Real Estate Investing – A Comprehensive Guide for Beginners
Real estate investing has always had its place in the field of a wide range of investment products. In recent years it has come to the forefront and interest of the general public. Mainly due to a significant decline in interest rates not only on mortgages and loans but also savings products.
Investment real estate can bring you a much better appreciation than a savings account, term deposits or building savings.
Real estate can save the value of money from inflation for decades. Provide housing and you can even value your money interestingly. Although not every investment ends in success. Real estate investments are considered one of the safest options.
However, it should be noted that this is not an easy way to invest. Appropriate knowledge is needed to maximize your chances of making the best investment.
In this article, we will look at why investing in real estate. How to choose a suitable property (location selection, layout, etc.). What to look out for how to know the appropriate time to buy real estate and also show other indirect forms of investment to real estate tokenization.
Real estate tokenization is a process in which real estate shares are created as digital tokens on a blockchain. Tokenizing your real estate project can help you raise capital more efficiently by giving investors unprecedented access to private real estate investments, transparency, and liquidity. Check out the best available at digishares.io
It is impossible without knowledge. Definitely not when investing in real estate. That is why we have prepared this comprehensive article for you. Which contains a lot of necessary information? Are you serious about investing in real estate?
Note: The term investment property refers to property that is not acquired for the purpose of owning a home. But for the purpose of renting or selling it at a profit. It is possible to say that someone invests in their own housing but it is not an investment in the financial sense.
How to invest in real estate – Basic differences between physical purchases and other forms
There are basically two main approaches to investing in real estate. You will either buy physical real estate (directly), such as apartments, land, cottages and houses, or you can invest in real estate funds, real estate bonds, crowdfunding, etc. (i.e., indirectly).
How to invest in physical real estate? Why be interested in real estate?
Investing in physical real estate is considered an appropriate investment in assets during periods of low interest rates due to its stability. Rising interest rates, rents and wages are pushing real estate prices up (except for short-term declines).
We will now take a closer look at the main aspects of this investment, be it pros or cons. Or – Why be interested in investing in real estate?
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You can achieve double evaluation
One option is to live in real estate, save on rent and protect invested money from inflation (but this is not entirely an investment).
The second is to buy, for example, an investment apartment that you will rent. Its price will increase over time and in addition you will regularly collect extra income. You can increase the value of your investment twice. And it is this variant that we will now address in the article.
How can rising real estate prices look like in practice? The largest increase in average apartment prices in 2014-2018 was in Zlin, where apartments became more expensive by about 80%. The apartment with a size of 65 square meters in 2014 cost about 1 million. In 2018, however, it was already 1.8 million. In the same period, flats in Prague became more expensive by almost 70%.
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The real estate market is one of the most stable
Along with, for example, investing in gold, real estate is considered one of the safest and most stable. Their decline, even during crises, is not significant, if at all. Often, only the growth of the price is dampened, but the price does not fall at all.
After all, housing is a basic human need, no matter what happens on the market.
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Long-term low interest rates
The economic slowdown and the huge government debt caused by the support in the coronavirus pandemic are forcing the ECB (European Central Bank) to continue to keep interest rates low. He can’t afford to raise interest rates too much at the moment, and that’s good news for the real estate market and mortgages.
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If you need funds, you can sell the property
Real estate is not exactly the most liquid investment, but there is still the possibility of sale and sometimes it goes quite fast. Conversely, in the case of bonds, for example, there is often no possibility of earlier termination. For example, if you decide to travel in retirement, all you have to do is sell the property and go on a long vacation.
According to the analysis, it takes 86-121 days from the submission of the advertisement to the signing of the reservation contract (the most frequent moment of downloading the advertisement). The larger the apartment, the longer. The money transfer takes at least another 5 weeks from the signing of the reservation contract.
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Yield about 5% per year
Determining the exact return on real estate investment is difficult as a number of factors need to be taken into account. Nevertheless, if we get rid of inflation, fees, interest, liquidity, rising or falling prices and focus on the rents themselves, the return can be around 20 years and about 5% per year.
