Investment in real estate, or as many call it, investment in brick, is one of the most widespread types of investment throughout the world. Many people decide to delve into it looking for the best real estate investment to obtain sources of passive income, great benefits or the peace of mind of having a secure value, but to what extent is this true?
In this article, I will tell you which are the most interesting types of real estate investment and what differences you can find with other types of investment.
Types of investment in real estate
What is the first thing that comes to mind when I say: “real estate investing”? Surely, like most people, the first thing you have thought about is buying a home to rent or sell. And although these transactions are an essential part of this type of investment, they are only the tip of the iceberg. These are the main types of real estate investments:
Invest in SOCIMIs or REITs
One of the ways that fewer people know about investing in the real estate market is through SOCIMIs (Listed Public Limited Investment Companies in the Real Estate Market) or their equivalent in English, REITs ( Real Estate Investment Trust ).
These companies are companies that are dedicated to the purchase, rehabilitation, sale and rental of homes and large properties such as warehouses, office buildings, land… But what does a private company have to do with you?
Like many other companies, some SOCIMIs are listed on the Stock Exchange, so you can “jump on the bandwagon” by investing in them. When these companies make profits, they distribute dividends, which as a shareholder will be your profits.
Additionally, if you have a good investment strategy, you can obtain an additional benefit from capital gains by selling the shares of these companies for a price higher than the one you bought them for.
Thus, you can start investing in the real estate market easily, quickly and with little capital. But the most important thing is that it is a “passive” investment, since you are not the one in charge of searching for the properties, buying them, renovating them… You simply have to wait for the benefits.
Real estate crowdfunding
The main problem or entry barrier of investing in real estate is that a high capital is needed to be able to acquire a property or, failing that, request a loan that allows you to buy it.
For this reason, crowdfunding in this type of project is increasingly common. In short, it consists of a group of investors creating a joint fund to invest in a property in which they could not invest separately.
Thus, if the property in question has a value of €100,000 and the shares are €1,000, with 100 individual investors the property can be acquired and the profits subsequently distributed among all. It can be a good option to invest €10,000, for example, if you do not have all the capital to buy a flat on your own.
And no, you don’t need to ask your contacts if they want to invest with you. Instead, you can use platforms such as Urbanitae, Evostate, Brickstarter or Estateguru, which are responsible for finding the property, preparing it, buying it and putting it up for sale or rent.
Buy an apartment to rent
Without a doubt, one of the most typical ways to invest in the real estate market is by buying a property to rent it. Be careful, just because it’s typical doesn’t mean it’s bad. In fact, it is one of the best strategies to obtain long-term profitability.
Unlike crowdfunding, in this case it is you who has to put up all the capital necessary for the project. As a general rule, you will have to request a mortgage for which they will ask you for 20% of the value of the property, but you will also need additional capital for the expenses involved in carrying out this type of operation.
Subsequently, you have to rent the apartment at a price that allows you to pay the mortgage and the additional expenses of the home; Possible damages to tenants, IBI, community…
And although people think that this is one of the safest ways to invest money, it is not without risks. The most important are that you cannot find tenants, or that you can but they decide not to pay you.
These problems can be much more serious if you have had to go into debt to buy the property, since you may not be able to afford the mortgage with the rest of your income.
But if you want to invest in properties to rent and a home is out of your budget, you can start by buying parking spaces or storage rooms in the largest cities in your country.
These properties have much lower costs than a house, and in many cases, it is possible to buy them without having to take out a loan. Of course, the income they generate is lower, but they can provide a higher annual return than conventional homes.
Buy renovate and sell
Instead of buying a property in order to obtain long-term profitability, many people decide to look for properties that need minor renovations or remodelling to sell them for a higher price in a short period of time.
It is a very interesting way of investing in real estate due to the benefits that can be obtained. However, it is important to know that not everything is so simple.
First of all you need to find a property that is very devalued due to its condition, but not so much that reconditioning it is more expensive than the benefit you could obtain.
Subsequently, you have to take care of planning and carrying out or subcontracting the renovation, with the costs that this will entail. And finally, you have to sell the property for a price higher than all the costs you have incurred when carrying out the operation.
Therefore, it is a very interesting way to obtain good returns in the real estate market, but it is for those who “want to get their hands dirty.”
