avenues, like equity, investments in real estate properties are less liquid. In other words, one cannot purchase and sell residential and commercial properties regularly.

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Real Estate Investment Strategies

Let us look at some popular real estate investment strategies.

#1 – Purchasing And Holding Rental Property

Purchasing single-family residences or SFRs and holding them is a popular strategy investors use to make financial gains through appreciation in a property’s value and rental income. Moreover, they utilize this strategy to make the most of unique tax benefits.  

#2 – Reinvesting Rental Income

This is a complementary strategy used by many investors utilizing the buy-and-hold approach. In this case, investors save the net cash flow generated from a rental property until they accumulate adequate funds to pay the down payment on another rental property. Then, they save the cash flow generated from both properties until they have sufficient funds for another property.

#3 – House Hack

This strategy is for individuals who own their property but have extra funds to buy a rental property. It involves living in a property that generates income. Examples of such properties are duplexes, triplexes, or any house that has extra space, like a spare bedroom or basement that can be rented. In this case, property owners rent out a part of the residence to lower the housing costs.

#4 – Fixing And Flipping

This high-risk strategy can potentially provide investors with a high reward if everything works out well. In this case, the flipper locates an undervalued property and buys it. After that, the person aims to increase the value of that property through strategic renovations to make financial gains. Alternatively, they simply hold the property, trying to profit from the increase in its value.

If an investor cannot flip a property fast or if a person underestimates the required repairs, they could be short on funds. Hence, the fixing and flipping strategy is ideal for individuals with significant experience in projecting a property’s fair market value, the renovation costs, and the required capital to do the job on time while not exceeding the budget.

#5 – Real Estate Wholesaling

This strategy is a variation of the last approach. In this case, the wholesaler does not take possession of the asset. Rather, wholesalers seek a motivated seller’s distressed property. Then, they put that asset under contract at a price below the market value, project the required repairs, and assign the sale and purchase agreement to a different investor in return for a wholesale fee.

Types

The different types of real estate investments are as follows:

#1 – REITs (Real Estate Investment Trusts)

The establishment of a REIT occurs when a trust is set up to utilize investors’ funds for the purpose of selling, purchasing, and operating income-generating properties. The buying and selling of REITs take place on stock exchanges. This investment option is suitable for individuals seeking regular income. That said, it offers capital appreciation too.

#2 – Residential Real Estate

A residential real estate property can be anything where people stay or live, such as condos, vacation homes, and single-family residences. Individuals investing in residential real estate generate earnings through capital appreciation, rent, or both.

#3 – Raw Land

Investors generally purchase land for commercial or residential development. That said, purchasing land for development typically requires extensive market research, especially if investors wish to develop a property.

Such an investment is suitable for persons having vast knowledge regarding real estate, for example, zoning regulations, building codes, food plains, etc., besides comprehending the commercial and local rental markets.

#4 – Commercial Real Estate

It refers to a space leased or rented by a business. Examples include an office rented by only one organization, a mall with different businesses, and gas stations. One must remember that retail and industrial real estate fall under the umbrella of commercial real estate. Also, commercial properties typically have a higher rent and longer lease than residential properties. This means commercial real estate investors can generate a more stable income over the long term than residential real estate investors.

#5 – Real Estate Mutual Fund

Such a mutual fund predominantly invests in real estate operating companies or REOC and REITs. Investors can get diversified exposure to the real estate space without paying a significant sum. Based on the diversification strategies and objectives , these funds can offer investors a broader selection of assets that one can achieve by purchasing individual REITs. This investment option is more liquid than commercial and residential real estate.

Examples

Let us look at a few real estate investment examples to understand the concept better.

Example #1

Suppose Jim purchased a house for $500,000 and put it on rent for $5,000 monthly. Three years later, he sold the house for $550,000, and during the timeframe from the purchase date, he did not increase the return. Therefore, in the three years, Jim earned $180,000 ($5,000 x 12 x 3) + $50,000, i.e., $230,000 in total on his real estate investment through rental income and capital appreciation.

Example #2

Two Years back, Prestige Estates Projects Ltd, a Karnataka-based property development organization, sold commercial assets of around 16 million to Blackstone, a private equity company. In April 2023, the former announced that it is constructing additional office assets. However, it has also mentioned that it plans to use those assets for its own real estate investment trust or REIT offering.

The company has office space of 20 million square feet under construction. Out of that, a significant part is in Mumbai, India. It is expected that the space will become ready for use by 2025. This will take Prestige Estate’s overall office portfolio to over 40 million square feet by that time. The total cost is near the ₹13,000 crore mark. The forthcoming properties are marquee assets, and the organization aims to monetize them via a REIT listing.

Frequently Asked Questions (FAQs)

1. How does real estate investment trust work?

The business model of REITs is simple. They lease space and earn rental income on properties. Then, they distribute the money accumulated as dividends to shareholders. One must remember that a trust must pay at least 90% of the taxable profits as dividends to the shareholders to be a REIT.  

2. Is real estate investment worth it?

Yes, because of these reasons:
– Investments in real estate are immune to the effect of inflation.
– It can offer individuals a steady source of earnings.
– This strategy can provide tax benefits and significant long-term returns.

3. How to start a real estate investment group?

One can follow these steps to establish a real estate investment group or REIG:
– Prepare a plan regarding how the REIG must operate
– Choose the types of real estate it will purchase
– Solicit members

4. Is real estate investment better than stocks?

Real estate and stocks can fulfill different financial goals. While the former can offer stability, the latter is subject to high volatility. Hence, one must consider their risk appetite and financial goals before investing.

This has been a guide to what is Real Estate Investment. Here, we explain the topic in detail, including its strategies, types, and examples. You can learn more about it from the following articles –

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