Example. Consider buying an apartment for 2.4 million crowns. Suppose the monthly rental income is CZK 10,000, i-e CZK 120,000 per year. Then the percentage return on investment can be estimated as 2,400,000 / 120,000, which corresponds to just 5% per year and a return of 20 years.
Note: Due to the low mortgage interest rates in recent years, it is no exception that the rent covers the entire mortgage payment.
However, the example above is really very simplified. Further in the article we will talk about why the return cannot be calculated in this way and with what everything needs to be calculated.
- Growing demand
An increasing number of applicants is expected in the future. The share of rent and housing in Europe is around 50%, while in the Czech Republic it is only 20%.
In addition, there is insufficient supply in the real estate market. E.g., in 2015, only 400 flats per 100 thousand were built in Prague. resident. According to the Venture club website, average real estate prices have risen by about 50% in the last 7 years alone due to GDP growth and average wages, low unemployment and low interest rates.
The most important factors when looking for an investment property
When searching, assessing and selecting the best property to buy or rent, pay close attention to the following areas .
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Site selection
The location is very important, give it plenty of time. Generally, larger cities and more lucrative areas are preferred, as this will ensure better occupancy (tenants are better sought), higher rents and easier real estate sales.
But if you want an apartment in a larger city and at the same time in a lucrative area, it is of course bought at a much higher price.
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Choosing the layout of the apartment
Smaller flats are most often in demand. It can pay the most to invest in 1 + 1, 2 + kk or 2 + 1. Why small and medium-sized flats? There are a number of reasons.
People often move to the metropolis for work, or they rent only a small apartment for themselves, where they only sleep a few nights a week. Then there are young people just looking for a partner and students. Birth rates are falling and it is no longer common to have many children. Most families have only one, or. two, so an apartment with a maximum of 3 + kk or 2 + kk is enough for them.
Smaller apartments are also often in demand for their price. A lot of people can’t afford their own housing, and even then, they are small apartments.
There is a trend to delay marriage and family formation. In addition, we achieve a high divorce rate in the Czech Republic – around 50% (as stated by the CZSO) and a smaller apartment is enough for people. A potential couple looking for one roof over their head can be two individuals looking for two smaller apartments at once.
On the other hand, the advantage of large apartments is the long-term rental. Such tenants tend to remain in the long run.
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Mortgage, rent and price
While it is generally not recommended to take out a loan when investing in gold or stocks, for example, the situation is the opposite with real estate. Mortgages are a great tool if used correctly.
Apartments and houses are one of the few assets where the bank can lend you up to 90% of their value. But how high a mortgage can you take?
Finding a property in a good location with an interesting price is not everything. Renovations may also be needed, which will be an additional expense. You need to anticipate them and have them calculated in your mortgage (or have your own resources).
The most common are mortgages
In the end, the whole mortgage may be too expensive for you and the bank will not give it to you due to the conditions that the CNB (Czech National Bank) recommends to commercial banks to obtain them. So, it’s good to have at least some of your own resources. By having X% of the property price, you will also increase the range of banks that can potentially provide you with a loan. The most common are mortgages of 70, 80 and 90% LTV.
It is also appropriate to have a sufficient financial reserve. During the purchase, renovation or even rental, problems may arise that you could not or could not have foreseen in advance.
TIP: A real estate agent can help you find and assess a suitable property. If you are new to this field, consider consulting a professional.
Once you are considering whether your entire mortgage payment will be covered by the rent, try to do a little research yourself (whether on Airbnb or classic rentals, or simply ask the people who live in the area). This will give you a better idea of the amount of rent.
The opportunity to increase the rent – a tasteful design is a very positive factor for the amount of rent. If you would like a high rent, a nicely furnished and well-photographed apartment will probably be more interesting and rent faster. E.g., in “expensive” Prague, it may pay to use the services of a residential designer.
