Real Estate
Real estate investing involves the purchase, management and sale or rental of real estate for profit. Someone who actively or passively invests in real estate is called a real estate entrepreneur or a real estate investor. Some investors actively develop, improve or renovate properties to make more money from them.
Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more generally) buildings or housing in general.
In markets where land and building prices are rising, real estate is often purchased as an investment, whether or not the owner intends to use the property. Often investment properties are rented out, but "flipping" involves quickly reselling a property, sometimes taking advantage of arbitrage or quickly rising value, and sometimes after repairs are made that substantially raise the value of the property.
Types of real estate investments
Real estate is divided into several broad categories, including residential property, commercial property and industrial property.
Residential property: Residential real estate may contain either a single family or multifamily structure that is available for occupation or for non-business purposes. Residences can be classified by and how they are connected to neighbouring residences and land. Different types of housing tenure can be used for the same physical type. For example, connected residences might be owned by a single entity and leased out, or owned separately with an agreement covering the relationship between units and common areas and concerns.
Commercial property: Commercial property is real estate (buildings or land) intended to generate a profit, either from capital gains or rental income. It includes office buildings, medical centers, hotels, malls, retail stores, multifamily housing buildings, farm land, warehouses, and garages. Cash inflows and outflows are the money that is put into, or received from, the property including the original purchase cost and sale revenue over the entire life of the investment. An example of this sort of investment is a real estate fund.
Industrial property: Industrial property is one of two subsets of intellectual property (the other being copyright), it takes a range of forms, including patents for inventions, industrial designs (aesthetic creations related to the appearance of industrial products), trademarks, service marks, layout-designs of integrated circuits, commercial names and designations, geographical indications and protection against unfair competition.
Valuation
Property valuation is often the preliminary step taken during a real estate investment. Information asymmetry is commonplace in real estate markets, where one party may have more accurate information regarding the actual value of the property.
This typically includes gathering documents and information about the property, inspecting the physical property, and comparing it to the market value of similar properties.[5] A common method of valuing real estate is by dividing its net operating income by its capitalization rate, or CAP rate.
Sources of investment returns
Real estate properties may generate revenue through a number of means, including net operating income, tax shelter offsets, equity build-up, and capital appreciation.
Net operating income is the sum of all profits from rents and other sources of ordinary income generated by a property, minus the sum of ongoing expenses, such as maintenance, utilities, fees, taxes, and other expenses. Rent is one of the main sources of revenue in commercial real estate investment. Tenants pay an agreed upon sum to landlords in exchange for the use of real property, and may also pay a portion of upkeep or operating expenses on the property.
Tax shelter offsets occur in one of three ways: depreciation (which may sometimes be accelerated), tax credits, and carryover losses which reduce tax liability charged against income from other sources for a period of 27.5 years.
Equity build-up is the increase in the investor's equity ratio as the portion of debt service payments devoted to principal accrue over time. Equity build-up counts as positive cash flow from the asset where the debt service payment is made out of income from the property.
Capital appreciation is the increase in the market value of the asset over time, realized as a cash flow when the property is sold. Capital appreciation can be very unpredictable unless it is part of a development and improvement strategy.
Why investing in property is a good idea
- Steady source of income
- Provides ample liquidity
- Power of leverage
- Appreciation of Value
- Safe & Secured Investment Option
- Tax Benefits
Things to Consider While Investing in Real Estate in India
- Check the Location
- Check the Property Papers
- Research About the Property
- Know the Purpose of Your Investment