Invest in tourist apartments
Nowadays it is fashionable to travel, especially to get to know different parts of the world and their cultures. For this reason, the tourist apartment market is booming, and companies like Airbnb have had an incredible boom.
Investing in tourist apartments consists of buying a property to rent it to tourists who come to visit the city for short periods of time. But it is not an investment that requires little work, since processing procedures with new tenants frequently consumes a lot of time.
Furthermore, not all apartments are attractive to a tourist, since they will most likely value things that a conventional tenant would not give so much importance to.
Therefore, if you decide to start investing in tourist apartments, I recommend that you analyze the market well and investigate what type of properties achieve the best results and why.
Invest in commercial real estate
So far I have mainly talked about investing in homes or smaller properties, but what about large office buildings, industrial warehouses or shopping malls?
All of these investments can also be very profitable, although as you can imagine you need a large capital to access them. This makes them investments reserved for wealthy people or large companies.
However, you can also invest in small establishments for local stores in your city. It is an investment that can give a great return, but to be successful it is very important to know the market situation in each area and be ready to hold out for a while without selling the property.
How to invest in properties
Investing in properties is an excellent option to grow our money in the long term. Properties are tangible assets that have historically proven to be a safe and profitable investment. Before starting to invest, it is important to be clear about our financial objectives and know the real estate market we want to enter.
The first stage of investing in real estate is defining our budget and analyzing our financing possibilities. It is important to note that investing in property generally requires a considerable sum of money, so good financial planning is essential. Additionally, it is advisable to seek the advice of a professional in the area to obtain the best financing option.
Once we are clear about our budget, it is important to research and analyze the real estate market. This involves studying price trends, demand and supply in the area in which we want to invest. It is essential to be aware of changes in the market and the opportunities that may arise. It is also important to consider location, as a property in a high-demand area will have a greater chance of appreciation in the long term.
Another important aspect to consider is the type of property in which we want to invest. There are different options, such as apartments, houses, land or even commercial properties. Each type of property has its advantages and disadvantages, so it is necessary to evaluate which one best suits our objectives and needs. It is also advisable to seek the advice of a real estate professional to obtain detailed information about each type of property and its specific characteristics.
Finally, once we have selected the property we want to invest in, it is essential to carry out a thorough inspection before making any decision. This involves reviewing the condition of the property, legal documents, taxes and any other relevant aspects. It is also important to take into account the additional expenses that investing in property will entail, such as maintenance costs, insurance and possible repairs. Once we have completed all these steps, we will be ready to invest in property and start enjoying the long-term benefits.
Differences between investment in real estate and investment in the stock market
The only type of investment that is as popular or more popular than investing in real estate is investing in the stock market. Both are strategies that can be combined, and are most likely the best option to have a well-diversified portfolio, but how are they different?
The main advantage of buying stock shares is that you can start with very little capital. Many brokers allow you to start trading from €10, and some even less, so the barriers to entry are almost non-existent.
In addition, there are financial products such as ETFs that, with very low capital (sometimes less than €50), allow you to invest in hundreds of companies at the same time. Therefore, you can diversify your investment even when you do not have a large sum of money. This is impossible in the real estate market, where each property costs tens of thousands of euros.
Logically, it is not necessary to go into debt to invest in the stock market, although you can do so if you use financial leverage. However, most people would have to take out a loan to buy a property.
Given the few barriers to entry that stock market investment has, the liquidity of this market is very high. Therefore, you can buy and sell shares instantly, since there are so many people investing that there will always be a counterparty for your operation. In the case of real estate, the sales process can take months.
If you are considering investing in the stock market but want to do it in a diversified and effortless way, we recommend investing in index funds through a robo advisor.
Of course, owning a home implies a series of expenses that as the owner you must assume; insurance, IBI, community… As an investor in the Stock Market you only have to pay the purchase and sale commissions, which in many cases do not even reach €2.
And what about profitability? The return you can obtain both in the stock market and in the stock market depends exclusively on you and what investments you decide to make, but above all, those you decide not to make.
Which one should you choose? I honestly don’t think you should stick to just one type of investment, since the ideal is to be as diversified as possible. If you do not have enough capital to buy a property on your own, you can partner with someone or use the crowdfunding platforms that I mentioned above.
