Editor’s note: This article was first published in September 2014. The depressed Spanish property market, the garage-space opportunity, industrial warehouses as a bad business at the moment, the shopping-centre bubble and the reference to the property market recovering all reflect Spain at that time.
Since one of our readers asked us to cover real estate investment and explain how to go about it, we’re going to look at the subject in depth, explaining all the ways you can invest in property along with a few tips to bear in mind.
First of all, although real estate has historically been an even more profitable investment than shares, the truth is that in most of its forms it requires more capital, or, in other cases, smart use of debt.
But first, what isn’t real estate investing?
It certainly isn’t buying a home with a mortgage in the hope that its price will go up. That is strangling yourself financially, although you might be able to rent the property out for more each month than the mortgage payment. Difficult, but possible.
Otherwise, this kind of investment would be considered risky, since you have taken on debt to buy an illiquid asset.
Right now, at least in Spain, even with a depressed property market that can’t get back on its feet, a business opportunity has emerged around investing in garages and parking spaces. As you will have noticed, almost every city is having more and more trouble with parking, which is fuelling the growth of car park operators and pushing up the price of garage spaces. In principle, investing in garage spaces looks set to be very profitable over the next few years.
What kinds of real estate investment are there?
1. Residential real estate
Properties such as houses, terraced houses, flats or apartment buildings, where we can charge a tenant the agreed rent for the duration of the lease.
2. Commercial property
Mainly office buildings and retail premises. With office buildings, we usually have a better chance of getting bank financing, since the idea is to rent out the different offices and floors to other companies or businesses.
3. Industrial real estate
From warehouses on industrial estates (a bad business at the moment) to all kinds of land zoned for industrial use.
4. Shopping centres
This kind of investment really does require a lot of capital. And a shopping-centre bubble is starting to form in most cities. I don’t think we need to explain how it works: you will have seen how a shopping centre rents out all its space to shops, cafés, cinemas and large supermarket chains such as Carrefour or Alcampo. Nightclubs, too.
This business was very lucrative for many years, and because it was so lucrative, many other business people jumped into it, and now they are killing each other. It’s common to see shopping centres with too many units standing empty. And that growing number of closed units suggests they are probably not earning all the money they should.
5. Mixed-use real estate
Here we are talking about the real multi-millionaires, since this kind of investment is basically all of the above combined. One example is the Dubai project, where a whole smart, climate-controlled city is being built that will include the largest shopping centre in the world.
See also: The myth of getting rich on the stock market and retiring young
6. Land
During the recent bubble, anyone could make millions with this kind of investment. It often meant investing in a plot of rural land, making another small investment in an envelope handed to the town planning councillor to get it rezoned for building, and “ta-da!” The land tripled in value in a matter of days.
Others, less fond of the art of bribing mayors and councillors, would buy a large tract of land and sell it off in parcels. In real estate, the value added by subdividing means we can make more money.
7. Investing in real estate through REITs
Real estate investment trusts (REITs) are a way of investing in property as if you were investing in shares.
REITs are companies that invest in real estate assets with the aim of generating rental income, which they pay to investors as dividends. They are attractive because they are usually subject to very low taxation. However, they are a complex investment that would take a long time to explain properly, since they also invest in mortgage loans, stakes in other REITs and shares.
REITs are traded every day, so their price fluctuates daily. Another of their advantages is that they are a liquid asset we can sell quickly, but they carry risks.
8. Investing in real estate through shares
Obviously, we can buy shares in property companies, and as the property market recovers, those shares would rise in value, on top of paying dividends, if the companies pay any.
Tips to bear in mind
When investing in real estate, borrowing money isn’t bad as long as we have drawn up a plan in which the risk-return equation is attractive. In fact, most real estate projects are financed by, or have stakes held by, lenders or partners, but bear in mind that the project might not turn out as expected and we could end up in debt. That is exactly what happened to Donald Trump, who found himself owing billions to the banks.
See also: Serious mistakes when investing in the stock market, part two
Finally, American real estate investors don’t take chances when it comes to whose name their investments are held in.
In other words, if they buy three office buildings, they set up three different companies, one for each building. That way, one company can act as guarantor for a new project, and if there is a lawsuit, only the property held by that company can be taken, while the rest stays untouched.
The same applies to civil claims if someone is hurt when a floor gives way or a roof tile falls on their head on our property.
Any big real estate investor will advise you to do it this way.
But above all, in the property market, just as with shares, the moment you get in is what matters most.
Further reading
- 34 lessons about money
- 8 books Warren Buffett thinks everyone should read
- The best question for measuring the health of your personal finances
Featured image: Partonez, CC BY-SA 4.0, via Wikimedia Commons.
