Real Estate – The Best Investment Option

Are you scared to have your money in the stock exchange after some bad experience or are you fed up with hardly any return on investment with your money in the bank? Do you instinctively like the idea of investing in income producing real estate with results that you can see?

Yes, compared with other types of investments, real estate investing involves a relatively favorable risk/reward profile, but with relatively low ease of entry and exit.

There are many valid ways to invest in real estate. For example, some people may invest in a Real Estate Investment Trust known as a REIT which trades just like a stock. However, investing in REITs is relatively less safe than pure investment in property. The average return is also most often less than real estate can offer. REITS are yet to become popular in Sri Lanka.

Some investors also buy property to hold for a short while and re-sell, known as “flipping,” while some may buy properties to develop and re-sell at a profit.

Most however, purchase individual properties, either houses, apartments or commercial spaces, renting them out for income and managing these properties as a business.

Here are a few benefits from investing in Real Estate, mainly those that are bought for renting.

Positive Cash flow:

Rental properties when purchased correctly generate significant cash flow and this is the single most important thing about investing in rental properties. You should never purchase properties with appreciation as your primary objective. Your real estate investment business runs on cash and cash flow and not on appreciation. It is so important that it can almost be your only measure of success and safety.

The income stream produced is stable and predictable:

Rents tend to slowly rise over time but even during tough economic times they tend to be fairly stable, falling only modestly. You usually won’t find yourself wondering how much income your rental properties will produce next year. They will produce very close to what they produced last year. If they don’t, they are being poorly managed. This is quite familiar with the investment in apartments for sale in Colombo.

Appreciation over time:

This is in addition to the income stream. As the property appreciates, rents will tend to rise with it, meaning that your income stream will also grow with time. Both of these act as a hedge against inflation. Unlike the more typical items offered as inflation hedges such as gold, real estate gives you income while you wait. Gold just sits there.

Pride of Ownership:

The right property in the right location with the right tenants and ownership mindset can produce a tremendous pride of ownership factor that is highest among all asset classes. Home ownership is out of reach for most people. Imagine as an investor, owning several family housing units instead? This is best with houses for sale in Colombo.

Capitalizing on physical assets:

Income producing real estate is one of the few investment classes that, as a hard asset, has meaningful value. The property’s land has value, as does the structure itself, and the income it generates has value for future investors. Income producing real estate investments do not have good and bad days, as does the stock exchange. Lands for sale in Colombo has the highest price per perch in Sri Lanka.

Following are some of the most important factors to be considered in investing in Real Estate.

Location of the property:

The ago old punch line “Location, Location, Location” still prevails and remains the most important factor for profitability in real estate investment. Proximity to amenities, peaceful areas, neighborhood status, scenic views, etc are major factors for residential property valuations, while proximity to markets, warehouses, transport hubs, highways, etc, play an important role for commercial property in Colombo valuations.

Valuation of the property:

Real estate financing during purchase, listing price during sale, investment analysis, insurance premium and taxation, all depend on real estate valuation.

Investment Purpose and Investment horizon:

Given the low liquidity and high value investment in real estate, lacking clarity on purpose of the investment may lead to unexpected results including financial distress, especially if the investment is mortgaged.

Broad categories are: Buy and self-use, Buy and lease, Buy and Sell (Short term or Long term).

Expected Cash Flows and Profit opportunities:

The investment purpose and usage influences cash flows and hence profit opportunities. Therefore, draft projections for the following should be developed.

Expected cash flow from rental income.

Expected increase in value due to price appreciation.

Cost benefit analysis of renovation before re-sale to get a better price.

Cost benefit analysis of mortgaged loans versus appreciation.

Know the pitfalls of Leverage:

Loans are convenient but may come at a big cost – you commit your future income, to get utility today for a cost of interest spread across many years. Real Estate financing needs higher amounts and hence has higher exposure. Understanding it properly allows you to benefit from it to the maximum, while ignoring the risks can lead to major pitfalls.

Investment in New Construction Vs Existing establishments:

New construction properties usually offer attractive pricing, the option of customization, clearly documented amenities and clear titles. The investor has to deal only with the developer. Risks include delays in possession, increase in costs, no awareness of neighborhood etc.

Those on re-sale have the opposite factors and may need a more thorough check on ownership, documents and legal matters.

Real Estate investments offer a good high value risk-return profile. Thoughtful consideration of the above mentioned factors  will enable investors to reap the benefits while mitigating the risks.

Richard Buultjens is the MD/CEO of R B Realtors and Consultants (Private) Limited, a leading Real Estate Service provider.

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