Practical guide to Real Estate investment.
Considerations when making a real estate investment.
We can divide real estate buyers into two groups. Those who buy to live, first or second home, and those who buy as an investment.
In this section, we write about the most frequent buying scenarios as an investment: rental income investment, capitalization, and value-keeper investment. Of course, it can be a mix of these.
RENTAL INCOME INVESTMENT
A rental income investment focuses on the net annual return generatedfrom rental income, and not on the appreciation of the asset. This type of investment seeks to maximize the annual return on rentals and actively receiving income on a regular basis.
We can consider a high yieldinvestment to that property that generates a net return that exceeds 6% per year. These investments are usually found in secondary cities, and not in the large capitals.
A capitalization investment is when we look for the property appreciation in a given period of time. In this type of investment, we usually do not look for rental income as an end, but as an additional income. The appreciation/capitalization is generated by the increasing price of the property in a certain place. This increase can happen because of multiple factors.
A typical investment is the purchase of an off-plan property, paying it at a price lower than the market price, and waiting until its completion for a subsequent sale, or you can just place it for rent. Given that the off-plan price is lower than the market price if the property was already built.
We invest as a value-keeper investment when our objective is to protect our capital in the long term in markets with greater stability. No short-term capitalization or high rental returns are sought after. We can say that the objective is the asset value stability.
For reference, value-keeper investments cities by excellence are London and New York. Stable prices, with low rental return, but strong demand.
WHY DO WE INVEST?
We invest our savings and capital, mainly, to reduce the fear of the future. We invest to generate additional income and to have a safeguard against our main income potential loss, possible crises, and for many other factors that can threaten our well-being and that of our family. We also invest to secure higher income for our retirement, complementing retirements, pensions, and other forms of income. In short, we invest to secure and increase our wealth.
It is for this reason that we generally find it difficult to make a purchase decision, and even more so when it is not in the countrywe live in.
There are questions that you can ask yourself that will help you find out if you are making the right investment. Let us look at the following:
- Do I really have the capital to make the investment?
- Why do I want to make a real estate investment?
- What is most important to me when I make an investment?
- What is the main objective that I am looking for? And the second?
- What do I value the most when I invest?
- Am I willing to invest in another country?
- Are there risks? If so, which ones? Can they be mitigated?
- What is my main fear when investing? How can I reduce it or eliminate it?
Once you have the answers to the above questions, you can check them against the investment options you have available and see if they suit them, or you can find more alternatives.
INVESTING IN ANOTHER COUNTRY
One of the best ways to create wealth is by investing in property in solid and stable countries. If you already live in one of these, a good way to diversify your wealth is buying properties in other countries. This way, you can diversify risks and create different sources of income.
What to look at before investing in another country:
- Safe legal framework: developed countries have clear guidelines on real estate purchase processes, providing a safe path to the parties. Which one are those?
- Local market situation: it is important to know the market situation, whether it is in a stable situation, going either down or up, as any scenario can present a good investment opportunity.
- Management: Who will manage the property? Where will I get paid?
- Taxes: How does it affect my non-resident status? Is it convenient to form a corporate vehicle? What taxes must I pay and how does it affect my taxes in my country of residence?
- Legal processes: Ease of legal processes for buying, renting, selling, and executing contracts.
Investing in developed countries is usually easier than the investor expects. The procedures can generally be done remotely, and with a professional to guide you, they are very easy to accomplish.
Investing in developed countries is usually easier than the investor expects. The procedures can generally be done remotely, and with a professional to guide you, they are quite easy to accomplish.