April 4, 2023

Investing in real estate: different ways to do it

Without a doubt, investing in real estate is an idea that, sooner or later, tends to cross the minds of most people who want to get an extra return on their savings. The most common formula is usually to buy an apartment to rent but there are other ways to invest in the real estate market without necessarily becoming the owner of a new property. 

Below we will tell you how to invest successfully in the real estate market, what advantages and disadvantages each of the formulas has and what is its level of risk. 

Buying a home to rent or sell it later 

Buying a home to rent or sell has been known over the years as the best formula for investing in real estate, since, on the one hand, it allows you to increase your wealth and on the other to obtain extra income. 

The gross profitability offered by the rental of a home is around 3.8%, according to data from the CBN corresponding to the third quarter of 2019. However, if the revaluation of the property is also taken into account, profitability increases to 10.7%. 

The increase in rental prices experienced in recent years has favoured this higher profitability. Also, investing in an apartment for rent has some tax advantages, since the owner can apply a 60% reduction to income earned by renting to calculate the net yield declared in income tax. 

The main disadvantage of this real estate investment formula is that it is a non-liquid asset, which means that the money will not be available immediately in an emergency (selling a flat usually takes several months, unless you throw down its price ). On the other hand, the high capital required to carry out the acquisitions is another of the handicaps, since it prevents diversifying the investment in several assets and implies a greater risk. The house also generates extra maintenance expenses, taxes, and repair costs caused by the passage of time. Finally, the last of the dangers of investing in your apartment is the possibility of non-payment by its occupants. 

The operation of real estate investment funds makes them advisable only for long-term investment since the properties are mainly used for rent. They also have the disadvantage of a lack of liquidity, because they usually establish certain rules to rescue the investment and thus avoid the overselling demand if the price falls. As with all funds, it is only taxed when the shares are reimbursed.

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Invest in publicly traded real estate 

Another option to invest in the real estate market are companies in the sector that are listed on the Stock Market. This formula is characterized by having greater liquidity and profitability than indirect investment in real estate: shares can be sold to obtain liquidity if necessary. Also, it has fewer costs, because you do not have to pay as many taxes as when buying a home. 

Regarding the risks, investment in developers is more subject to the cycles of the real estate market, so the share price may fluctuate. The investor must analyze the company’s situation to know if the stock is expensive or cheap and the potential for appreciation that it can achieve.

Real estate crowdfunding 

It consists of collecting funds collectively for, in the case of real estate crowdfunding, buying homes or real estate assets through different private contributions. Real estate crowdfunding projects consist of the purchase of real estate to reform them and put them up for sale or rent again to obtain a capital gain. The investor invests in platforms that buy the properties and then sell them renovated and receives part of the profits obtained in the operation. 

The advantage of investing in real estate in this way is that it does not require a lot of capital, so it is the investor who decides the risk he is willing to take with his greater or lesser contribution. Also, you can participate in large projects for very little money and choose at any time which ones you want to be part of and which ones you don’t.

As you have read, there are numerous ways to invest in real estate. The choice will depend on the profile of the investor, their level of liquidity, the need to recover the money at any time they may have and, of course, the degree of risk they want to assume. However, the higher the risk of the investment, generally the greater its return.

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