Investing in real estate is becoming increasingly popular and recent changes in the government legislation hasn’t stopped the investors buying property or land. More and more investors are buying properties or land with a view to refurbishing, converting or building these properties with the intention to selling them to make a profit or alternatively renting them out to generate long term income.
What are the benefits of investing into real estate
- Quick profits – if the investor is buying a property which he/she intends to refurbish and then sell on for a profit
- Income for Life – If the investor buys the property cheaply at auction or one that might need refurbishing which they do up and rent out. It could earn them a small income for life especially as rental rates continue to rise. The rent received from the tenants could also pay for any mortgage and upkeep.
- Medium Risk – compared to stocks and shares investing in real estate is less riskier and is a tangible asset. Property values in a down market have never dropped below a third of their market value and as they are long term investments you are bound to make a profit or have high yields. At the same time real estate investments are more resilient against the market compared to stocks and shares.
- Wealth through Appreciation – as the property value goes up the investment will generate wealth by building equity. Real estate can never be worth nothing.
- Hedge against Inflation – investing in properties is an excellent hedge against inflation. As the price level goes up, so does the rental income you get from your property and your investment’s value. This means that real estate investors are protected against both the immediate and the long-term effects of inflation.
What are some drawbacks on real estate investment
- Costly – more expensive to buy in comparison to other forms of investments such as bonds and stocks and shares
- Debt – Not all investors are cash buyers and will take out a loan for the purchase which will increase their debt
- Liable to pay – If the property is empty or the tenant moves out you will be liable to make the mortgage payments
- Investment to flip – if the property purchased was to do up and sell and it doesn’t sell when expected the investor is lumbered with the debt and has to pay for it
- Additional Expenses – when you purchase a property you are responsible for timely repairs and upkeep on the property. The local authority can fine you if it is not done in a defined time frame.
- Low Liquidity – compared to other forms of investment as properties take a lot longer to sell.
- Lack of finance – banks have increasingly become strict to lend and not all investors meet the lenders criteria
- Legal – property owner becomes liable for damage to others for example if something falls on someone and injures them whilst on the property, the property owner becomes liable to pay for any damages or medical care
Experienced real estate investors will leverage themselves against both the advantages and disadvantages to increase their profits.
Not all investors have cash to purchase the properties so how do they fund this investment?
- Mortgages – standard mortgage which is a loan secured against the investment could be a residential mortgage or a buy to let mortgage if the property is to be let out
- Alternative finance – such as bridging loans or refurbishment loans or development finance
Short term loans such as bridging loans are used to secure against a property or multiple properties to allow an investor to purchase a property either privately or through auction. The investor could be wanting to sell a property already owned or could be wanting to refurbish this new property and either sell it or put it on a long-term finance such as a buy to let mortgage.
Refurbishment Loans can be bridging loans or development finance depending on what the investor wishes to do to the property i.e. whether they are doing light refurbishing with small conversions or extensions or doing extensive work to the property.
Development Loans are a form of property development finance against land or properties that either need building from ground up or need extensive work where the lenders offers the investor money towards the purchase of the site and towards the build cost or the works or both against the final value of the completed or finished property.
It is best to speak to a broker who is well versed in property transactions to get best advice on how to proceed or what might be the best available finance option. It is also advisable to do thorough research before purchasing any property. If payments are not maintained or if the loan is not repaid on time, the lender can repossess the property.